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Fair value measurement | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures |
Fair Value Measurement | Note 23 – Fair value measurement ASC Subtopic 820-10 “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels in order to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is broken down into three levels based on the reliability of inputs as follows:  Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Valuation on these instruments does not necessitate a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market.  Level 2 - Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the financial instrument.  Level 3 - Inputs are unobservable and significant to the fair value measurement. Unobservable inputs reflect the Corporation’s own assumptions about assumptions that market participants would use in pricing the asset or liability. The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is based upon quoted market prices when available. If listed prices or quotes are not available, the Corporation employs internally-developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s fair value is adequately representative of the price that would be received or paid in the marketplace. These adjustments include amounts that reflect counterparty credit quality, the Corporation’s credit standing, constraints on liquidity and unobservable parameters that are applied consistently. There have been no changes in the Corporation’s methodologies used to estimate the fair value of assets and liabilities from those disclosed in the 2020 Form 10-K. The estimated fair value may be subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in calculating fair value could significantly affect the results. Fair Value on a Recurring and Nonrecurring Basis The following fair value hierarchy tables present information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020:
At September 30, 2021
(In thousands) | Level 1 | Level 2 | Level 3 | Total
RECURRING FAIR VALUE MEASUREMENTS |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |
Debt securities available-for-sale: |  |  |  |  |  |  |  |
U.S. Treasury securities | $ | 799,972 | $ | 13,816,977 | $ | - | $ | 14,616,949
Obligations of U.S. Government sponsored entities |  | - |  | 71 |  | - |  | 71
Collateralized mortgage obligations - federal agencies |  | - |  | 250,491 |  | - |  | 250,491
Mortgage-backed securities |  | - |  | 9,522,676 |  | 883 |  | 9,523,559
Other |  | - |  | 156 |  | - |  | 156
Total debt securities available-for-sale | $ | 799,972 | $ | 23,590,371 | $ | 883 | $ | 24,391,226
Trading account debt securities, excluding derivatives: |  |  |  |  |  |  |  |
U.S. Treasury securities | $ | 10,780 | $ | - | $ | - | $ | 10,780
Obligations of Puerto Rico, States and political subdivisions |  | - |  | 82 |  | - |  | 82
Collateralized mortgage obligations |  | - |  | 61 |  | 220 |  | 281
Mortgage-backed securities |  | - |  | 24,569 |  | - |  | 24,569
Other |  | - |  | - |  | 352 |  | 352
Total trading account debt securities, excluding derivatives | $ | 10,780 | $ | 24,712 | $ | 572 | $ | 36,064
Equity securities | $ | - | $ | 30,212 | $ | - | $ | 30,212
Mortgage servicing rights |  | - |  | - |  | 116,567 |  | 116,567
Derivatives |  | - |  | 23,827 |  | - |  | 23,827
Total assets measured at fair value on a recurring basis | $ | 810,752 | $ | 23,669,122 | $ | 118,022 | $ | 24,597,896
Liabilities |  |  |  |  |  |  |  |
Derivatives | $ | - | $ | (20,879) | $ | - | $ | (20,879)
Total liabilities measured at fair value on a recurring basis | $ | - | $ | (20,879) | $ | - | $ | (20,879)
At December 31, 2020
(In thousands) | Level 1 | Level 2 | Level 3 | Total
RECURRING FAIR VALUE MEASUREMENTS |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |
Debt securities available-for-sale: |  |  |  |  |  |  |  |
U.S. Treasury securities | $ | 3,499,781 | $ | 7,288,259 | $ | - | $ | 10,788,040
Obligations of U.S. Government sponsored entities |  | - |  | 60,184 |  | - |  | 60,184
Collateralized mortgage obligations - federal agencies |  | - |  | 392,132 |  | - |  | 392,132
Mortgage-backed securities |  | - |  | 10,319,547 |  | 1,014 |  | 10,320,561
Other |  | - |  | 235 |  | - |  | 235
Total debt securities available-for-sale | $ | 3,499,781 | $ | 18,060,357 | $ | 1,014 | $ | 21,561,152
Trading account debt securities, excluding derivatives: |  |  |  |  |  |  |  |
U.S. Treasury securities | $ | 11,506 | $ | - | $ | - | $ | 11,506
Obligations of Puerto Rico, States and political subdivisions |  | - |  | 103 |  | - |  | 103
Collateralized mortgage obligations |  | - |  | 68 |  | 278 |  | 346
Mortgage-backed securities |  | - |  | 24,338 |  | - |  | 24,338
Other |  | - |  | - |  | 381 |  | 381
Total trading account debt securities, excluding derivatives | $ | 11,506 | $ | 24,509 | $ | 659 | $ | 36,674
Equity securities | $ | - | $ | 29,590 | $ | - | $ | 29,590
Mortgage servicing rights |  | - |  | - |  | 118,395 |  | 118,395
Derivatives |  | - |  | 20,785 |  | - |  | 20,785
Total assets measured at fair value on a recurring basis | $ | 3,511,287 | $ | 18,135,241 | $ | 120,068 | $ | 21,766,596
Liabilities |  |  |  |  |  |  |  |
Derivatives | $ | - | $ | (18,925) | $ | - | $ | (18,925)
Total liabilities measured at fair value on a recurring basis | $ | - | $ | (18,925) | $ | - | $ | (18,925)
The fair value information included in the following tables is not as of period end, but as of the date that the fair value measurement was recorded during the quarters and nine months ended September 30, 2021 and 2020 and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.
