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Fair Value | 3 Months Ended
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Mar. 31, 2016
Fair Value Disclosures [Abstract] |
Fair Value | NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS The Company follows the fair value measurement framework under GAAP. Fair Value Measurement The fair value measurement framework defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This framework also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Money market investments The fair value of money market investments is based on the carrying amounts reflected in the unaudited consol idated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments. Investment securities The fair value of investment securities is based on quoted market prices, when available, or ma rket prices provided by Interactive Data Corporation (“IDC”), an independent, well-recognized pricing company. Such securities are classified as Level 1 or Level 2 depending on the basis for determining fair value. If listed prices or quotes are not availa ble, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument, and such securities are classified as Level 3. At March 31, 2016 and December 31, 2015, the Compa ny did not have investment securities classified as Level 3. Derivative instruments The fair value of the interest rate swaps is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future. The fair value of most of these derivative instruments is based on observable market parameters, which include discounting the instruments’ cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account fo r the industry sector and the credit rating of the counterparty and/or the Company. Certain other derivative instruments with limited market activity are valued using externally developed models that consider unobservable market parameters. Based on their valuation methodology, derivative instruments are classified as Level 2 or Level 3. The Company has offered its customers certificates of deposit with an option tied to the performance of the S&P Index and uses equity indexed option agreements with major broker-dealers to manage its exposure to changes in this index. Their fair value is obtained through the use of an external based valuation that was thoroughly evaluated and adopted by management as its measurement tool for these options. The payoff of the se options is linked to the average value of the S&P Index on a specific set of dates during the life of the option. The methodology uses an average rate option or a cash-settled option whose payoff is based on the difference between the expected average v alue of the S&P Index during the remaining life of the option and the strike price at inception. The assumptions, which are uncertain and require a degree of judgment, include primarily S&P Index volatility, forward interest rate projections, estimated ind ex dividend payout, and leverage. Servicing assets Servicing assets do not trade in an active market with readily observable prices. Servicing assets are priced using a discounted cash flow model. The valuation model considers servicing fees, portfolio c haracteristics, prepayment assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, the servicing rights are classified as Level 3. Impaired Loans Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flow s are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value described in Accounting Standards Codification (“ASC”) 820-10 and wou ld generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on the fair value of the collateral, which is derived from appr aisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC 310-10-35 less disposition costs. Currently, the associated loans considered impaired are classified as Level 3. Foreclosed real estate Foreclosed real estate includes real estate properties securing residential mortgage and commercial loans. The fair value of foreclosed real estate may be determined using an external appraisal, broker price option or an internal valuation. These foreclosed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals. Other repossessed assets Other repossessed assets include repossessed automobile loans and leases. The fa ir value of the repossessed automobiles may be determined using internal valuation and an external appraisal. These repossessed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals. Assets and liabilities measured at fair value on a recurring and non-recurring basis are summarized below:
| March 31, 2016
| Fair Value Measurements
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (In thousands)
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale | $ | - |  | $ | 669,285 |  | $ | - |  | $ | 669,285
Trading securities |  | - |  |  | 314 |  |  | - |  |  | 314
Money market investments |  | 5,897 |  |  | - |  |  | - |  |  | 5,897
Derivative assets |  | - |  |  | 1,890 |  |  | 772 |  |  | 2,662
Servicing assets |  | - |  |  | - |  |  | 7,819 |  |  | 7,819
Derivative liabilities |  | - |  |  | (6,220) |  |  | (746) |  |  | (6,966)
| $ | 5,897 |  | $ | 665,269 |  | $ | 7,845 |  | $ | 679,011
