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FAIR VALUE | 6 Months Ended
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Jun. 30, 2022
Fair Value Disclosures [Abstract] |
FAIR VALUE [Text Block] | NOTE 18 – FAIR VALUE Fair Value Measurement ASC Topic 820, “Fair Value Measurement,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance also establishes a fair value hierarchy for classifying assets and liabilities, which is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. One of three levels of inputs may be used to measure fair value:
Level 1 | Valuations of Level 1 assets and liabilities are obtained from readily-available pricing sources for market transactions involving identical assets or liabilities in active markets.
Level 2 | Valuations of Level 2 assets and liabilities are based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 | Valuations of Level 3 assets and liabilities are based on unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined by using pricing models for which the determination of fair value requires significant management judgment as to the estimation.
See Note 30 - Fair Value included in the 2021 Annual Report on Form 10-K for information regarding valuation techniques and inputs used to measure financial instruments at fair value on a recurring basis.
Assets and liabilities measured at fair value on a recurring basis are summarized below as of June 30, 2022 and December 31, 2021:
|  | As of June 30, 2022 |  | As of December 31, 2021
|  | Fair Value Measurements Using |  | Fair Value Measurements Using
(In thousands) | Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Debt securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| U.S. Treasury securities | $ | 141,347 |  | $ | - |  | $ | - |  | $ | 141,347 |  | $ | 148,486 |  | $ | - |  | $ | - |  | $ | 148,486
| Noncallable U.S. agencies debt securities |  | - |  |  | 258,663 |  |  | - |  |  | 258,663 |  |  | - |  |  | 285,028 |  |  | - |  |  | 285,028
| Callable U.S. agencies debt securities |  | - |  |  | 2,159,474 |  |  | - |  |  | 2,159,474 |  |  | - |  |  | 1,971,954 |  |  | - |  |  | 1,971,954
| MBS |  | - |  |  | 3,511,456 |  |  | 6,371 | (1) | 3,517,827 |  |  | - |  |  | 4,037,209 |  |  | 7,234 |  |  | 4,044,443
| Puerto Rico government obligations |  | - |  |  | - |  |  | 2,809 |  |  | 2,809 |  |  | - |  |  | - |  |  | 2,850 |  |  | 2,850
| Other investments |  | - |  |  | - |  |  | 1,000 |  |  | 1,000 |  |  | - |  |  | - |  |  | 1,000 |  |  | 1,000
Equity securities |  | 5,082 |  |  | - |  |  | - |  |  | 5,082 |  |  | 5,378 |  |  | - |  |  | - |  |  | 5,378
Derivative assets |  | - |  |  | 1,025 |  |  | - |  |  | 1,025 |  |  | - |  |  | 1,505 |  |  | - |  |  | 1,505
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  | - |  |  | 636 |  |  | - |  |  | 636 |  |  | - |  |  | 1,178 |  |  | - |  |  | 1,178
(1) | Related to private label MBS.
The table below presents a reconciliation of the beginning and ending balances of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters and six-month periods ended June 30, 2022 and 2021:
|  |  | Quarter Ended June 30,
|  |  | 2022 |  | 2021
Level 3 Instruments Only | Debt Securities |  | Debt Securities
(In thousands) | Available For Sale (1) |  | Available For Sale (1)
Beginning balance | $ | 10,647 |  | $ | 11,776
| Total (losses) gains: |  |  |  |  |
|  | Included in other comprehensive income (unrealized) |  | (106) |  |  | 384
|  | Included in earnings (unrealized) (2) |  | 35 |  |  | -
| Principal repayments and amortization |  | (396) |  |  | (679)
Ending balance | $ | 10,180 |  | $ | 11,481
(1) | Amounts mostly related to private label MBS.
(2) | Changes in unrealized gains included in earnings were recognized within provision for credit losses - benefit and relate to assets still held as of the reporting date.
|  |  | Six-Month Period Ended June 30,
|  |  | 2022 |  | 2021
Level 3 Instruments Only | Debt Securities |  | Debt Securities
(In thousands) | Available For Sale(1) |  | Available For Sale(1)
Beginning balance | $ | 11,084 |  | $ | 11,977
| Total (losses) gains: |  |  |  |  |
|  | Included in other comprehensive income (unrealized) |  | (393) |  |  | 705
|  | Included in earnings (unrealized) (2) |  | 423 |  |  | 127
| Principal repayments and amortization |  | (934) |  |  | (1,328)
Ending balance | $ | 10,180 |  | $ | 11,481
(1) | Amounts mostly related to private label MBS.
