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Fair value measurement | 9 Months Ended
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Sep. 30, 2023
Fair Value Disclosures |
Fair Value Measurement | Note 24 – 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 judgements 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 2022 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, 2023 and December 31, 2022: At September 30, 2023 (In thousands) Level 1 Level 2 Level 3 Measured at NAV Total RECURRING FAIR VALUE MEASUREMENTS Assets Debt securities available-for-sale: U.S. Treasury securities $ 3,871,643 $ 7,458,038 $ - $ - $ 11,329,681 Collateralized mortgage obligations - federal agencies - 138,014 - - 138,014 Mortgage-backed securities - 5,660,488 653 - 5,661,141 Other - 22 1,000 - 1,022 Total debt securities available-for-sale $ 3,871,643 $ 13,256,562 $ 1,653 $ - $ 17,129,858 Trading account debt securities, excluding derivatives: U.S. Treasury securities $ 15,644 $ - $ - $ - $ 15,644 Obligations of Puerto Rico, States and political subdivisions - 57 - - 57 Collateralized mortgage obligations - 42 10 - 52 Mortgage-backed securities - 14,747 137 - 14,884 Other - - 188 - 188 Total trading account debt securities, excluding derivatives $ 15,644 $ 14,846 $ 335 $ - $ 30,825 Equity securities $ - $ 35,026 $ - $ 286 $ 35,312 Mortgage servicing rights - - 119,030 - 119,030 Loans held-for-sale - 5,239 - - 5,239 Derivatives - 23,511 - - 23,511 Total assets measured at fair value on a recurring basis $ 3,887,287 $ 13,335,184 $ 121,018 $ 286 $ 17,343,775 Liabilities Derivatives $ - $ (21,747) $ - $ - $ (21,747) Total liabilities measured at fair value on a recurring basis $ - $ (21,747) $ - $ - $ (21,747) At December 31, 2022 (In thousands) Level 1 Level 2 Level 3 Measured at NAV Total RECURRING FAIR VALUE MEASUREMENTS Assets Debt securities available-for-sale: U.S. Treasury securities $ 1,908,589 $ 9,272,359 $ - $ - $ 11,180,948 Collateralized mortgage obligations - federal agencies - 165,196 - - 165,196 Mortgage-backed securities - 6,456,459 711 - 6,457,170 Other - 60 1,000 - 1,060 Total debt securities available-for-sale $ 1,908,589 $ 15,894,074 $ 1,711 $ - $ 17,804,374 Trading account debt securities, excluding derivatives: U.S. Treasury securities $ 13,069 $ - $ - $ - $ 13,069 Obligations of Puerto Rico, States and political subdivisions - 64 - - 64 Collateralized mortgage obligations - 47 113 - 160 Mortgage-backed securities - 14,008 215 - 14,223 Other - - 207 - 207 Total trading account debt securities, excluding derivatives $ 13,069 $ 14,119 $ 535 $ - $ 27,723 Equity securities $ - $ 29,302 $ - $ 330 $ 29,632 Mortgage servicing rights - - 128,350 - 128,350 Derivatives - 19,229 - - 19,229 Total assets measured at fair value on a recurring basis $ 1,921,658 $ 15,956,724 $ 130,596 $ 330 $ 18,009,308 Liabilities Derivatives $ - $ (17,000) $ - $ - $ (17,000) Total liabilities measured at fair value on a recurring basis $ - $ (17,000) $ - $ - $ (17,000) Beginning in the first quarter of 2023, the Corporation has elected the fair value option for BPPR mortgage loans held for sale. This election better aligns with the management of the portfolio from a business perspective. As of December 31, 2022, the Corporation had not elected the fair value option for any of the loans in the held for sale portfolio. Loans held-for-sale measured at fair value Loans held-for-sale measured at fair value were priced based on secondary market prices. These loans are classified as Level 2. The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for mortgage loans held for sale measured at fair value as of September 30,2023. (In thousands) September 30, 2023 Aggregate Unpaid Fair Value Principal Balance Difference Loans held for sale $ 5,239 $ 5,364 $ (125) No loans held for sell were 90 or more days past due or on nonaccrual status as of September 30,2023. During the quarter and nine months ended September 30,2023, the Corporation recognized an unrealized gain of $ 23 thousand and an unrealized loss of $ 104 thousand, respectively, for changes in the fair value of mortgage loans held for sale for which we elected the fair value option, that was offset by the changes in the fair value of the related hedging instrument, both of which are recorded within the mortgage banking activities line item of the accompanying Statement of Operations. 