Nine months ended September 30, 2021
(In thousands) | Level 1 | Level 2 | Level 3 | Total |  |
NONRECURRING FAIR VALUE MEASUREMENTS |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  | Write-downs
Loans[1] | $ | - | $ | - | $ | 22,700 | $ | 22,700 | $ | (4,775)
Other real estate owned[2] |  | - |  | - |  | 6,540 |  | 6,540 |  | (1,583)
Long-lived assets held-for-sale[3] |  | - |  | - |  | 2,728 |  | 2,728 |  | (303)
Total assets measured at fair value on a nonrecurring basis | $ | - | $ | - | $ | 31,968 | $ | 31,968 | $ | (6,661)
[1] Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations. Costs to sell are excluded from the reported fair value amount.
[2] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount.
[3] Represents the fair value of long-lived assets held-for-sale that were written down to their fair value.
Nine months ended September 30, 2020
(In thousands) | Level 1 | Level 2 | Level 3 | Total |  |
NONRECURRING FAIR VALUE MEASUREMENTS |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  | Write-downs
Loans[1] | $ | - | $ | - | $ | 96,740 | $ | 96,740 | $ | (20,495)
Loans held-for-sale[2] |  | - |  | - |  | 4,070 |  | 4,070 |  | (2,038)
Other real estate owned[3] |  | - |  | - |  | 19,475 |  | 19,475 |  | (3,025)
Other foreclosed assets[3] |  | - |  | - |  | 444 |  | 444 |  | (701)
Total assets measured at fair value on a nonrecurring basis | $ | - | $ | - | $ | 120,729 | $ | 120,729 | $ | (26,259)
[1] Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations. Costs to sell are excluded from the reported fair value amount.
[2] Relates to a quarterly valuation on loans held-for-sale. Costs to sell are excluded from the reported fair value amount.
[3] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount.
The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters and nine months ended September 30, 2021 and 2020.
| Quarter ended September 30, 2021
|  | MBS | CMOs | Other |  |  |  |
|  | classified | classified | securities |  |  |  |
|  | as debt | as trading | classified |  |  |  |
|  | securities | account | as trading | Mortgage |
|  | available- | debt | account debt | servicing | Total
(In thousands) | for-sale | securities | securities | rights | assets
Balance at June 30, 2021 | $ | 938 | $ | 250 | $ | 361 | $ | 119,467 | $ | 121,016
Gains (losses) included in earnings |  | - |  | - |  | (9) |  | (5,979) |  | (5,988)
Gains (losses) included in OCI |  | (5) |  | - |  | - |  | - |  | (5)
Additions |  | - |  | 4 |  | - |  | 3,079 |  | 3,083
Settlements |  | (50) |  | (34) |  | - |  | - |  | (84)
Balance at September 30, 2021 | $ | 883 | $ | 220 | $ | 352 | $ | 116,567 | $ | 118,022
Changes in unrealized gains (losses) included in earnings relating to assets still held at September 30, 2021 | $ | - | $ | - | $ | 4 | $ | (1,912) | $ | (1,908)
| Nine months ended September 30, 2021
|  | MBS |  |  | Other |  |  |  |
|  | classified | CMOs | securities |  |  |  |
|  | as investment | classified | classified |  |  |  |
|  | securities | as trading | as trading | Mortgage |
|  | available- | account | account | servicing | Total
(In thousands) | for-sale | securities | securities | rights | assets
Balance at January 1, 2021 | $ | 1,014 | $ | 278 | $ | 381 | $ | 118,395 | $ | 120,068
Gains (losses) included in earnings |  | - |  | - |  | (29) |  | (11,716) |  | (11,745)
Gains (losses) included in OCI |  | (6) |  | - |  | - |  | - |  | (6)
Additions |  | - |  | 28 |  | - |  | 9,888 |  | 9,916
Settlements |  | (125) |  | (86) |  | - |  | - |  | (211)
Balance at September 30, 2021 | $ | 883 | $ | 220 | $ | 352 | $ | 116,567 | $ | 118,022
Changes in unrealized gains (losses) included in earnings relating to assets still held at September 30, 2021 | $ | - | $ | (1) | $ | 13 | $ | 1,214 | $ | 1,226