Non-recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |
Impaired commercial loans | $ | - |  | $ | - |  | $ | 227,117 |  | $ | 227,117
Foreclosed real estate |  | - |  |  | - |  |  | 56,777 |  |  | 56,777
Other repossessed assets |  | - |  |  | - |  |  | 4,408 |  |  | 4,408
| $ | - |  | $ | - |  | $ | 288,302 |  | $ | 288,302
| December 31, 2015
| Fair Value Measurements
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (In thousands)
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale | $ | - |  | $ | 974,609 |  | $ | - |  | $ | 974,609
Trading securities |  | - |  |  | 288 |  |  | - |  |  | 288
Money market investments |  | 4,699 |  |  | - |  |  | - |  |  | 4,699
Derivative assets |  | - |  |  | 1,854 |  |  | 1,171 |  |  | 3,025
Servicing assets |  | - |  |  | - |  |  | 7,455 |  |  | 7,455
Derivative liabilities |  | - |  |  | (6,162) |  |  | (1,095) |  |  | (7,257)
| $ | 4,699 |  | $ | 970,589 |  | $ | 7,531 |  | $ | 982,819
Non-recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |
Impaired commercial loans | $ | - |  | $ | - |  | $ | 235,767 |  | $ | 235,767
Foreclosed real estate |  | - |  |  | - |  |  | 58,176 |  |  | 58,176
Other repossessed assets |  | - |  |  | - |  |  | 6,226 |  |  | 6,226
| $ | - |  | $ | - |  | $ | 300,169 |  | $ | 300,169
The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters ended March 31, 2016 and 2015:
| Quarter Ended March 31, 2016
| Derivative |  |  |  |  | Derivative |  |  |
| asset |  |  |  |  | liability |  |  |
| (S&P |  |  |  |  | (S&P |  |  |
| Purchased |  |  | Servicing |  | Embedded |  |  |
Level 3 Instruments Only | Options) |  |  | assets |  | Options) |  | Total
Balance at beginning of period | $ | 1,171 |  | $ | 7,455 |  | $ | (1,095) |  | $ | 7,531
Gains (losses) included in earnings |  | (399) |  |  | - |  |  | 330 |  |  | (69)
New instruments acquired |  | - |  |  | 557 |  |  | - |  |  | 557
Principal repayments |  | - |  |  | (104) |  |  | - |  |  | (104)
Amortization |  | - |  |  | - |  |  | 19 |  |  | 19
Changes in fair value of servicing assets |  | - |  |  | (89) |  |  | - |  |  | (89)
Balance at end of period | $ | 772 |  | $ | 7,819 |  | $ | (746) |  | $ | 7,845
| Quarter Ended March 31, 2015
| Derivative |  |  |  |  | Derivative |
| asset |  |  |  |  | liability |
| (S&P |  |  |  |  | (S&P |
| Purchased |  |  | Servicing |  |  | Embedded |
Level 3 Instruments Only | Options) |  |  | assets |  |  | Options) |  | Total
Balance at beginning of period | $ | 5,555 |  | $ | 13,992 |  | $ | (5,477) |  | $ | 14,070
(Losses) gains included in earnings |  | (1,821) |  |  | - |  |  | 1,782 |  |  | (39)
New instruments acquired |  | - |  |  | 531 |  |  | - |  |  | 531
Principal repayments |  | - |  |  | (418) |  |  | - |  |  | (418)
Amortization |  | - |  |  | - |  |  | 78 |  |  | 78
Changes in fair value of servicing assets |  |  |  |  | (59) |  |  | - |  |  | (59)
Changes in fair value due to sales price of mortgage servicing rights held-for-sale |  | - |  |  | (1,882) |  |  | - |  |  | (1,882)
Balance at end of period | $ | 3,734 |  | $ | 12,164 |  | $ | (3,617) |  | $ | 12,281
D uring the quarters ended March 31, 2016 and 2015, there were purchases and sales of assets and liabilities measured at fair value on a recurring basis. There were no transfers into or out of Level 1 and Level 2 fair value measurements during such periods. The table below presents quantitative information for all assets and liabilities measured at fair value on a recurring and non-recurring basis using significant unobservable inputs (Level 3) at March 31, 2016:
|  | March 31, 2016
|  | Fair Value |  | Valuation Technique |  | Unobservable Input |  | Range
|  | (In thousands) |  |  |  |  |  |
Derivative assets (S&P Purchased Options) |  | $ | 772 |  | Option pricing model |  | Implied option volatility |  | 35.32% -38.69%
|  |  |  |  |  |  | Counterparty credit risk (based on 5-year credit default swap ("CDS") spread) |  | 79.96%-89.03%
Servicing assets |  | $ | 7,819 |  | Cash flow valuation |  | Constant prepayment rate |  | 4.43%-12.17%
|  |  |  |  |  |  | Discount rate |  | 10.00% - 12.00%
Derivative liability (S&P Embedded Options) |  | $ | (746) |  | Option pricing model |  | Implied option volatility |  | 35.32% -38.69%
|  |  |  |  |  |  | Counterparty credit risk (based on 5-year CDS spread) |  | 79.96%-89.03
Collateral dependant impaired loans |  | $ | 25,252 |  | Fair value of property or collateral |  | Appraised value less disposition costs |  | 30.20%-42.40%
Puerto Rico Electric Power Authority line of credit, net |  | $ | 186,675 |  | Cash flow valuation |  | Discount rate |  | 7.25%
Other non-collateral dependant impaired loans |  | $ | 15,190 |  | Cash flow valuation |  | Discount rate |  | 4.25%-16.95%
Foreclosed real estate |  | $ | 56,777 |  | Fair value of property or collateral |  | Appraised value less disposition costs |  | 30.20%-42.20%
Other repossessed assets |  | $ | 4,408 |  | Fair value of property or collateral |  | Appraised value less disposition costs |  | 30.20%-42.20%
