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Fair value measurement | 6 Months Ended
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Jun. 30, 2024
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 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 2023 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 June 30, 2024 and December 31, 2023: At June 30, 2024 (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 $ 7,751,165 $ 5,256,221 $ - $ - $ 13,007,386 Collateralized mortgage obligations - federal agencies - 131,853 - - 131,853 Mortgage-backed securities - 5,400,959 581 - 5,401,540 Other - - 2,000 - 2,000 Total debt securities available-for-sale $ 7,751,165 $ 10,789,033 $ 2,581 $ - $ 18,542,779 Trading account debt securities, excluding derivatives: U.S. Treasury securities $ 7,064 $ - $ - $ - $ 7,064 Obligations of Puerto Rico, States and political subdivisions - 59 - - 59 Collateralized mortgage obligations - 87 - - 87 Mortgage-backed securities - 20,560 84 - 20,644 Other - - 158 - 158 Total trading account debt securities, excluding derivatives $ 7,064 $ 20,706 $ 242 $ - $ 28,012 Equity securities $ - $ 43,081 $ - $ 388 $ 43,469 Mortgage servicing rights - - 113,386 - 113,386 Loans held-for-sale - 5,197 - - 5,197 Derivatives - 25,228 - - 25,228 Total assets measured at fair value on a recurring basis $ 7,758,229 $ 10,883,245 $ 116,209 $ 388 $ 18,758,071 Liabilities Derivatives $ - $ (23,198) $ - $ - $ (23,198) Total liabilities measured at fair value on a recurring basis $ - $ (23,198) $ - $ - $ (23,198) 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) 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. 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 tables summarize 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 June 30, 2024 and December 31, 2023. (In thousands) June 30, 2024 Aggregate Unpaid Fair Value Principal Balance Difference Loans held for sale $ 5,197 $ 5,139 $ 58 (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 June 30, 2024 and December 31, 2023. For the six months ended June 30, 2024, 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 quarters and six months ended June 30, 2024 and 2023 and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date. Six months ended June 30, 2024 (In thousands) Level 1 Level 2 Level 3 Total NONRECURRING FAIR VALUE MEASUREMENTS Assets Write-downs Loans [1] $ - $ - $ 2,039 $ 2,039 $ (329) Loans held-for-sale [2] - 3,028 - 3,028 (38) Other real estate owned [3] - - 4,426 4,426 (1,602) Other foreclosed assets [3] - - 211 211 (46) Total assets measured at fair value on a nonrecurring basis $ - $ 3,028 $ 6,676 $ 9,704 $ (2,015) [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. Six months ended June 30, 2023 (In thousands) Level 1 Level 2 Level 3 Total NONRECURRING FAIR VALUE MEASUREMENTS Assets Write-downs Loans [1] $ - $ - $ 18,923 $ 18,923 $ (7,092) Other real estate owned [2] - - 2,815 2,815 (656) Other foreclosed assets [2] - - 41 41 (9) Total assets measured at fair value on a nonrecurring basis $ - $ - $ 21,779 $ 21,779 $ (7,757) [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. The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters and six months ended June 30, 2024 and 2023. Quarter ended June 30, 2024 MBS Other MBS Other classified securities classified securities as debt classified as as trading classified securities debt securities account as trading Mortgage available- available- debt account debt servicing Total (In thousands) for-sale for-sale securities securities rights assets Balance at March 31, 2024 $ 607 $ 2,000 $ 84 $ 166 $ 114,964 $ 117,821 Gains (losses) included in earnings - - - (8) (1,945) (1,953) Gains (losses) included in OCI (1) - - - - (1) Additions - - - - 367 367 Settlements (25) - - - - (25) Balance at June 30, 2024 $ 581 $ 2,000 $ 84 $ 158 $ 113,386 $ 116,209 Changes in unrealized gains (losses) included in earnings relating to assets still