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FAIR VALUE | 9 Months Ended
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Sep. 30, 2023
FAIR VALUE [Abstract] |
FAIR VALUE | 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 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. See Note 25 – Fair Value , to the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K for a description of the valuation methodologies 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, 2023 and December 31, 2022: As of September 30, 2023 As of December 31, 2022 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 $ 140,723 $ - $ - $ 140,723 $ 138,875 $ - $ - $ 138,875 Noncallable U.S. agencies debt securities - 430,515 - 430,515 - 389,787 - 389,787 Callable U.S. agencies debt securities - 1,877,075 - 1,877,075 - 1,963,566 - 1,963,566 MBS - 2,721,124 4,918 (1) 2,726,042 - 3,098,797 5,794 (1) 3,104,591 Puerto Rico government obligations - - 1,448 1,448 - - 2,201 2,201 Other investments - - - - - - 500 500 Equity securities 4,775 - - 4,775 4,861 - - 4,861 Derivative assets - 360 - 360 - 633 - 633 Liabilities: Derivative liabilities - 170 - 170 - 476 - 476 (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 quarters and nine-month periods ended September 30, 2023 and 2022: Quarter Ended September 30, Nine-Month Period Ended September 30, 2023 2022 2023 2022 Level 3 Instruments Only Securities Available for Sale (1) Securities Available for Sale (1) Securities Available for Sale (1) Securities Available for Sale (1) (In thousands) Beginning balance $ 7,357 $ 10,180 $ 8,495 $ 11,084 Total (losses)/gains: Included in other comprehensive loss (unrealized) (722) (177) (903) (570) Included in earnings (unrealized) (2) (32) 12 (7) 435 Principal repayments and amortization (237) (1,152) (1,219) (3) (2,086) Ending balance $ 6,366 $ 8,863 $ 6,366 $ 8,863 ___________________ (1) Amounts mostly related to private label MBS. (2) Changes in unrealized (losses) gains included in earnings were recognized within provision for credit losses - expense (benefit) and relate to assets still held as of the reporting date. (3) Includes a $ 0.5 million repayment of a matured debt security. 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 September 30, 2023 and December 31, 2022: September 30, 2023 Fair Value Valuation Technique Unobservable Input Range Weighted Average Minimum Maximum (Dollars in thousands) Available-for-sale debt securities: Private label MBS $ 4,918 Discounted cash flows Discount rate 17.3% 17.3% 17.3% Prepayment rate 1.2% 8.8% 5.3% Projected cumulative loss rate 0.2% 13.7% 5.5% Puerto Rico government obligations $ 1,448 Discounted cash flows Discount rate 13.9% 13.9% 13.9% Projected cumulative loss rate 24.5% 24.5% 24.5% 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% 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. See Note 2 – Debt Securities for information on the methodology used to calculate the fair value of these debt securities. Additionally, fair value is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP. As of September 30, 2023, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a non- recurring basis and still held at September 30, 2023, as shown in the following table: Carrying value as of September 30, 2023 Related to (losses) gains recorded for the Quarter Ended September 30, 2023 Related to losses recorded for the Nine- Month Period Ended September 30, 2023 (Losses) gains recorded for the Quarter Ended September 30, 2023 Losses recorded for the Nine-Month Period Ended September 30, 2023 (In thousands) Level 3: Loans receivable (1) $ 16,655 $ 24,933 $ (2,495) $ (9,234) OREO (2) 1,085 2,124 (169) (205) Level 2: Loans held for sale (3) $ 8,961 $ 8,961 $ 16 $ (57) (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) The Corporation derived the fair value of these loans based on published secondary market prices of MBS with similar characteristics. 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, 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) Level 3: Loans receivable (1) $ 4,207 $ 27,531 $ (227) $ (2,978) OREO (2) 1,234 2,913 (57) (34) Premises and equipment (3) - 1,242 - (218) Level 2: Loans held for sale (4) $ 12,169 $ 12,169 $ (177) $ (177) (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. (4) The Corporation derived the fair value of these loans based on published secondary market prices of MBS with similar characteristics. See Note 25 – Fair Value, to the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K for qualitative information regarding the fair value measurements for Level 3 financial instruments measured at fair value on nonrecurring basis. 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, 2023 and December 31, 2022: Total Carrying Amount in Statement of Financial Condition as of September 30, 2023 Fair Value Estimate as of September 30, 2023 Level 1 Level 2 Level 3 (In thousands) Assets: Cash and due from banks and money market investments (amortized cost) $ 584,913 $ 584,913 $ 584,913 $ - $ - Available-for-sale debt securities (fair value) 5,175,803 5,175,803 140,723 5,028,714 6,366 Held-to-maturity debt securities (amortized cost) 359,169 Less: ACL on held-to-maturity debt securities (2,250) Held-to-maturity debt securities, net of ACL $ 356,919 342,851 - 232,719 110,132 Equity securities (amortized cost) 43,908 43,908 - 43,908 (1) - Other equity securities (fair value) 4,775 4,775 4,775 - - Loans held for sale (lower of cost or market) 8,961 8,961 - 8,961 - Loans held for investment (amortized cost) 11,950,932 Less: ACL for loans and finance leases (263,615) Loans held for investment, net of ACL $ 11,687,317 11,566,106 - - 11,566,106 MSRs (amortized cost) 27,601 45,114 - - 45,114 Derivative assets (fair value) (2) 360 360 - 360 - Liabilities: Deposits (amortized cost) $ 16,435,237 $ 16,447,189 $ - $ 16,447,189 $ - Advances from the FHLB (amortized cost): Long-term 500,000 491,505 - 491,505 - Other long-term borrowings (amortized cost) 161,700 159,549 - - 159,549 Derivative liabilities (fair value) (2) 170 170 - 170 - (1) Includes FHLB stock with a carrying value of $ 34.6 million, which is 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, 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 $ - Short-term securities sold under agreements to repurchase (amortized cost) 75,133 75,230 - 75,230 - Advances from the FHLB (amortized cost) Short-term 475,000 474,731 - 474,731 - Long-term 200,000 199,865 - 199,865 - Other long-term 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 is 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 -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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