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Fair Value of Financial Instruments | 3 Months Ended
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Mar. 31, 2021
Fair Value of Financial Instruments [Abstract] |
Fair Value of Financial Instruments | NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS OFG follows the fair value measurement framework under U.S. Generally Accepted Accounting Principles (“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 consolidated 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 valuations obtained from an independent pricing provider, ICE Data Pricing (formerly known as IDC). ICE is a well-recognized pricing company and an established leader in financial information. 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 available, 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, 2021 and 2020, OFG 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 for the industry sector and the credit rating of the counterparty and/or OFG. 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. 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 characteristics, 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. 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 automobiles. The fair 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, 2021
| Fair Value Measurements
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (In thousands)
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale | $ | 10,946 |  | $ | 460,063 |  | $ | - |  | $ | 471,009
Trading securities |  | - |  |  | 23 |  |  | - |  |  | 23
Money market investments |  | 11,401 |  |  | - |  |  | - |  |  | 11,401
Servicing assets |  | - |  |  | - |  |  | 47,911 |  |  | 47,911
Derivative liabilities |  | - |  |  | (1,465) |  |  | - |  |  | (1,465)
| $ | 22,347 |  | $ | 458,621 |  | $ | 47,911 |  | $ | 528,879
Non-recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |
Collateral dependent loans |  | - |  |  | - |  |  | 27,737 |  |  | 27,737
Foreclosed real estate |  | - |  |  | - |  |  | 15,598 |  |  | 15,598
Other repossessed assets |  | - |  |  | - |  |  | 2,768 |  |  | 2,768
| $ | - |  | $ | - |  | $ | 46,103 |  | $ | 46,103
| December 31, 2020
| Fair Value Measurements
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (In thousands)
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale | $ | 10,983 |  | $ | 435,455 |  | $ | - |  | $ | 446,438
Trading securities |  | - |  |  | 22 |  |  | - |  |  | 22
Money market investments |  | 11,908 |  |  | - |  |  | - |  |  | 11,908
Servicing assets |  | - |  |  | - |  |  | 47,295 |  |  | 47,295
Derivative liabilities |  | - |  |  | (1,712) |  |  | - |  |  | (1,712)
| $ | 22,891 |  | $ | 433,765 |  | $ | 47,295 |  | $ | 503,951
Non-recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |
Collateral dependent loans | $ | - |  | $ | - |  | $ | 29,279 |  | $ | 29,279
Foreclosed real estate |  | - |  |  | - |  |  | 11,596 |  |  | 11,596
Other repossessed assets |  | - |  |  | - |  |  | 1,816 |  |  | 1,816
| $ | - |  | $ | - |  | $ | 42,691 |  | $ | 42,691
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, 2021 and 2020:
Level 3 Instruments Only |
| Servicing Assets
| Quarter Ended March 31,
| 2021 |  | 2020
| (In thousands)
Balance at beginning of period | $ | 47,295 |  | $ | 50,779
New instruments acquired |  | 1,420 |  |  | 456
Principal repayments |  | (1,507) |  |  | (767)
Changes in fair value of servicing assets |  | 703 |  |  | (1,181)
Balance at end of period | $ | 47,911 |  | $ | 49,287
There were no transfers into or out of level 3 and no changes in unrealized gains and losses from recurring level 3 fair value measurements held at March 31, 2021 and 2020 during the quarters then ended included in other comprehensive income. For more information on the qualitative information about level 3 fair value measurements, see Note 7 – Servicing Assets. During the quarters ended March 31, 2021 and 2020, there were purchases and sales of assets and liabilities measured at fair value on a recurring basis. 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, 2021:
|  | March 31, 2021 |  |
|  | Fair Value |  | Valuation Technique |  | Unobservable Input |  | Range |  | Weighted Average
|  | (In thousands) |  |  |  |  |  |  |  |
Servicing assets |  | $ | 47,911 |  | Cash flow valuation |  | Constant prepayment rate |  | 4.5% - 40.5% |  | 6.54%
|  |  |  |  |  |  | Discount rate |  | 10.00% - 15.50% |  | 11.49%
Collateral dependent loans |  | $ | 27,737 |  | Fair value of property or collateral |  | Appraised value less disposition costs |  | 18.20% - 29.20% |  | 19.91%
Foreclosed real estate |  | $ | 15,598 |  | Fair value of property or collateral |  | Appraised value less disposition costs |  | 18.20% - 29.20% |  | 19.37%