| Quarter ended September 30, 2020
|  | MBS |  |  | Other |  |  |  |
|  | classified | CMOs | securities |  |  |  |
|  | as investment | classified | classified |  |  |  |
|  | securities | as trading | as trading | Mortgage |
|  | available- | account | account | servicing | Total
(In thousands) | for-sale | securities | securities | rights | assets
Balance at June 30, 2020 | $ | 1,151 | $ | 442 | $ | 423 | $ | 141,144 | $ | 143,160
Gains (losses) included in earnings |  | - |  | - |  | (10) |  | (20,491) |  | (20,501)
Gains (losses) included in OCI |  | (2) |  | - |  | - |  | - |  | (2)
Additions |  | - |  | 2 |  | - |  | 2,899 |  | 2,901
Settlements |  | (25) |  | (34) |  | - |  | - |  | (59)
Balance at September 30, 2020 | $ | 1,124 | $ | 410 | $ | 413 | $ | 123,552 | $ | 125,499
Changes in unrealized gains (losses) included in earnings relating to assets still held at September 30, 2020 | $ | - | $ | - | $ | - | $ | (7,892) | $ | (7,892)
| Nine months ended September 30, 2020
|  | MBS |  |  | Other |  |  |  |
|  | classified | CMOs | securities |  |  |  |
|  | as investment | classified | classified |  |  |  |
|  | securities | as trading | as trading | Mortgage |
|  | available- | account | account | servicing | Total
(In thousands) | for-sale | securities | securities | rights | assets
Balance at January 1, 2020 | $ | 1,182 | $ | 530 | $ | 440 | $ | 150,906 | $ | 153,058
Gains (losses) included in earnings |  | - |  | - |  | (27) |  | (33,360) |  | (33,387)
Gains (losses) included in OCI |  | (8) |  | - |  | - |  | - |  | (8)
Additions |  | - |  | 4 |  | - |  | 6,006 |  | 6,010
Settlements |  | (50) |  | (124) |  | - |  | - |  | (174)
Balance at September 30, 2020 | $ | 1,124 | $ | 410 | $ | 413 | $ | 123,552 | $ | 125,499
Changes in unrealized gains (losses) included in earnings relating to assets still held at September 30, 2020 | $ | - | $ | - | $ | 13 | $ | (15,278) | $ | (15,265)
Gains and losses (realized and unrealized) included in earnings for the quarters and nine months ended September 30, 2021 and 2020 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:
| Quarter ended September 30, 2021 | Nine months ended September 30, 2021
|  |  | Changes in unrealized |  |  | Changes in unrealized
| Total gains | gains (losses) relating to | Total gains | gains (losses) relating to
| (losses) included | assets still held at | (losses) included | assets still held at
(In thousands) | in earnings | reporting date | in earnings | reporting date
Mortgage banking activities | $ | (5,979) | $ | (1,912) | $ | (11,716) | $ | 1,214
Trading account profit (loss) |  | (9) |  | 4 |  | (29) |  | 12
Total | $ | (5,988) | $ | (1,908) | $ | (11,745) | $ | 1,226
| Quarter ended September 30, 2020 | Nine months ended September 30, 2020
|  |  | Changes in unrealized |  |  | Changes in unrealized
| Total gains | gains (losses) relating to | Total gains | gains (losses) relating to
| (losses) included | assets still held at | (losses) included | assets still held at
(In thousands) | in earnings | reporting date | in earnings | reporting date
Mortgage banking activities | $ | (20,491) | $ | (7,892) | $ | (33,360) | $ | (15,278)
Trading account profit (loss) |  | (10) |  | - |  | (27) |  | 13
Total | $ | (20,501) | $ | (7,892) | $ | (33,387) | $ | (15,265)
The following tables include quantitative information about significant unobservable inputs used to derive the fair value of Level 3 instruments, excluding those instruments for which the unobservable inputs were not developed by the Corporation such as prices of prior transactions and/or unadjusted third-party pricing sources at September 30, 2021 and 2020.
