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Goodwill and other intangible assets | 9 Months Ended
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Sep. 30, 2023
Goodwill and Intangible Assets Disclosure |
Goodwill And Other Intangible Assets | Note 14 – Goodwill and other intangible assets The changes in the carrying amount of goodwill for the nine months ended September 30, 2023 and 2022, allocated by reportable segments, were as follows (refer to Note 33 for the definition of the Corporation’s reportable segments): September 30, 2023 Balance at Goodwill on Goodwill Balance at (In thousands) January 1, 2023 acquisition impairment September 30, 2023 Banco Popular de Puerto Rico $ 436,383 $ - $ - $ 436,383 Popular U.S. 391,045 - (23,000) 368,045 Total Popular, Inc. $ 827,428 $ - $ (23,000) $ 804,428 September 30, 2022 Balance at Goodwill on Goodwill Balance at (In thousands) January 1, 2022 acquisition impairment September 30, 2022 Banco Popular de Puerto Rico $ 320,248 $ 116,135 $ - $ 436,383 Popular U.S. 400,045 - (9,000) 391,045 Total Popular, Inc. $ 720,293 $ 116,135 $ (9,000) $ 827,428 The goodwill recognized during the quarter ended September 30, 2022 in the reportable segment of Banco Popular de Puerto Rico of $ 116.1 million was related to the Evertec Transactions, as defined in Note 23 to the Consolidated Financial Statements included in this Form 10-Q. During the third quarter of 2023, the Corporation recorded an impairment of $ 23 million as a result of its annual goodwill impairment test related to its U.S. based equipment leasing subsidiary, Popular Equipment Finance (“PEF”), due to lower forecasted cash flows and an increase in the rate used to discount cash flows. During 2022 the Corporation recognized a goodwill impairment of $ 9 million related to Popular Equipment Finance (“PEF”) , as a result of a decrease in the projected earnings of this business unit. Other Intangible Assets The following table reflects the components of other intangible assets subject to amortization: Gross Carrying Accumulated Net Carrying (In thousands) Amount Amortization Value September 30, 2023 Core deposits $ 12,810 $ 10,995 $ 1,815 Other customer relationships 14,286 6,302 7,984 Total other intangible assets $ 27,096 $ 17,297 $ 9,799 December 31, 2022 Core deposits $ 12,810 $ 10,034 $ 2,776 Other customer relationships 14,286 4,878 9,408 Total other intangible assets $ 27,096 $ 14,912 $ 12,184 During the quarter ended September 30, 2023, the Corporation recognized $ 0.8 million in amortization expense related to other intangible assets with definite useful lives (September 30, 2022 - $ 0.8 million). During the nine months ended September 30, 2023, the Corporation recognized $ 2.4 million in amortization related to other intangible assets with definite useful lives (September 30, 2022 - $ 2.5 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 2023 $ 794 Year 2024 2,938 Year 2025 1,750 Year 2026 1,440 Year 2027 959 Later years 1,918 Results of the Annual 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 its reporting units below their carrying amounts. The Corporation performed the annual goodwill impairment evaluation for the entire organization during the third quarter of 2023 using July 31, 2023 as the annual evaluation date. The reporting units utilized for this evaluation were those that are one level below the business segments, which are the legal entities within the reportable segment. The Corporation follows push-down accounting, as such all goodwill is assigned to the reporting units when carrying out a business combination. In determining the fair value of each 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 and the weights applied to each valuation methodology, as applicable. 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. 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. Management uses judgment in the determination of which value drivers are considered more appropriate for each 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 had been previously determined by the Corporation 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. 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 12.30 % to 16.96 % for the 2023 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, industry risk premium, and a specific geographic risk premium (as applicable). The resulting discount rates were analyzed in terms of reasonability given the current market conditions. The results of the BPPR annual goodwill impairment test as of July 31, 2023 indicated that the average estimated fair value using all valuation methodologies exceeded BPPR’s equity value by approximately $ 3.7 billion or 468 % compared to $ 3.1 billion or 245 %, for the annual goodwill impairment test completed as of July 31, 2022. PB’s annual 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 $ 129 million or 8 %, compared to $ 670 million or 41 %, for the annual goodwill impairment test completed as of July 31, 2022. Accordingly, no impairment was recognized for BPPR or PB. The goodwill balance of BPPR and PB, as legal entities, represented approximately 93 % of the Corporation’s total goodwill balance as of the July 31, 2023 valuation date. An impairment of $ 23 million was recognized by the Corporation from the annual test as of July 31, 2023 related to PEF due to lower forecasted cash flows and an increase in the rate used to discount cash flows. During 2022 the Corporation recognized a goodwill impairment of $ 9 million related to PEF, as a result of a decrease in the projected earnings of this business unit. The PEF goodwill balance as of September 30, 2023 amounted to $ 17 million (December 31, 2022 - $ 40 million). 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 July 31, 2023 annual 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. Particularly for reporting units with recognized impairments or where the estimated fair value approximates the equity value, future decreases in fair value estimates could result in additional impairment charges. Additionally, declines in the Corporation’s market capitalization and adverse economic conditions sustained over a longer period of time negatively affecting forecasted earnings could increase the risk of goodwill impairment in the future. A decline in the Corporation’s stock price related to global and/or regional macroeconomic conditions, a deterioration in the Puerto Rico or the U.S. economies, increases in the rate to discount future cash flows, and lower future earnings estimates 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 materially impact regulatory capital calculations. The following tables present the gross amount of goodwill and accumulated impairment losses by reportable segments. September 30, 2023 Balance at Balance at September 30, Accumulated September 30, 2023 impairment 2023 (In thousands) (gross amounts) losses (net amounts) Banco Popular de Puerto Rico $ 440,184 $ 3,801 $ 436,383 Popular U.S. 564,456 196,411 368,045 Total Popular, Inc. $ 1,004,640 $ 200,212 $ 804,428 December 31, 2022 Balance at Balance at December 31, Accumulated December 31, 2022 impairment 2022 (In thousands) (gross amounts) losses (net amounts) Banco Popular de Puerto Rico $ 440,184 $ 3,801 $ 436,383 Popular U.S. 564,456 173,411 391,045 Total Popular, Inc. $ 1,004,640 $ 177,212 $ 827,428

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