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Goodwill and other intangible assets | 3 Months Ended
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Mar. 31, 2020
Goodwill and Intangible Assets Disclosure |
Goodwill And Other Intangible Assets | Note 14 – Goodwill and other intangible assets Goodwill There were no changes in the carrying amount of goodwill for the quarters ended March 31, 2020 and 2019. The following table presents the gross amount of goodwill and accumulated impairment losses by reportable segments:
March 31, 2020
| Balance at |  |  | Balance at
| March 31, | Accumulated | March 31,
| 2020 | impairment | 2020
(In thousands) | (gross amounts) | losses | (net amounts)
Banco Popular de Puerto Rico | $ | 324,049 | $ | 3,801 | $ | 320,248
Popular U.S. |  | 515,285 |  | 164,411 |  | 350,874
Total Popular, Inc. | $ | 839,334 | $ | 168,212 | $ | 671,122
December 31, 2019
| Balance at |  |  | Balance at
| December 31, | Accumulated | December 31,
| 2019 | impairment | 2019
(In thousands) | (gross amounts) | losses | (net amounts)
Banco Popular de Puerto Rico | $ | 324,049 | $ | 3,801 | $ | 320,248
Popular U.S. |  | 515,285 |  | 164,411 |  | 350,874
Total Popular, Inc. | $ | 839,334 | $ | 168,212 | $ | 671,122
Interim Goodwill Impairment Test The Corporation’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment, at least annually and on a more frequent basis if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit. Management monitors events or changes in circumstances between annual tests to determine if these events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amounts Due to the effects of the current and projected interest rate environment and the effects of the COVID-19 pandemic on the valuation of the Corporation and its subsidiaries, the Corporation deemed these factors as a triggering event which required management to perform an interim goodwill impairment test. As discussed in Note 3, “New accounting pronouncements”, effective on January 1, 2020, the Corporation adopted ASU 2017-04, which simplifies the accounting for goodwill impairment by removing Step 2 of the two-step goodwill impairment test under the previous guidance. Accordingly, if the carrying amount of any of the reporting units exceeds its fair value, the Corporation would be required to record an impairment charge for the difference up to the amount of the goodwill. In determining the fair value of a reporting unit, the Corporation generally uses a combination of methods, including market price multiples of comparable companies and transactions, as well as discounted cash flow analysis. Management evaluates the particular circumstances of each reporting unit in order to determine the most appropriate valuation methodology. The Corporation evaluates the results obtained under each valuation methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and appropriate under the circumstances. Elements considered include current market and economic conditions, developments in specific lines of business, and any particular features in the individual reporting units. For purposes of the interim triggering event evaluation, management also considered the results of the fair value of the reporting units without considering the comparable transaction approach as there is limited information of comparable transactions during the COVID-19 pandemic. The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these evaluations include:  a selection of comparable publicly traded companies, based on nature of business, location and size;  a selection of comparable acquisitions;  the discount rate applied to future earnings, based on an estimate of the cost of equity;  the potential future earnings of the reporting unit; and  the market growth and new business assumptions. For purposes of the market comparable companies’ approach, valuations were determined by calculating average price multiples of relevant value drivers from a group of companies that are comparable to the reporting unit being analyzed and applying those price multiples to the value drivers of the reporting unit. Comparable companies’ price multiples represent minority-based multiples and thus, a control premium adjustment is added to the comparable companies’ market multiples applied to the reporting unit’s value drivers. For purposes of the market comparable transactions’ approach, valuations were determined by calculating average price multiples of relevant value drivers from a group of transactions for which the target companies are comparable to the reporting unit being analyzed and applying those price multiples to the value drivers of the reporting unit. Comparable transactions’ price multiples represent controlling based multiples and thus, no control premium adjustment is made to the comparable transactions’ market multiples applied to the reporting unit’s value drivers. While the market price multiple is not an assumption, a presumption that it provides an indicator of the value of the reporting unit is inherent in the valuation. The determination of the market comparable companies and transactions also involves a degree of judgment. For purposes of the discounted cash flows (“DCF”) approach, the valuation is based on estimated future cash flows. The financial projections used in the DCF valuation analysis for each reporting unit are based on the most recent (as of the valuation date) financial projections presented to the Corporation’s Asset / Liability Management Committee (“ALCO”). The growth assumptions included in these projections are based on management’s expectations for each reporting unit’s financial prospects considering economic and industry conditions as well as particular