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Fair value measurement | 12 Months Ended
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Dec. 31, 2023
Fair Value Disclosures |
Fair Value Measurement | Note 28 – 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. 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 December 31, 2023 and 2022: At December 31, 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 $ 3,936,036 $ 6,811,025 $ - $ - $ 10,747,061 Collateralized mortgage obligations - federal agencies - 134,686 - - 134,686 Mortgage-backed securities - 5,844,180 606 - 5,844,786 Other - 11 2,500 - 2,511 Total debt securities available-for-sale $ 3,936,036 $ 12,789,902 $ 3,106 $ - $ 16,729,044 Trading account debt securities, excluding derivatives: U.S. Treasury securities $ 16,859 $ - $ - $ - $ 16,859 Obligations of Puerto Rico, States and political subdivisions - 71 - - 71 Collateralized mortgage obligations - 93 5 - 98 Mortgage-backed securities - 14,261 112 - 14,373 Other - - 167 - 167 Total trading account debt securities, excluding derivatives $ 16,859 $ 14,425 $ 284 $ - $ 31,568 Equity securities $ - $ 37,965 $ - $ 310 $ 38,275 Mortgage servicing rights - - 118,109 - 118,109 Loans held-for-sale - 3,239 - - 3,239 Derivatives - 24,419 - - 24,419 Total assets measured at fair value on a recurring basis $ 3,952,895 $ 12,869,950 $ 121,499 $ 310 $ 16,944,654 Liabilities Derivatives $ - $ (21,103) $ - $ - $ (21,103) Total liabilities measured at fair value on a recurring basis $ - $ (21,103) $ - $ - $ (21,103) 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 newly originated 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 originated as held-for-sale measured at fair value as of December 31,2023. (In thousands) December 31, 2023 Aggregate Unpaid Fair Value Principal Balance Difference Loans held for sale $ 3,239 $ 3,202 $ 37 No loans held-for-sale were 90 or more days past due or on nonaccrual status as of December 31,2023. For the year ended December 31,2023, changes in the fair value of mortgage loans held-for-sale for which the Corporation elected the fair value option, were not considered material. 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 years ended December 31, 2023, 2022 and 2021 and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date. Year ended December 31, 2023 (In thousands) Level 1 Level 2 Level 3 Total NONRECURRING FAIR VALUE MEASUREMENTS Assets Write-downs Loans [1] $ - $ - $ 10,091 $ 10,091 $ (3,157) Other real estate owned [2] - - 6,560 6,560 (1,516) Other foreclosed assets [2] - - 102 102 (28) Total assets measured at fair value on a nonrecurring basis $ - $ - $ 16,753 $ 16,753 $ (4,701) [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. Year ended December 31, 2022 (In thousands) Level 1 Level 2 Level 3 Total NONRECURRING FAIR VALUE MEASUREMENTS Assets Write-downs Loans [1] $ - $ - $ 11,215 $ 11,215 $ (2,067) Other real estate owned [2] - - 3,992 3,992 (1,026) Other foreclosed assets [2] - - 13 13 (1) Long-lived assets held-for-sale [3] - - 1,178 1,178 (2,155) Total assets measured at fair value on a nonrecurring basis $ - $ - $ 16,398 $ 16,398 $ (5,249) [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. [3] Represents the fair value of long-lived assets held-for-sale that were written down to their fair value. Year ended December 31, 2021 (In thousands) Level 1 Level 2 Level 3 Total NONRECURRING FAIR VALUE MEASUREMENTS Assets Write-downs Loans [1] $ - $ - $ 21,167 $ 21,167 $ (3,721) Other real estate owned [2] - - 7,727 7,727 (1,579) Other foreclosed assets [2] - - 68 68 (33) Long-lived assets held-for-sale [3] - - 9,007 9,007 (5,320) Trademark [4] - - 156 156 (5,404) Total assets measured at fair value on a nonrecurring basis $ - $ - $ 38,125 $ 38,125 $ (16,057) [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. [4] Represents the fair value of a trademark due to a write-down on impairment. The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2023, 2022, and 2021. Year ended December 31, 2023 MBS Other classified classified CMOs MBS Other as debt as debt classified classified securities securities securities as trading as trading classified as Mortgage available- available- account debt account debt trading account servicing Total Contingent Total (In thousands) for-sale for-sale securities securities debt securities rights assets Consideration liabilities Balance at January 1, 2023 $ 711 $ 1,000 $ 113 $ 215 $ 207 $ 128,350 $ 130,596 $ - $ - Gains (losses) included in earnings - - - (2) (40) (11,589) (11,631) - - Gains (losses) included in OCI (5) - - - - - (5) - - Additions - 1,500 4 - - 2,097 3,601 - - Sales - - - - - (1,269) (1,269) - - Settlements (100) - (112) (101) - 520 207 - - Balance at December 31, 2023 $ 606 $ 2,500 $ 5 $ 112 $ 167 $ 118,109 $ 121,499 $ - $ - Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2023 $ - $ - $ - $ (1) $ 18 $ (529) $ (512) $ - $ - Year ended December 31, 2022 MBS Other Other classified classified CMOs MBS securities as debt as debt classified classified classified securities securities as trading as trading as trading Mortgage available- available- account debt account debt account debt servicing Total Contingent Total (In thousands) for-sale for-sale securities 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) 4 (73) 166 95 9,241 9,241 Gains (losses) included in OCI (15) - - - - - (15) - - Additions - 1,000 5 211 - 6,614 7,830 - - Settlements (100) - (88) - - - (188) - - Balance