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FAIR VALUE | 9 Months Ended
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Sep. 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 September 30, 2022 and December 31, 2021: As of September 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 $ 138,258 $ - $ - $ 138,258 $ 148,486 $ - $ - $ 148,486 Noncallable U.S. agencies debt securities - 249,798 - 249,798 - 285,028 - 285,028 Callable U.S. agencies debt securities - 2,086,221 - 2,086,221 - 1,971,954 - 1,971,954 MBS - 3,185,549 6,170 (1) 3,191,719 - 4,037,209 7,234 (1) 4,044,443 Puerto Rico government obligations - - 2,193 2,193 - - 2,850 2,850 Other investments - - 500 500 - - 1,000 1,000 Equity securities 4,924 - - 4,924 5,378 - - 5,378 Derivative assets - 1,212 - 1,212 - 1,505 - 1,505 Liabilities: Derivative liabilities - 452 - 452 - 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 nine-month periods ended September 30, 2022 and 2021: Quarter Ended September 30, 2022 2021 Level 3 Instruments Only Debt Securities Debt Securities (In thousands) Available For Sale (1) Available For Sale (1) Beginning balance $ 10,180 $ 11,481 Total (losses) gains: Included in other comprehensive income (unrealized) (177) 191 Included in earnings (unrealized) (2) 12 9 Purchases - 1,000 Principal repayments and amortization (1,152) (1,213) Ending balance $ 8,863 $ 11,468 (1) Amounts mostly related to private label MBS. (2) Changes in unrealized gains included in earnings were recognized within provision for credit losses - expense (benefit) and relate to assets still held as of the reporting date. Nine-Month Period Ended September 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) (570) 896 Included in earnings (unrealized) (2) 435 136 Purchases - 1,000 Principal repayments and amortization (2,086) (2,541) Ending balance $ 8,863 $ 11,468 (1) Amounts mostly related to private label MBS. (2) Changes in unrealized gains included in earnings were recognized within provision for credit losses - expense (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 September 30, 2022 and December 31, 2021: September 30, 2022 Fair Value Valuation Technique Unobservable Input Range Weighted Average (Dollars in thousands) Minimum Maximum Available-for-sale debt securities: Private label MBS $ 6,170 Discounted cash flows Discount rate 16.4% 16.4% 16.4% Prepayment rate 1.9% 17.4% 12.6% Projected cumulative loss rate 0.2% 17.3% 6.9% Puerto Rico government obligations 2,193 Discounted cash flows Discount rate 13.0% 13.0% 13.0% Projected cumulative loss rate 19.0% 19.0% 19.0% 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 plus a spread 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 September 30, 2022, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a non-recurring basis and still held at September 30, 2022, and categorized as Level 3, as shown in the following table: Carrying value as of September 30, 2022 Related to losses recorded for the Quarter Ended September 30, 2022 Related to losses recorded for the Nine-Month Period Ended September 30, 2022 Losses recorded for the Quarter Ended September 30, 2022 Losses recorded for the Nine-Month Period Ended September 30, 2022 (In thousands) Loans receivable (1) $ 4,207 $ 27,531 $ (227) $ (2,978) OREO (2) 1,234 2,913 (57) (34) Loans held for sale 12,169 12,169 (177) (177) 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 September 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 September 30, 2021 as shown in the following table: Carrying value as of September 30, 2021 Related to losses recorded for the Quarter Ended September 30, 2021 Related to losses recorded for the Nine-Month Period Ended September 30, 2021 Losses recorded for the Quarter Ended September 30, 2021 Losses recorded for the Nine-Month Period Ended September 30, 2021 (In thousands) Loans receivable (1) $ 25,240 $ 37,154 $ (1,612) $ (5,285) OREO (2) 5,631 8,370 (53) (210) (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. 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 September 30, 2022 and December 31, 2021: Total Carrying Amount in Statement of Financial Condition as of September 30, 2022 Fair Value Estimate as of September 30, 2022 Level 1 Level 2 Level 3 (In thousands) Assets: Cash and due from banks and money market investments (amortized cost) $ 554,990 $ 554,990 $ 554,990 $ - $ - Debt securities available for sale (fair value) 5,668,689 5,668,689 138,258 5,521,568 8,863 Debt securities held to maturity (amortized cost) 445,862 Less: allowance for credit losses on held-to-maturity debt securities (8,257) Debt securities held to maturity, net of allowance $ 437,605 429,530 - 268,552 160,978 Equity securities (amortized cost) 19,803 19,803 - 19,803 (1) - Other equity securities (fair value) 4,924 4,924 4,924 - - Loans held for sale (lower of cost or market) 12,169 12,169 - 12,169 - Loans held for investment (amortized cost) 11,298,618 Less: allowance for credit losses for loans and finance leases (257,859) Loans held for investment, net of allowance $ 11,040,759 10,986,720 - - 10,986,720 MSRs (amortized cost) 29,690 44,621 - - 44,621 Derivative assets (fair value) (2) 1,212 1,212 - 1,212 - Liabilities: Deposits (amortized cost) $ 16,569,581 $ 16,553,140 $ - $ 16,553,140 $ - Securities sold under agreements to repurchase (amortized cost) 200,000 202,510 - 202,510 - Other borrowings (amortized cost) 183,762 181,761 - - 181,761 Derivative liabilities (fair value) (2) 452 452 - 452 - (1) Includes FHLB stock with a carrying value of $ 12.3 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 https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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