held at June 30, 2024 $ - $ - $ - $ 10 $ 500 $ 510 Six months ended June 30, 2024 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, 2024 $ 606 $ 2,500 $ 5 $ 112 $ 167 $ 118,109 $ 121,499 Gains (losses) included in earnings - (500) - - (9) (5,384) (5,893) Additions - - - - - 661 661 Settlements (25) - (5) (28) - - (58) Balance at June 30, 2024 $ 581 $ 2,000 $ - $ 84 $ 158 $ 113,386 $ 116,209 Changes in unrealized gains (losses) included in earnings relating to assets still held at June 30, 2024 $ - $ (500) $ - $ - $ 12 $ (702) $ (1,190) Quarter ended June 30, 2023 MBS Other Other classified securities CMOs MBS securities as debt classified as classified classified classified securities debt securities as trading as trading as trading Mortgage available- available- account debt account debt account debt servicing Total (In thousands) for-sale for-sale securities securities securities rights assets Balance at March 31, 2023 $ 655 $ 1,000 $ 88 $ 188 $ 199 $ 127,475 $ 129,605 Gains (losses) included in earnings - - - - (8) (6,217) (6,225) Additions - - 4 - - 739 743 Sales - - - - - (1,269) (1,269) Settlements - - (36) (25) - 521 460 Balance at June 30, 2023 $ 655 $ 1,000 $ 56 $ 163 $ 191 $ 121,249 $ 123,314 Changes in unrealized gains (losses) included in earnings relating to assets still held at June 30, 2023 $ - $ - $ - $ - $ 9 $ (2,732) $ (2,723) Six months ended June 30, 2023 MBS Other Other classified securities CMOs securities as debt classified as classified MBS classified securities debt securities as trading classified as as trading Mortgage available- available- account debt trading account 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) (16) (7,593) (7,611) Gains (losses) included in OCI (6) - - - - - (6) Additions - - 4 - - 1,240 1,244 Sales - - - - - (1,269) (1,269) Settlements (50) - (61) (50) - 521 360 Balance at June 30, 2023 $ 655 $ 1,000 $ 56 $ 163 $ 191 $ 121,249 $ 123,314 Changes in unrealized gains (losses) included in earnings relating to assets still held at June 30, 2023 $ - $ - $ - $ (1) $ 18 $ (1,447) $ (1,430) Gains and losses (realized and unrealized) included in earnings for the quarters and six months ended June 30, 2024 and 2023 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows: Quarter ended June 30, 2024 Six months ended June 30, 2024 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 $ (1,945) $ 500 $ (5,384) $ (702) Trading account profit (loss) (8) 10 (9) 12 Provision for credit losses - - (500) (500) Total $ (1,953) $ 510 $ (5,893) $ (1,190) Quarter ended June 30, 2023 Six months ended June 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 $ (6,217) $ (2,732) $ (7,593) $ (1,447) Trading account profit (loss) (8) 9 (18) 17 Total $ (6,225) $ (2,723) $ (7,611) $ (1,430) 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 June 30, 2024 and 2023. Fair value at June 30, (In thousands) 2024 Valuation technique Unobservable inputs Weighted average (range) [1] Other - trading $ 158 Discounted cash flow model Weighted average life 2.3 years Yield 12.0% Prepayment speed 10.8% Loans held-in-portfolio $ 2,039 [2] External appraisal Haircut applied on external appraisals 10.0% [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. Fair value at June 30, (In thousands) 2023 Valuation technique Unobservable inputs Weighted average (range) [1] CMO's - trading $ 56 Discounted cash flow model Weighted average life 0.2 years ( 0.2 - 0.4 years) Yield 4.9 % ( 4.9 % - 5.4 %) Prepayment speed 7.9 % ( 7.7 % - 25 %) Other - trading $ 191 Discounted cash flow model Weighted average life 2.5 years Yield 12.0% Prepayment speed 10.8% Loans held-in-portfolio $ 18,854 [2] External appraisal Haircut applied on external appraisals 12 .0% ( 5 .0% - 20 .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.

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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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