(2) | Changes in unrealized gains included in earnings were recognized within provision for credit losses - benefit and relate to assets still held as of the reporting date.
The tables below present quantitative information for significant assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2022 and December 31, 2021:
|  | June 30, 2022 |  |
|  | Fair Value |  | Valuation Technique |  | Unobservable Input |  | Range |  | Weighted Average
(Dollars in thousands) |  |  |  | Minimum | Maximum |
Available-for-sale debt securities:
| Private label MBS | $ | 6,371 |  | Discounted cash flows |  | Discount rate |  | 15.2% | 15.2% |  | 15.2%
|  |  |  |  |  |  | Prepayment rate |  | 3.2% | 20.9% |  | 12.7%
|  |  |  |  |  |  | Projected cumulative loss rate |  | 0.4% | 15.8% |  | 5.6%
| Puerto Rico government obligations |  | 2,809 |  | Discounted cash flows |  | Discount rate |  | 9.1% | 9.1% |  | 9.1%
|  |  |  |  |  |  | Projected cumulative loss rate |  | 19.2% | 19.2% |  | 19.2%
|  | December 31, 2021 |  |
|  | Fair Value |  | Valuation Technique |  | Unobservable Input |  | Range |  | Weighted Average
(Dollars in thousands) |  |  |  | Minimum | Maximum |
Available-for-sale debt securities:
| Private label MBS | $ | 7,234 |  | Discounted cash flows |  | Discount rate |  | 12.9% | 12.9% |  | 12.9%
|  |  |  |  |  |  | Prepayment rate |  | 7.6% | 24.9% |  | 15.2%
|  |  |  |  |  |  | Projected cumulative loss rate |  | 0.2% | 15.7% |  | 7.6%
| Puerto Rico government obligations |  | 2,850 |  | Discounted cash flows |  | Discount rate |  | 6.6% | 8.4% |  | 7.9%
|  |  |  |  |  |  | Projected cumulative loss rate |  | 8.6% | 8.6% |  | 8.6%
Information about Sensitivity to Changes in Significant Unobservable Inputs Private label MBS: The significant unobservable inputs in the valuation include probability of default, the loss severity assumption, and prepayment rates. Shifts in those inputs would result in different fair value measurements. Increases in the probability of default, loss severity assumptions, and prepayment rates in isolation would generally result in an adverse effect on the fair value of the instruments. The Corporation modeled meaningful and possible shifts of each input to assess the effect on the fair value estimation. Puerto Rico Government Obligations: The significant unobservable input used in the fair value measurement is the assumed loss rate of the underlying residential mortgage loans that collateralize these obligations, which are guaranteed by the PRHFA. A significant increase (decrease) in the assumed rate would lead to a (lower) higher fair value estimate. The fair value of these bonds was based on a discounted cash flow methodology that considers the structure and terms of the debt security. The Corporation utilizes PDs and LGDs that consider, among other things, historical payment performance, loan-to-value attributes and relevant current and forward-looking macroeconomic variables, such as regional unemployment rates, the housing price index and the expected recovery of PRHFA guarantee. Under this approach, expected cash flows (interest and principal) were discounted at the Treasury yield curve as of the reporting date and compared to the amortized cost. Additionally, fair value is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP. As of June 30, 2022, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a non-recurring basis and still held at June 30, 2022, and categorized as Level 3, as shown in the following table:
|  | Carrying value as of June 30, 2022 |  |  |  |
|  | Related to (losses) gains recorded for the Quarter Ended June 30, 2022 |  | Related to losses recorded for the Six-Month Period Ended June 30, 2022 |  | (Losses) gains recorded for the Quarter Ended June 30, 2022 |  | Losses recorded for the Six-Month Period Ended June 30, 2022
(In thousands) |  |  |  |  |  |  |  |  |  |  |
Loans receivable (1) | $ | 5,422 |  | $ | 29,967 |  | $ | (817) |  | $ | (3,848)
OREO (2) |  | 2,140 |  |  | 2,741 |  |  | 35 |  |  | (38)
Premises and equipment (3) |  | - |  |  | 1,242 |  |  | - |  |  | (218)
(1) | Consists mainly of collateral dependent commercial and construction loans. The Corporation generally measured losses based on the fair value of the collateral. The Corporation derived the fair values from external appraisals that took into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g., absorption rates), which are not market observable.
(2) | The Corporation derived the fair values from appraisals that took into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g., absorption rates and net operating income of income producing properties), which are not market observable. Losses were related to market valuation adjustments after the transfer of the loans to the OREO portfolio.