Information about Sensitivity to Changes in Significant Unobservable Inputs Other debt securities – The significant unobservable inputs used in the fair value measurement of one of the Company’s other debt securities are indicative comparable pricing, option adjusted spread (“OAS”), yield to maturity, and spread to maturity. Significant changes in any of those inputs in isolation would result in a significantly different fair value measurement. Generally, a change in the assumption used for indicative comparable pricing is accompanied by a directionally opposite change in the assumption used for OAS and a directionally, although not equally proportional, opposite change in the assumptions used for yield to maturity and spread to maturity. Derivative asset (S&P Purchased Options) – The significant unobservable inputs used in the fair value measurement of the Company’s derivative assets related to S&P purchased options are implied option volatility and counterparty credit risk. Significant changes in any of those inputs in isolation would result in a significantly different fair value measurement. Generally, a change in the assumption used for implied option volatility is not necessarily accompanied by directionally similar or opposite changes in the assumption used for counterparty credit risk. Servicing assets – The significant unobservable inputs used in the fair value measurement of the Company’s servicing assets are constant prepayment rates and discount rates. Changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or offset the sensitivities. Mort gage banking activities, a component of total banking and financial service revenue in the consolidated statements of operations, include the changes from period to period in the fair value of the mortgage loan servicing rights, which may result from chang es in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, including changes due to collection/realization of expected cash flows. Derivative liability (S&P Embedd ed Options) – The significant unobservable inputs used in the fair value measurement of the Company’s derivative liability related to S&P purchased options are implied option volatility and counterparty credit risk. Significant changes in any of those inpu ts in isolation would result in a significantly different fair value measurement. Generally, a change in the assumption used for implied option volatility is not necessarily accompanied by directionally similar or opposite changes in the assumption used fo r counterparty credit risk. Fair Value of Financial Instruments The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Company. The estimated fair va lue is subjective in nature, involves uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could affect these fair value estimates. The fair value estimates do not take into consideration the value of future business and the value of assets and liabilities that are not financial instruments. Other significant tangible and intangible assets that are not considered financial instruments are the value of long-ter m customer relationships of retail deposits, and premises and equipment. The estimated fair value and carrying value of the Company’s financial instruments at March 31, 2016 and December 31, 2015 is as follows:
| March 31, |  | December 31,
| 2016 |  | 2015
| Fair |  | Carrying |  | Fair |  | Carrying
| Value |  | Value |  | Value |  | Value
| (In thousands)
Level 1 |  |  |  |  |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 677,849 |  | $ | 677,849 |  | $ | 536,710 |  | $ | 536,710
Restricted cash |  | 3,349 |  | $ | 3,349 |  | $ | 3,349 |  | $ | 3,349
Level 2 |  |  |  |  |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Trading securities |  | 314 |  | $ | 314 |  | $ | 288 |  | $ | 288
Investment securities available-for-sale |  | 669,285 |  | $ | 669,285 |  | $ | 974,609 |  | $ | 974,609
Investment securities held-to-maturity |  | 641,346 |  | $ | 637,036 |  | $ | 614,679 |  | $ | 620,189
Federal Home Loan Bank (FHLB) stock |  | 20,761 |  | $ | 20,761 |  | $ | 20,783 |  | $ | 20,783
Other investments |  | 3 |  | $ | 3 |  | $ | 3 |  | $ | 3
Derivative assets |  | 1,890 |  | $ | 1,890 |  | $ | 1,855 |  | $ | 1,855
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  | 6,220 |  | $ | 6,220 |  | $ | 6,162 |  | $ | 6,162
Level 3 |  |  |  |  |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Total loans (including loans held-for-sale) |  | 4,088,158 |  |  | 4,360,129 |  |  | 4,101,219 |  |  | 4,434,213
Derivative assets |  | 772 |  |  | 772 |  |  | 1,170 |  |  | 1,170
FDIC indemnification asset |  | 10,897 |  |  | 20,923 |  |  | 17,786 |  |  | 22,599
Accrued interest receivable |  | 18,392 |  |  | 18,392 |  |  | 20,637 |  |  | 20,637
Servicing assets |  | 7,819 |  |  | 7,819 |  |  | 7,455 |  |  | 7,455
Accounts receivable and other assets |  | 44,781 |  |  | 44,781 |  |  | 42,786 |  |  | 42,786
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits |  | 4,772,507 |  |  | 4,778,947 |  |  | 4,705,878 |  |  | 4,715,764
Securities sold under agreements to repurchase |  | 645,098 |  |  | 636,172 |  |  | 955,859 |  |  | 934,691
Advances from FHLB |  | 334,782 |  |  | 331,980 |  |  | 335,812 |  |  | 332,476
