Business combination

3 Months Ended

Mar. 31, 2019

Note 4 – Business combination

On August 1, 2018, Popular, Inc., through its subsidiary Popular Auto, LLC (“Popular Auto”), acquired and assumed from Reliable Financial Services, Inc. and Reliable Finance Holding Co. (“Reliable”), subsidiaries of Wells Fargo & Company, certain assets and liabilities related to their auto finance business in Puerto Rico (the “Reliable Transaction” or “Transaction”). Popular Auto acquired approximately $1.6 billion in retail auto loans and $341 million in primarily auto-related commercial loans. Reliable has continued operating as a Division of Popular Auto in parallel with Popular Auto’s existing operations to provide continuity of service to Reliable customers while allowing Popular to assess best practices before completing the integration of the two operations. The Corporation expects to complete the integration of these operations during the second quarter of 2019 and continue to operate this business under the name of Popular Auto.

Wells Fargo retained approximately $398 million in retail auto loans as part of the Transaction and subsequently sold the same to a third party. Popular Auto has entered into a separate servicing agreement with respect to such loans.

Popular entered into the Transaction as part of its growth strategy to increase its market share in the auto finance business in Puerto Rico.

The following table presents the fair values of the consideration and major classes of identifiable assets acquired and liabilities assumed by the Corporation as of August 1, 2018, net of cumulative measurement period adjustments as of period end.

	Book value prior to
	purchase accounting		Fair value		Measurement		As recorded by
(In thousands)	adjustments		adjustments		period adjustments		Popular, Inc.
Cash consideration	$	1,843,256	$	-	$	-	$	1,843,256

Assets:
Loans	$	1,912,866	$	(126,908)^[1]	$	16,505 ^[1]	$	1,802,463
Premises and equipment		1,246		-		-		1,246
Accrued income receivable		1,466		-		-		1,466
Other assets		5,020		-		(91)		4,929
Trademark		-		488		-		488
Total assets	$	1,920,598	$	(126,420)	$	16,414	$	1,810,592

Liabilities:
Other liabilities	$	11,164	$	-	$	-	$	11,164
Total liabilities	$	11,164	$	-	$	-	$	11,164
Net assets acquired	$	1,909,434	$	(126,420)	$	16,414	$	1,799,428
Goodwill on acquisition							$	43,828
[1] The fair value discount is comprised of $106 million related to the retail auto loans portfolio and $4 million related to the commercial loans portfolio.

During the fourth quarter of 2018, measurement period adjustments, amounting to $16.5 million, were made to the estimated fair values of the loans acquired as part of the Transaction to reflect new information obtained about facts and circumstances that existed as of the acquisition date. The increase in the fair value of retail auto loans and commercial loans by $12.2 million and $4.3 million, respectively, was mainly attributed to decreases in credit loss expectations. The related cumulative adjustment to the amortization of the fair value discounts for the retail and commercial portfolios offset each other, resulting in an immaterial impact to the Corporation’s results.

Contractual cash flows for retail auto loans and commercial loans amounted to $1.8 billion and $348 million, respectively, from which $105 million and $3 million, respectively, are not expected to be collected.

For a description of the methods used to determine the fair values of significant assets acquired on the Reliable Transaction, refer to Note 4 of the Consolidated Statements included in the 2018 Form 10-K.