plans of each entity (i.e. restructuring plans, de-leveraging, etc.). The cost of equity used to discount the cash flows was calculated using the Ibbotson Build-Up Method and ranged from 10.27% to 11.01% for the March 2020 analysis. The Ibbotson Build-Up Method builds up a cost of equity starting with the rate of return of a “risk-free” asset (20-year U.S. Treasury note) and adds to it additional risk elements such as equity risk premium, size premium and industry risk premium. The resulting discount rates were analyzed in terms of reasonability given the current market conditions. The results of BPPR interim goodwill impairment test as of March 31, 2020 indicated that the average estimated fair value using all valuation methodologies exceeded BPPR’s equity value by approximately $761 million or 25% compared to $1.2 billion or 37%, for the annual goodwill impairment test completed as of July 31, 2019. The fair value conclusion for BPPR considers the comparable transactions approach. If the comparable transactions approach is not considered, as those transactions occurred prior to COVID-19, the average estimated fair value exceeded BPPR’s equity value by approximately $589 million or 19%. Accordingly, there was no impairment on goodwill recorded in BPPR at March 31, 2020. PB’s interim goodwill impairment test results as of such dates indicated that the average estimated fair value using all valuation methodologies exceeded PB’s equity value by approximately $85 million or 5%, compared to $338 million or 21%, for the annual goodwill impairment test completed as of July 31, 2019. The fair value conclusion for PB considers the comparable transactions approach. If the comparable transactions approach is not considered, as those transactions occurred prior to COVID-19, the average estimated fair value exceeded PB’s equity value by approximately $26 million or 2%. Accordingly, there was no impairment on goodwill recorded in PB at March 31, 2020. The goodwill balance of BPPR and PB, as legal entities, represented approximately 91% of the Corporation’s total goodwill balance as of the March 31, 2020 valuation date. Furthermore, as part of the analyses, management performed a reconciliation of the aggregate fair values determined for the reporting units to the market capitalization of the Corporation concluding that the fair value results determined for the reporting units in the March 31, 2020 interim assessment were reasonable. The goodwill impairment evaluation process requires the Corporation to make estimates and assumptions with regard to the fair value of the reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment of goodwill that would, in turn, negatively impact the Corporation’s results of operations and the reporting units where the goodwill is recorded. Declines in the Corporation’s market capitalization and adverse economic conditions sustained over a longer period of time negatively affecting forecasted cash flows could increase the risk of goodwill impairment in the future. The extent to which the COVID-19 pandemic further impacts our business, results of operations and financial condition, as well as the operations of our clients, customers, service providers and suppliers, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response thereto. A further decline in the Corporation’s stock price related to global and/or regional macroeconomic conditions, the continued weakness in the Puerto Rico economy and fiscal situation, reduced future earnings estimates, additional expenses and higher credit losses, and the continuance of the current interest rate environment could, individually or in the aggregate, have a material impact on the determination of the fair value of our reporting units, which could in turn result in an impairment of goodwill in the future. An impairment of goodwill would result in a non-cash expense, net of tax impact. A charge to earnings related to a goodwill impairment would not impact regulatory capital calculations. Other Intangible Assets At March 31, 2020 and December 31, 2019, the Corporation had $6.1 million of identifiable intangible assets with indefinite useful lives, mostly associated with the E-LOAN trademark. The following table reflects the components of other intangible assets subject to amortization:
|  | Gross Carrying |  | Accumulated |  | Net Carrying
(In thousands) |  | Amount |  | Amortization |  | Value
March 31, 2020 |  |  |  |  |  |
| Core deposits | $ | 37,224 | $ | 30,723 | $ | 6,501
| Other customer relationships |  | 42,909 |  | 29,592 |  | 13,317
| Trademark |  | 488 |  | 163 |  | 325
Total other intangible assets | $ | 80,621 | $ | 60,478 | $ | 20,143
December 31, 2019 |  |  |  |  |  |
| Core deposits | $ | 37,224 | $ | 29,792 | $ | 7,432
| Other customer relationships |  | 42,909 |  | 28,075 |  | 14,834
| Trademark |  | 488 |  | 138 |  | 350
Total other intangible assets | $ | 80,621 | $ | 58,005 | $ | 22,616
During the quarter ended March 31, 2020, the Corporation recognized $2.5 million in amortization expense related to other intangible assets with definite useful lives (March 31, 2019 - $2.3 million). The following table presents the estimated amortization of the intangible assets with definite useful lives for each of the following periods:
(In thousands) |  |
Remaining 2020 | $ | 3,897
Year 2021 |  | 3,559
Year 2022 |  | 2,683
Year 2023 |  | 2,642
Year 2024 |  | 2,355
Later years |  | 5,007

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- Definition The entire disclosure for goodwill and intangible assets. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -URI http://asc.fasb.org/topic&trid=2144416 + Details
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