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FAIR VALUE | 12 Months Ended
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Dec. 31, 2022
FAIR VALUE [Abstract] |
FAIR VALUE [Text Block] | NOTE 25 – 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 Va luations 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 Va luations 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. Financial Instruments Recorded at Fair Value on a Recurring Basis Debt securities available for sale and marketable equity securities held at fair value The fair value of investment securities was based on unadjusted quoted market prices (as is the case with U.S. Treasury securities and equity securities with readily determinable fair values), when available (Level 1), or market prices for comparable assets (as is the case with U.S. agencies MBS and U.S. agency debt securities) that are based on observable market parameters, including benchmark yields, reported trades, quotes from brokers or dealers, issuer spreads, bids, offers and reference data, including market research operations, when available (Level 2). Observable prices in the market already consider the risk of nonperformance. If listed prices or quotes are not available, fair value is based upon discounted cash flow models that use unobservable inputs due to the limited market activity of the instrument, as is the case with certain private label MBS held by the Corporation (Level 3). Derivative instruments The fair value of most of the Corporation’s derivative instruments is based on observable market parameters and takes into consideration the credit risk component of paying counterparties, when appropriate. On interest caps, only the seller's credit risk is considered. The Corporation valued the interest rate swaps and caps using a discounted cash flow approach based on the related LIBOR and swap forward rate for each cash flow. Assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31, 2022 and 2021: As of December 31, 2022 As of December 31, 2021 Fair Value Measurements Using Fair Value Measurements Using Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total (In thousands) Assets: Debt securities available for sale: U.S. Treasury securities $ 138,875 $ - $ - $ 138,875 $ 148,486 $ - $ - $ 148,486 Noncallable U.S. agencies debt securities - 389,787 - 389,787 - 285,028 - 285,028 Callable U.S. agencies debt securities - 1,963,566 - 1,963,566 - 1,971,954 - 1,971,954 MBS - 3,098,797 5,794 (1) 3,104,591 - 4,037,209 7,234 (1) 4,044,443 Puerto Rico government obligations - - 2,201 2,201 - - 2,850 2,850 Other investments - - 500 500 - - 1,000 1,000 Equity securities 4,861 - - 4,861 5,378 - - 5,378 Derivative assets - 633 - 633 - 1,505 - 1,505 Liabilities: Derivative liabilities - 476 - 476 - 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 measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2022, 2021, and 2020: 2022 2021 2020 Level 3 Instruments Only Securities Available for Sale (1) Securities Available for Sale (1) Securities Available for Sale (1) (In thousands) Beginning balance $ 11,084 $ 11,977 $ 14,590 Total gains (losses): Included in other comprehensive income (unrealized) (401) 1,281 2,403 Included in earnings (unrealized) (2) 434 136 (1,641) BSPR securities acquired - - 150 Purchases - 1,000 - Principal repayments and amortization (2,622) (3,310) (3,525) Ending balance $ 8,495 $ 11,084 $ 11,977 ___________________ (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 measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of December 31, 2022 and 2021: December 31, 2022 Fair Value Valuation Technique Unobservable Input Range Weighted Average Minimum Maximum (Dollars in thousands) Available-for-sale debt securities: Private label MBS $ 5,794 Discounted cash flows Discount rate 16.2% 16.2% 16.2% Prepayment rate 1.5% 15.2% 11.8% Projected cumulative loss rate 0.3% 15.6% 5.6% Puerto Rico government obligations $ 2,201 Discounted cash flows Discount rate 12.9% 12.9% 12.9% Projected cumulative loss rate 19.3% 19.3% 19.3% December 31, 2021 Fair Value Valuation Technique Unobservable Input Range Weighted Average Minimum Maximum (Dollars in thousands) 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 expected recovery of the PRHFA guarantee. Under this approach, expected cash flows (interest and principal) are 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 December 31, 2022, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a non- recurring basis and still held at December 31, 2022, as shown in the following table: Carrying value as of December 31, Related to losses recorded for the Year Ended December 31, 2022 2021 2020 2022 2021 2020 (In thousands) Level 3: Loans receivable (1) $ 11,437 $ 31,534 $ 74,197 $ (736) $ (5,466) $ (13,737) OREO (2) 5,461 9,126 50,248 (917) (48) (1,837) Premises and equipment (3) 1,242 - - (218) - - Level 2: Loans held for sale $ 12,306 $ - $ - $ (106) $ - $ - (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. Qualitative information regarding the fair value measurements for Level 3 financial instruments as of December 31, 2022 are as follows: December 31, 2022 Method Inputs Loans Income, Market, Comparable Sales, Discounted Cash Flows External appraised values; probability weighting of broker price opinions; management assumptions regarding market trends or other relevant factors OREO Income, Market, Comparable Sales, Discounted Cash Flows External appraised values; probability weighting of broker price opinions; management assumptions regarding market trends or other relevant factors Premises and equipment Market External appraised value The following tables present the carrying value, estimated fair value and estimated fair value level of the hierarchy of financial instruments as of December 31, 2022 and 2021: Total Carrying Amount in Statement of Financial Condition as of December 31, 2022 Fair Value Estimate as of December 31, 2022 Level 1 Level 2 Level 3 (In thousands) Assets: Cash and due from banks and money market investments (amortized cost) $ 480,505 $ 480,505 $ 480,505 $ - $ - Available-for-sale debt securities (fair value) 5,599,520 5,599,520 138,875 5,452,150 8,495 Held-to-maturity debt securities (amortized cost) 437,537 Less: ACL on held-to-maturity debt securities (8,286) Held-to-maturity debt securities, net of ACL $ 429,251 427,115 - 260,106 167,009 Equity securities (amortized cost) 50,428 50,428 - 50,428 (1) - Other equity securities (fair value) 4,861 4,861 4,861 - - Loans held for sale (lower of cost or market) 12,306 12,306 - 12,306 - Loans held for investment (amortized cost) 11,552,825 Less: ACL for loans and finance leases (260,464) Loans held for investment, net of ACL $ 11,292,361 11,106,809 - - 11,106,809 MSRs (amortized cost) 29,037 44,710 - - 44,710 Derivative assets (fair value) (2) 633 633 - 633 - Liabilities: Deposits (amortized cost) $ 16,143,467 $ 16,139,937 $ - $ 16,139,937 $ - Securities sold under agreements to repurchase (amortized cost) 75,133 75,230 - 75,230 - Advances from FHLB (amortized cost) 675,000 674,596 - 674,596 - Other borrowings (amortized cost) 183,762 187,246 - - 187,246 Derivative liabilities (fair value) (2) 476 476 - 476 - (1) Includes FHLB stock with a carrying value of $ 42.9 million, which are considered restricted. (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 $ - $ - Available-for-sale debt securities (fair value) 6,453,761 6,453,761 148,486 6,294,191 11,084 Held-to-maturity debt securities (amortized cost) 178,133 Less: ACL on held-to-maturity debt securities (8,571) Held-to-maturity debt securities, net of ACL $ 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: ACL for loans and finance leases (269,030) Loans held for investment, net of ACL $ 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, which are considered restricted. (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 future 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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