(3) | Relates to a banking facility reclassified to held-for-sale and measured at the fair value of the collateral.
As of June 30, 2021, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a non-recurring basis and still held as of June 30, 2021 as shown in the following table:
|  | Carrying value as of June 30, 2021 |  |  |  |  |  |
|  | Related to losses recorded for the Quarter Ended June 30, 2021 |  | Related to losses recorded for the Six-Month Period Ended June 30, 2021 |  | Losses recorded for the Quarter Ended June 30, 2021 |  | Losses recorded for the Six-Month Period Ended June 30, 2021
(In thousands) |  |  |  |  |  |  |  |  |  |  |
Loans receivable (1) | $ | 13,013 |  | $ | 41,610 |  | $ | (1,689) |  | $ | (4,350)
OREO (2) |  | 2,930 |  |  | 5,033 |  |  | (225) |  |  | (374)
Loans held for sale (3) |  | - |  |  | 4,004 |  |  | - |  |  | (116)
(1) | Consists mainly of collateral dependent commercial and construction loans. The Corporation generally measured losses based on the fair value of the collateral. The Corporation derived the fair values from external appraisals that took into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the collateral (e.g., absorption rates), which are not market observable.
(2) | The Corporation derived the fair values from appraisals that took into consideration prices in observed transactions involving similar assets in similar locations but adjusted for specific characteristics and assumptions of the properties (e.g., absorption rates and net operating income of income producing properties), which are not market observable. Losses were related to market valuation adjustments after the transfer of the loans to the OREO portfolio.
(3) | Commercial loan participation transferred to held for sale in the first quarter of 2021 and still in inventory as of June 30, 2021. The value was primarily derived from offers of market participants that the Corporation considered.
See Note 30 - Fair Value included in the 2021 Annual Report on Form 10-K for qualitative information regarding the fair value measurements for Level 3 financial instruments. Fair Value of Financial Instruments
The following tables present the carrying value, estimated fair value and estimated fair value level of the hierarchy of financial instruments as of June 30, 2022 and December 31, 2021:
|  | Total Carrying Amount in Statement of Financial Condition as of June 30, 2022 |  | Fair Value Estimate as of June 30, 2022 |  | Level 1 |  | Level 2 |  | Level 3
(In thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks and money |  |  |  |  |  |  |  |  |  |  |  |  |  |
| market investments (amortized cost) | $ | 1,263,523 |  | $ | 1,263,523 |  | $ | 1,263,523 |  | $ | - |  | $ | -
Debt securities available |  |  |  |  |  |  |  |  |  |  |  |  |  |
| for sale (fair value) |  | 6,081,120 |  |  | 6,081,120 |  |  | 141,347 |  |  | 5,929,593 |  |  | 10,180
Debt securities held to maturity (amortized cost) |  | 458,227 |  |  |  |  |  |  |  |  |  |  |  |
Less: allowance for credit losses on |  |  |  |  |  |  |  |  |  |  |  |  |  |
| held-to-maturity debt securities |  | (8,885) |  |  |  |  |  |  |  |  |  |  |  |
Debt securities held to maturity, net of allowance | $ | 449,342 |  |  | 453,242 |  |  | - |  |  | 278,223 |  |  | 175,019
Equity securities (amortized cost) |  | 27,761 |  |  | 27,761 |  |  | - |  |  | 27,761 | (1) | -
Other equity securities (fair value) |  | 5,082 |  |  | 5,082 |  |  | 5,082 |  |  | - |  |  | -
Loans held for sale (lower of cost or market) |  | 22,601 |  |  | 22,790 |  |  | - |  |  | 22,790 |  |  | -
Loans held for investment (amortized cost) |  | 11,206,874 |  |  |  |  |  |  |  |  |  |  |  |
Less: allowance for credit losses for loans and finance leases |  | (252,152) |  |  |  |  |  |  |  |  |  |  |  |
Loans held for investment, net of allowance | $ | 10,954,722 |  |  | 10,954,724 |  |  | - |  |  | - |  |  | 10,954,724
MSRs (amortized cost) |  | 30,277 |  |  | 44,337 |  |  | - |  |  | - |  |  | 44,337
Derivative assets (fair value) (2) |  | 1,025 |  |  | 1,025 |  |  | - |  |  | 1,025 |  |  | -
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits (amortized cost) | $ | 17,140,128 |  | $ | 17,146,043 |  | $ | - |  | $ | 17,146,043 |  | $ | -
Securities sold under agreements |  |  |  |  |  |  |  |  |  |  |  |  |  |
| to repurchase (amortized cost) |  | 200,000 |  |  | 205,456 |  |  | - |  |  | 205,456 |  |  | -
Advances from FHLB (amortized cost) |  | 200,000 |  |  | 200,051 |  |  | - |  |  | 200,051 |  |  | -
Other borrowings (amortized cost) |  | 183,762 |  |  | 175,122 |  |  | - |  |  | - |  |  | 175,122
Derivative liabilities (fair value) (2) |  | 636 |  |  | 636 |  |  | - |  |  | 636 |  |  | -
(1) | Includes FHLB stock with a carrying value of $21.3 million.