at December 31, 2022 $ 711 $ 1,000 $ 113 $ 215 $ 207 $ 128,350 $ 130,596 $ - $ - Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2022 $ - $ - $ (2) $ 4 $ (23) $ 11,964 $ 11,943 $ - $ - Year ended December 31, 2021 MBS Other classified CMOs securities as debt classified classified securities as trading as trading Mortgage available- account debt account debt servicing Total Contingent Total (In thousands) for-sale securities securities rights assets Consideration liabilities Balance at January 1, 2021 $ 1,014 $ 278 $ 381 $ 118,395 $ 120,068 $ - $ - Gains (losses) included in earnings - (1) (101) (10,216) (10,318) - - Gains (losses) included in OCI (13) - - - (13) - - Additions - 29 - 13,391 13,419 (9,241) (9,241) Settlements (175) (107) - - (282) - - Balance at December 31, 2021 $ 826 $ 198 $ 280 $ 121,570 $ 122,874 $ (9,241) $ (9,241) Changes in unrealized gains (losses) included in earnings relating to assets still held at December 31, 2021 $ - $ (1) $ (45) $ 6,410 $ 6,364 $ - $ - Gains and losses (realized and unrealized) included in earnings for the years ended December 31, 2023, 2022, and 2021 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows: 2023 2022 2021 Total Changes in unrealized Total Changes in unrealized Total Changes in unrealized gains (losses) gains (losses) gains (losses) gains (losses) gains (losses) gains (losses) included relating to assets still included relating to assets still included relating to assets still (In thousands) in earnings held at reporting date in earnings held at reporting date in earnings held at reporting date Mortgage banking activities $ (11,589) $ (529) $ 166 $ 11,964 $ (10,216) $ 6,410 Trading account (loss) profit (42) 17 (71) (21) (102) (46) Other operating income - - 9,241 - - - Total $ (11,631) $ (512) $ 9,336 $ 11,943 $ (10,318) $ 6,364 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 December 31, 2023 and 2022. Fair value at December 31, (In thousands) 2023 Valuation technique Unobservable inputs Weighted average (range) [1] CMO's - trading $ 5 Discounted cash flow model Weighted average life 0.2 years ( 0.1 - 0.2 years) Yield 4.9 % Prepayment speed 14.5 % Other - trading $ 167 Discounted cash flow model Weighted average life 2.3 years Yield 12.0% Prepayment speed 10.8% Loans held-in-portfolio $ 10,023 [2] External appraisal Haircut applied on external appraisals 6.9 % ( 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 December 31, (In thousands) 2022 Valuation technique Unobservable inputs Weighted average (range) [1] CMO's - trading $ 113 Discounted cash flow model Weighted average life 0.4 years ( 0.1 - 0.6 years) Yield 4.9 % ( 4.9 % - 5.4 %) Prepayment speed 10.2 % ( 9.1 % - 32 %) Other - trading $ 207 Discounted cash flow model Weighted average life 2.5 years Yield 12.0% Prepayment speed 10.8% Loans held-in-portfolio $ 5,087 [2] External appraisal Haircut applied on external appraisals 8.3 % ( 5 .0% - 10.4 %) Other real estate owned $ 528 [3] External appraisal Haircut applied on external appraisals 18.4 % ( 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. 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. Significant 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 . Following is a description of the Corporation’s valuation methodologies used for assets and liabilities measured at fair value. The disclosure requirements exclude certain financial instruments and all non-financial instruments. Accordingly, the aggregate fair value amounts of the financial instruments disclosed do not represent management’s estimate of the underlying value of the Corporation. Trading account debt securities and debt securities available-for-sale ● U.S. Treasury securities: The fair value of U.S. Treasury notes is based on yields that are interpolated from the constant maturity treasury curve. These securities are classified as Level 2. U.S. Treasury bills are classified as Level 1 given the high volume of trades and pricing based on those trades. ● Obligations of U.S. Government sponsored entities: The Obligations of U.S. Government sponsored entities include U.S. agency securities, which fair value is based on an active exchange market and on quoted market prices for similar securities. The U.S. agency securities are classified as Level 2. ● Obligations of Puerto Rico, States and political subdivisions: Obligations of Puerto Rico, States and political subdivisions include municipal bonds. The bonds are segregated and the like characteristics divided into specific sectors. Market inputs used in the evaluation process include all or some of the following: trades, bid price or spread, two sided markets, quotes, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, market data feeds such as those obtained from municipal market sources, discount and capital rates, and trustee reports. The municipal bonds are classified as Level 2. ● Mortgage-backed securities: Certain agency mortgage-backed securities (“MBS”) are priced based on a bond’s theoretical value derived from similar bonds defined by credit quality and market sector. Their fair value incorporates an option adjusted spread. The agency MBS are classified as Level 2. Other agency MBS such as GNMA Puerto Rico Serials are priced using an internally-prepared pricing matrix with quoted prices from local brokers dealers. These particular MBS are classified as Level 3. ● Collateralized mortgage obligations: Agency collateralized mortgage obligations (“CMOs”) are priced based on a