Other repossessed assets |  | $ | 2,768 |  | Fair value of property or collateral |  | Estimated net realizable value less disposition costs |  | 45.00% - 55.00% |  | 53.57%
Information about Sensitivity to Changes in Significant Unobservable Inputs Servicing assets – The significant unobservable inputs used in the fair value measurement of OFG’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. Mortgage 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 changes 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. 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 OFG. The estimated fair value 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-term customer relationships of retail deposits, and premises and equipment. The estimated fair value and carrying value of OFG’s financial instruments at March 31, 2021 and December 31, 2020 is as follows:
| March 31, |  | December 31,
| 2021 |  | 2020
| Fair |  | Carrying |  | Fair |  | Carrying
| Value |  | Value |  | Value |  | Value
| (In thousands)
Level 1 |  |  |  |  |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 2,408,366 |  | $ | 2,408,366 |  | $ | 2,154,202 |  | $ | 2,154,202
Restricted cash | $ | 1,050 |  | $ | 1,050 |  | $ | 1,375 |  | $ | 1,375
Investment securities available-for-sale | $ | 10,946 |  | $ | 10,946 |  | $ | 10,983 |  | $ | 10,983
Level 2 |  |  |  |  |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Trading securities | $ | 23 |  | $ | 23 |  | $ | 22 |  | $ | 22
Investment securities available-for-sale | $ | 460,063 |  | $ | 460,063 |  | $ | 435,455 |  | $ | 435,455
Investment securities held-to-maturity | $ | 125,478 |  | $ | 126,767 |  | $ | - |  | $ | -
Federal Home Loan Bank (FHLB) stock | $ | 8,233 |  | $ | 8,233 |  | $ | 8,278 |  | $ | 8,278
Other investments | $ | 5,557 |  | $ | 5,557 |  | $ | 3,962 |  | $ | 3,962
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities | $ | 1,465 |  | $ | 1,465 |  | $ | 1,712 |  | $ | 1,712
Level 3 |  |  |  |  |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Total loans (including loans held-for-sale) | $ | 6,296,880 |  | $ | 6,432,079 |  | $ | 6,323,689 |  | $ | 6,501,259
Accrued interest receivable | $ | 61,028 |  | $ | 61,028 |  | $ | 65,547 |  | $ | 65,547
Servicing assets | $ | 47,911 |  | $ | 47,911 |  | $ | 47,295 |  | $ | 47,295
Accounts receivable and other assets | $ | 88,803 |  | $ | 88,803 |  | $ | 78,845 |  | $ | 78,845
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits | $ | 8,781,079 |  | $ | 8,756,762 |  | $ | 8,422,599 |  | $ | 8,415,640
Advances from FHLB | $ | 66,896 |  | $ | 64,570 |  | $ | 68,147 |  | $ | 65,561
Other borrowings | $ | 443 |  | $ | 443 |  | $ | 707 |  | $ | 707
Subordinated capital notes | $ | 33,381 |  | $ | 36,083 |  | $ | 33,325 |  | $ | 36,083
Accrued expenses and other liabilities | $ | 127,190 |  | $ | 127,190 |  | $ | 154,418 |  | $ | 154,418
The following methods and assumptions were used to estimate the fair values of significant financial instruments at March 31, 2021 and December 31, 2020: • Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued interest receivable, accounts receivable and other assets, accrued expenses and other liabilities, and other borrowings have been valued at the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable 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 on quoted market prices, when available or prices provided from contracted pricing providers, or market prices 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 market activity of the instrument. • The fair value of servicing 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 factors, which are determined based on current market conditions. • The fair values of the derivative instruments, 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 projected 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 and non-performing loans) is based on the exit market price, which is estimated by segregating by type, such as mortgage, commercial, consumer, auto and leasing. Each loan segment is further segmented into fixed and adjustable interest rates. The fair value 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. • 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 certificates 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, and subordinated capital notes is based on the discounted value of the contractual cash flows using current estimated market discount rates for borrowings with similar terms, remaining 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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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