|  |  | Fair value at |  |  |  |  |
| September 30, |  |  |  |  |
(In thousands) |  | 2021 |  | Valuation technique | Unobservable inputs | Weighted average (range) [1]
CMO's - trading | $ | 220 |  | Discounted cash flow model | Weighted average life | 0.9 years (0.1 - 1.1 years) |
|  |  |  |  |  | Yield | 3.6% (3.6% - 4.1%) |
|  |  |  |  |  | Prepayment speed | 11.4% (10.1% - 16.7%) |
Other - trading | $ | 352 |  | Discounted cash flow model | Weighted average life | 3.6 years |
|  |  |  |  |  | Yield | 12.0% |
|  |  |  |  |  | Prepayment speed | 10.8% |
Mortgage servicing rights | $ | 116,567 |  | Discounted cash flow model | Prepayment speed | 6.2% (0.3% - 34.2%) |
|  |  |  |  |  | Weighted average life | 6.1 years (0.1 - 13.1 years) |
|  |  |  |  |  | Discount rate | 11.1% (9.5% - 14.7%) |
Loans held-in-portfolio | $ | 21,715 | [2] | External appraisal | Haircut applied on |  |
|  |  |  |  |  | external appraisals | 11.0% (10.0% - 30.5%) |
Other real estate owned | $ | 4,099 | [3] | External appraisal | Haircut applied on |  |
|  |  |  |  |  | external appraisals | 22.3% (5.0% - 35.0%) |
[1] | Weighted average of significant unobservable inputs used to develop Level 3 fair value measurements were calculated by relative fair value.
[2] | Loans held-in-portfolio in which haircuts were not applied to external appraisals were excluded from this table.
[3] | Other real estate owned in which haircuts were not applied to external appraisals were excluded from this table.
|  |  | Fair value at |  |  |  |  |
| September 30, |  |  |  |  |
(In thousands) |  | 2020 |  | Valuation technique | Unobservable inputs | Weighted average (range) [1]
CMO's - trading | $ | 410 |  | Discounted cash flow model | Weighted average life | 1.3 years (0.6 - 1.5 years) |
|  |  |  |  |  | Yield | 3.7% (3.6% - 4.1%) |
|  |  |  |  |  | Prepayment speed | 17.7% (13.8% - 18.4%) |
Other - trading | $ | 413 |  | Discounted cash flow model | Weighted average life | 3.8 years |
|  |  |  |  |  | Yield | 12.0% |
|  |  |  |  |  | Prepayment speed | 10.8% |
Mortgage servicing rights | $ | 123,552 |  | Discounted cash flow model | Prepayment speed | 6.9% (0.2% - 22.1%) |
|  |  |  |  |  | Weighted average life | 6.1 years (0.1 - 12.3 years) |
|  |  |  |  |  | Discount rate | 11.2% (9.5% - 14.7%) |
Loans held-in-portfolio | $ | 96,740 | [2] | External appraisal | Haircut applied on |  |
|  |  |  |  |  | external appraisals | 23.2% (21.0% - 40.0%) |
Other real estate owned | $ | 13,826 | [3] | External appraisal | Haircut applied on |  |
|  |  |  |  |  | external appraisals | 21.5% (5.0% - 30.0%) |
[1] | Weighted average of significant unobservable inputs used to develop Level 3 fair value measurements were calculated by relative fair value.
[2] | Loans held-in-portfolio in which haircuts were not applied to external appraisals were excluded from this table.
[3] | Other real estate owned in which haircuts were not applied to external appraisals were excluded from this table.
The significant unobservable inputs used in the fair value measurement of the Corporation’s collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are yield, constant prepayment rate, and weighted average life. S ignificant increases (decreases) in any of those inputs in isolation would result in significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the constant prepayment rate will generate a directionally opposite change in the weighted average life. For example, as the average life is reduced by a higher constant prepayment rate, a lower yield will be realized, and when there is a reduction in the constant prepayment rate, the average life of these collateralized mortgage obligations will extend, thus resulting in a higher yield.The significant unobservable inputs used in the fair value measurement of the Corporation’s mortgage servicing rights are constant prepayment rates and discount rates. Increases in interest rates may result in lower prepayments. Discount rates vary according to products and / or portfolios depending on the perceived risk. Increases in discount rates result in a lower fair value measurement.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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