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FAIR VALUE
 9 Months Ended
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.