bond’s theoretical value derived from similar bonds defined by credit quality and market sector and for which fair value incorporates an option adjusted spread. The option adjusted spread model includes prepayment and volatility assumptions, ratings (whole loans collateral) and spread adjustments. These CMOs are classified as Level 2. Other CMOs, due to their limited liquidity, are classified as Level 3 due to the insufficiency of inputs such as executed trades, credit information and cash flows. ● Corporate securities (included as “other” in the “available-for-sale” category): Given that the quoted prices are for similar instruments, these securities are classified as Level 2. ● Corporate securities and interest-only strips (included as “other” in the “trading account debt securities” category): For corporate securities, quoted prices for these security types are obtained from broker dealers. Given that the quoted prices are for similar instruments or do not trade in highly liquid markets, these securities are classified as Level 2. Given that the fair value was estimated based on a discounted cash flow model using unobservable inputs, interest-only strips are classified as Level 3. Equity securities Equity securities are comprised principally of shares in closed-ended and open-ended mutual funds and other equity securities. Closed-end funds are traded on the secondary market at the shares’ market value. Open-ended funds are considered to be liquid, as investors can sell their shares continually to the fund and are priced at NAV. Mutual funds are classified as Level 2. Other equity securities that do not trade in highly liquid markets are also classified as Level 2, except for one equity security that do not have readily determinable fair value and is under an investment company is measured at NAV. Mortgage servicing rights Mortgage servicing rights (“MSRs”) do not trade in an active market with readily observable prices. MSRs are priced using a discounted cash flow model valuation performed by a third party. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including portfolio characteristics, prepayments assumptions, discount rates, delinquency and foreclosure rates, late charges, other ancillary revenues, cost to service and other economic factors. Prepayment speeds are adjusted for the loans’ characteristics and portfolio behavior. Due to the unobservable nature of certain valuation inputs, the MSRs are classified as Level 3. Derivatives Interest rate caps and indexed options are traded in over-the-counter active markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or equity indexes, and are priced using an income approach based on present value and option pricing models using observable inputs. Other derivatives are liquid and have quoted prices, such as forward contracts or “to be announced securities” (“TBAs”). All of these derivatives are classified as Level 2. The non-performance risk is determined using internally-developed models that consider the collateral held, the remaining term, and the creditworthiness of the entity that bears the risk, and uses available public data or internally-developed data related to current spreads that denote their probability of default. Contingent consideration liability The fair value of the contingent consideration, which relates to earnout payments that could be payable to K2 over a three-year period, was calculated based on a discounted cash flow technique using the probability-weighted average from likely scenarios. This contingent consideration is classified as Level 3. Loans held-in-portfolio that are collateral dependent The impairment is 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 and which could be subject to internal adjustments. These collateral dependent loans are classified as Level 3. Loans measured at fair value or measured at the lower of cost or market Loans held-for-sale measured at fair value or measured at the lower of cost or market were priced based on secondary market prices. These loans are classified as Level 2. Other real estate owned and other foreclosed assets Other real estate owned includes real estate properties securing mortgage, consumer, and commercial loans. Other foreclosed assets include primarily automobiles securing auto loans. The fair value of foreclosed assets may be determined using an external appraisal, broker price opinion, or an internal valuation. These foreclosed assets are classified as Level 3 since they are subject to internal adjustments. ROU assets and leasehold improvements The impairment was measured based on the sublease rental value of the branches that were subject to the strategic realignment of PB’s New York Metro Branch network. These ROU assets and leasehold improvements are classified as Level 3. Long-lived assets held-for-sale The Corporation evaluates for impairment its long-lived assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and records a write down for the difference between the carrying amount and the fair value less cost to sell. These long-lived assets held-for-sale are classified as Level 3. Trademark The write-down on impairment of a trademark was based on the discontinuance of origination thru e-loan platform. This trademark is classified as Level 3.

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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 -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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