(2) | Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.
|  | Total Carrying Amount in Statement of Financial Condition as of December 31, 2021 |  | Fair Value Estimate as of December 31, 2021 |  | Level 1 |  | Level 2 |  | Level 3
(In thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks and money |  |  |  |  |  |  |  |  |  |  |  |  |  |
| market investments (amortized cost) | $ | 2,543,058 |  | $ | 2,543,058 |  | $ | 2,543,058 |  | $ | - |  | $ | -
Debt securities available |  |  |  |  |  |  |  |  |  |  |  |  |  |
| for sale (fair value) |  | 6,453,761 |  |  | 6,453,761 |  |  | 148,486 |  |  | 6,294,191 |  |  | 11,084
Debt securities held to maturity (amortized cost) |  | 178,133 |  |  |  |  |  |  |  |  |  |  |  |
Less: allowance for credit losses on |  |  |  |  |  |  |  |  |  |  |  |  |  |
| held-to-maturity debt securities |  | (8,571) |  |  |  |  |  |  |  |  |  |  |  |
Debt securities held to maturity, net of allowance |  | 169,562 |  |  | 167,147 |  |  | - |  |  | - |  |  | 167,147
Equity securities (amortized cost) |  | 26,791 |  |  | 26,791 |  |  | - |  |  | 26,791 | (1) | -
Other equity securities (fair value) |  | 5,378 |  |  | 5,378 |  |  | 5,378 |  |  | - |  |  | -
Loans held for sale (lower of cost or market) |  | 35,155 |  |  | 36,147 |  |  | - |  |  | 36,147 |  |  | -
Loans held for investment (amortized cost) |  | 11,060,658 |  |  |  |  |  |  |  |  |  |  |  |
Less: allowance for credit losses for loans and finance leases |  | (269,030) |  |  |  |  |  |  |  |  |  |  |  |
Loans held for investment, net of allowance | $ | 10,791,628 |  |  | 10,900,400 |  |  | - |  |  | - |  |  | 10,900,400
MSRs (amortized cost) |  | 30,986 |  |  | 42,132 |  |  | - |  |  | - |  |  | 42,132
Derivative assets (fair value) (2) |  | 1,505 |  |  | 1,505 |  |  | - |  |  | 1,505 |  |  | -
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits (amortized cost) | $ | 17,784,894 |  | $ | 17,800,706 |  | $ | - |  | $ | 17,800,706 |  | $ | -
Securities sold under |  |  |  |  |  |  |  |  |  |  |  |  |  |
| agreements to repurchase (amortized cost) |  | 300,000 |  |  | 322,105 |  |  | - |  |  | 322,105 |  |  | -
Advances from FHLB (amortized cost) |  | 200,000 |  |  | 202,044 |  |  | - |  |  | 202,044 |  |  | -
Other borrowings (amortized cost) |  | 183,762 |  |  | 177,689 |  |  | - |  |  | - |  |  | 177,689
Derivative liabilities (fair value) (2) |  | 1,178 |  |  | 1,178 |  |  | - |  |  | 1,178 |  |  | -
(1) | Includes FHLB stock with a carrying value of $21.5 million.
(2) | Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.
The short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include cash and cash due from banks and other short-term assets, such as FHLB stock. Certain assets, the most significant being premises and equipment, goodwill and other intangible assets, are not considered financial instruments and are not included above. Accordingly, this fair value information is not intended to, and does not, represent the Corporation’s underlying value. Many of these assets and liabilities that are subject to the disclosure requirements are not actively traded, requiring management to estimate fair values. These estimates necessarily involve the use of assumptions and judgment about a wide variety of factors, including but not limited to, relevancy of market prices of comparable instruments, expected futures cash flows, and appropriate discount rates.

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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=123874694&loc=d3e19207-110258 + Details
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