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, 2023 and 2022 and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date. Nine months ended September 30, 2023 (In thousands) Level 1 Level 2 Level 3 Total NONRECURRING FAIR VALUE MEASUREMENTS Assets Write-downs Loans [1] $ - $ - $ 9,113 $ 9,113 $ (3,087) Other real estate owned [2] - - 5,457 5,457 (1,012) Other foreclosed assets [2] - - 44 44 (14) Total assets measured at fair value on a nonrecurring basis $ - $ - $ 14,614 $ 14,614 $ (4,113) [1] Relates mainly 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. Nine months ended September 30, 2022 (In thousands) Level 1 Level 2 Level 3 Total NONRECURRING FAIR VALUE MEASUREMENTS Assets Write-downs Loans [1] $ - $ - $ 9,933 $ 9,933 $ (9,580) Loans held-for-sale [2] - - 8,080 8,080 (224) Other real estate owned [3] - - 3,067 3,067 (940) Other foreclosed assets [3] - - 30 30 (1) Long-lived assets held-for-sale [4] - - 686 686 (688) Total assets measured at fair value on a nonrecurring basis $ - $ - $ 21,796 $ 21,796 $ (11,433) [1] Relates mainly 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. [4] Represents the fair value of long-lived assets held-for-sale that were written down to their fair value. 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, 2023 and 2022. Quarter ended September 30, 2023 MBS Other CMOs MBS Other classified securities classified classified securities as debt classified as as trading as trading classified securities debt securities account account as trading Mortgage available- available- debt debt account debt servicing Total (In thousands) for-sale for-sale securities securities securities rights assets Balance at June 30, 2023 $ 655 $ 1,000 $ 56 $ 163 $ 191 $ 121,249 $ 123,314 Gains (losses) included in earnings - - - - (3) (2,793) (2,796) Gains (losses) included in OCI (2) - - - - - (2) Additions - - - - - 574 574 Settlements - - (46) (26) - - (72) Balance at September 30, 2023 $ 653 $ 1,000 $ 10 $ 137 $ 188 $ 119,030 $ 121,018 Changes in unrealized gains (losses) included in earnings relating to assets still held at September 30, 2023 $ - $ - $ - $ - $ 4 $ (381) $ (377) Nine months ended September 30, 2023 MBS Other MBS Other classified securities CMOs classified securities as debt classified as classified as trading classified securities debt securities as trading account as trading Mortgage available- available- account debt debt account debt servicing Total (In thousands) for-sale for-sale securities securities securities rights assets Balance at January 1, 2023 $ 711 $ 1,000 $ 113 $ 215 $ 207 $ 128,350 $ 130,596 Gains (losses) included in earnings - - - (2) (19) (10,386) (10,407) Gains (losses) included in OCI (8) - - - - - (8) Additions - - 4 - - 1,814 1,818 Sales - - - - - (1,269) (1,269) Settlements (50) - (107) (76) - 521 288 Balance at September 30, 2023 $ 653 $ 1,000 $ 10 137 $ 188 $ 119,030 $ 121,018 Changes in unrealized gains (losses) included in earnings relating to assets still held at September 30, 2023 $ - $ - $ - $ (1) $ 22 $ (1,828) $ (1,807) Quarter ended September 30, 2022 MBS Other Other classified securities CMOs securities as debt classified as classified classified securities debt securities as trading as trading Mortgage