Other borrowings |  | 2,661 |  |  | 1,756 |  |  | 2,593 |  |  | 1,734
Subordinated capital notes |  | 97,330 |  |  | 102,808 |  |  | 94,940 |  |  | 102,633
Accrued expenses and other liabilities |  | 92,761 |  |  | 92,761 |  |  | 92,935 |  |  | 92,935
Derivative liabilities embedded in deposits |  | 746 |  |  | 746 |  |  | 1,095 |  |  | 1,095
The following methods and assumptions were used to estimate the fair values of signi ficant financial instruments at March 31, 2016 and December 31, 2015: • Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued interest receivable, accounts receivable and other assets and accrued expenses and other liabilities have been valued at the ca rrying amounts reflected in the consolidated statements of financial condition as these are reas onable estimates of fair value given the short-term nature of the instruments. • Investments in FHLB-NY stock are valued at their redemption value. • The fair value of investment securities, including trading securities and other investments, is based o n quoted market prices, when available or prices provided from contracted pricing providers, or market price s provided by recognized broker-dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the ma rket activity of the instrument. • The fai r value of the FDIC indemnification asset represents the present value of the net estima ted cash payments expected to be received from the FDIC for futur e losses on covered assets based on the credit assumptions on estimated cash flows for each covered asset and the loss sharing percentages. The ultimate collect ability of the FDIC indemnification asset is dependent upon the performance of the underlyi ng covered loans, the passage of time and claims paid by the FDIC which are impacted by the Bank’s adherence to certain guidelines established by the FDIC. • The fair value of servi cing asset is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic fact ors, which are determined based on current market conditions. • The fair values of the derivative instruments are provided by valuation experts and counterparties. Certain derivatives with limited market activity are valued using externally developed mode ls that consider unobservable mar ket parameters. The Company has offered its customers certificates of deposit with an option tied to the performance of the S&P Index, and uses equity indexed option agreements with major broker-dealer s to manage its exposu re to changes in this index. Their fair value is obtained through the use of an external based valuation that was thoroughly evaluated and adopted by management as its measurement tool for these options. The payoff of these options is linked to the average value of the S&P Index on a specific set of dates during the life of the option. The methodology uses an average rate option or a cash-settled option whose payoff is based on the difference between the expected average value of the S&P Index during the re maining life of the option and the strike price at inception. The assumptions, which are uncertain and require a degree of judgment, include primarily S&P Index volatility, forward interest rate projections, estimated index dividend payout, and leverage. • Fair value of derivative liabilities, which include interest rate swaps and forward-settlement swaps, are based on the net discounted value of the contractual projected cash flows of both the pay-fixed receive-variable legs of the contracts. The projecte d cash flows are based on the forward yield curve, and discounted using current estimated market rates. • The fair value of the loan portfolio (including loans held-for-sale) is estimated by segregating by type, such as mort gage, commercial, consumer, aut o and leasing. Each loan segment is further segmented into fixed and adjustable interest rates and by performing and non-performing categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for prepayment estimates (voluntary and involuntary), if any, using estimated current market discount rates that reflect the credit and interest rate risk inherent in the loan. This fair value is not currently an indication of an exit price as that type of assumption cou ld result in a different fair value estimate. Non-performing loans have been valued at the carrying amounts. • The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity c ertificates of deposit is based on the discounted value of the contractual cash flows, using estimated current market discount rates for deposits of similar remaining maturities. • The fair value of long-term borrowings, which include securities sold under agreements to repurchase, advances from FHLB-NY, other borrowings, and subordinated capital notes, is based on the discounted valu e of the contractual cash flows using current estimated market discount rates for b orrowings with similar terms, remaini ng maturities and put dates.

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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/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13433-108611 + Details
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