available- available- account debt account debt servicing Total Contingent Total (In thousands) for-sale for-sale securities securities rights assets consideration liabilities Balance at June 30, 2022 $ 779 $ 500 $ 152 $ 264 $ 129,877 $ 131,572 $ (9,241) $ (9,241) Gains (losses) included in earnings - - (1) (9) (499) (509) 9,241 9,241 Gains (losses) included in OCI (18) - - - - (18) - - Additions - 500 3 - 1,163 1,666 - - Settlements (50) - (19) - - (69) - - Balance at September 30, 2022 $ 711 $ 1,000 $ 135 $ 255 $ 130,541 $ 132,642 $ - $ - Changes in unrealized gains (losses) included in earnings relating to assets still held at September 30, 2022 $ - $ - $ (1) $ 7 $ 1,984 $ 1,990 $ - $ - Nine months ended September 30, 2022 MBS Other Other classified securities CMOs securities as debt classified as classified classified securities debt securities as trading as trading Mortgage available- available- account debt account debt servicing Total Contingent Total (In thousands) for-sale for-sale securities securities rights assets consideration liabilities Balance at January 1, 2022 $ 826 $ - $ 198 $ 280 $ 121,570 $ 122,874 $ (9,241) $ (9,241) Gains (losses) included in earnings - - (2) (25) 2,776 2,749 9,241 9,241 Gains (losses) included in OCI (15) - - - - (15) - - Additions - 1,000 5 - 6,195 7,200 - - Settlements (100) - (66) - - (166) - - Balance at September 30, 2022 $ 711 $ 1,000 $ 135 $ 255 $ 130,541 $ 132,642 $ - $ - Changes in unrealized gains (losses) included in earnings relating to assets still held at September 30, 2022 $ - $ - $ (2) $ 14 $ 11,556 $ 11,568 $ - $ - Gains and losses (realized and unrealized) included in earnings for the quarters and nine months ended September 30, 2023 and 2022 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, 2023 Nine months ended September 30, 2023 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 $ (2,793) $ (381) $ (10,386) $ (1,828) Trading account profit (loss) (3) 4 (21) 21 Total $ (2,796) $ (377) $ (10,407) $ (1,807) Quarter ended September 30, 2022 Nine months ended September 30, 2022 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 $ (499) $ 1,984 $ 2,776 $ 11,556 Trading account profit (loss) (10) 6 (27) 12 Other operating income 9,241 - 9,241 - Total $ 8,732 $ 1,990 $ 11,990 $ 11,568 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, 2023 and 2022. Fair value at September 30, (In thousands) 2023 Valuation technique Unobservable inputs Weighted average (range) [1] CMO's - trading $ 10 Discounted cash flow model Weighted average life 0.2 years ( 0.2 - 0.3 years) Yield 4.9 % Prepayment speed 7.3 % Other - trading $ 188 Discounted cash flow model Weighted average life 2.5 years Yield 12.0% Prepayment speed 10.8% Loans held-in-portfolio $ 9,044 [2] External appraisal Haircut applied on external appraisals 7.2 % ( 5.0 % - 10.0 %) Other real estate owned $ 325 [3] External appraisal Haircut applied on external appraisals 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) 2022 Valuation technique Unobservable inputs Weighted average (range) [1] CMO's - trading $ 135 Discounted cash flow model Weighted average life 0.5 years ( 0.2 - 0.7 years) Yield 4.9 % ( 4.9 % - 5.4 %) Prepayment speed 10.7 % ( 10.1 % - 18.5 %) Other - trading $ 255 Discounted cash flow model Weighted average life 2.9 years Yield 12.0% Prepayment speed 10.8% Loans held-in-portfolio $ 4,473 [2] External appraisal Haircut applied on external appraisals 16.1 % ( 5 .0% - 25 .0%) Other real estate owned $ 289 [3] External appraisal Haircut applied on external appraisals 27 % ( 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.

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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 https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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