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FAIR VALUE OF FINANCIAL INSTRUMENTS
 3 Months Ended
Mar. 31, 2023
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS 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”). 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. OFG holds one security categorized as other debt that is classified as Level 3. The estimated fair value of this security is determined by using an adjusted third-party model to calculate the present value of projected future cash flows. The assumptions are highly uncertain and include primarily market discount rates and current spread. The assumptions used are drawn from similar securities that are actively traded in the market and have similar risk characteristics. The valuation is performed on a quarterly basis.
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 (or its fallback benchmark when applicable), 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.
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 opinion 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 are mainly composed of 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, 2023
Fair Value Measurements
Level 1Level 2Level 3Total
(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale$242,098 $1,110,595 $413 $1,353,106 
Trading securities— 10 — 10 
Money market investments3,172 — — 3,172 
Derivative assets— 275 — 275 
Servicing assets— — 49,345 49,345 
$245,270 $1,110,880 $49,758 $1,405,908 
Non-recurring fair value measurements:
Collateral dependent loans$— $— $9,117 $9,117 
Foreclosed real estate— — 9,250 9,250 
Other repossessed assets— — 4,563 4,563 
Mortgage loans held for sale— — 13,616 13,616 
Other loans held for sale$— $— $19,069 19,069 
$— $— $55,615 $55,615 
December 31, 2022
Fair Value Measurements
Level 1Level 2Level 3Total
(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale$309,133 $1,103,237 $406 $1,412,776 
Trading securities— 9 — 9 
Money market investments4,161 — — 4,161 
Derivative assets— 406 — 406 
Servicing assets— — 50,921 50,921 
$313,294 $1,103,652 $51,327 $1,468,273 
Non-recurring fair value measurements:
Collateral dependent loans$— $— $8,805 $8,805 
Foreclosed real estate— — 11,214 11,214 
Other repossessed assets— — 4,617 4,617 
Mortgage loans held for sale— — 19,499 19,499 
Other loans held for sale$— $— $21,088 21,088 
$— $— $65,223 $65,223 
The fair value information included in the tables above for non-recurring fair value measurements is not as of period-end. Instead, it is as of the date that the fair value measurement was recorded during the quarters ended March 31, 2023 and December 31, 2022, and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.
The tables below present 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, 2023 and 2022:
Level 3 Instruments Only
Quarter Ended March 31,
20232022
Other debt securities available for saleServicing AssetsTotalOther debt securities available for saleServicing AssetsTotal
(In thousands)
Balance at beginning period$406 $50,921 $51,327 $1,530 $48,973 $50,503 
New instruments acquired— 575 575 — 1,119 1,119 
Principal repayments and amortization— (1,065)(1,065)— (1,499)(1,499)
(Losses) gains included in earnings— (1,086)(1,086)— 853 853 
Gains included in other comprehensive income7 — 7 24 — 24 
Balance at end of period$413 $49,345 $49,758 $1,554 $49,446 $51,000 
There were no transfers in and/or out of Level 3 for financial instruments measured at fair value on a recurring basis during the quarters ended March 31, 2023 and 2022.
Servicing assets (losses) gains included in earnings during the quarters ended March 31, 2023 and 2022 were included as mortgage servicing activities in the consolidated statements of operations. For more information on the qualitative information about Level 3 fair value measurements, see Note 7 – Servicing Assets.
During the quarters ended March 31, 2023 and 2022, 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, 2023 and December 31, 2022:
March 31, 2023
Fair ValueValuation TechniqueUnobservable InputRangeWeighted Average
(In thousands)
Other debt securities available-for-sale$413 Cash flow valuationCredit Rating
Baa1 - Baa3
Baa2
Probability of Default Rate
0.15% - 2.12%
0.15 %
Recovery Rate34.73 %34.73 %
Servicing assets$49,345 Cash flow valuationConstant prepayment rate
3.59% - 23.26%
6.06 %
Discount rate
10.00% - 15.50%
11.45 %
Collateral dependent loans$9,117 Fair value of property
or collateral		Appraised value less disposition costs
10.20% - 33.20%
17.12 %
Foreclosed real estate$9,250 Fair value of property
or collateral		Appraised value less disposition costs
10.20% - 33.20%
12.15 %
Other repossessed assets$4,563 Fair value of property
or collateral		Estimated net realizable value less disposition costs
25.00% - 78.00%
61.37 %
Mortgage loans held for sale$13,616 Fair value of propertyEstimated net realizable value
96.43% - 102.57%
99.88 %
Other loans held for sale$19,069 Bids or sales contract pricesEstimated market value
100.00% - 133.64%
101.01 %
December 31, 2022
Fair ValueValuation TechniqueUnobservable InputRangeWeighted Average
(In thousands)
Other debt securities available-for-sale$406 Cash flow valuationCredit Rating
Baa1 - Baa3
Baa2
Probability of Default Rate
0.15% - 2.12%
0.15 %
Recovery Rate
34.73%
34.73 %
Servicing assets$50,921 Cash flow valuationConstant prepayment rate
3.43% - 21.20%
5.66 %
Discount rate
10.00% - 15.50%
11.45 %
Collateral dependent loans$8,805 Fair value of property
or collateral		Appraised value less disposition costs
10.20% - 51.20%
17.11 %
Foreclosed real estate$11,214 Fair value of property
or collateral		Appraised value less disposition costs
10.20% - 33.20%
11.81 %
Other repossessed assets$4,617 Fair value of property
or collateral		Estimated net realizable value less disposition costs
22.00% - 80.00%
58.49 %
Mortgage loans held for sale$19,499 Fair value of propertyEstimated net realizable value
83.25% - 102.43%
71.86%
Other loans held for sale$21,088 Bids or sales contract pricesEstimated market value
100.00% - 103.20%
74.65%
Information about Sensitivity to Changes in Significant Unobservable Inputs
Other debt security available for sale – The significant unobservable inputs used in the fair value measurement of one of OFG’s other debt securities is a DCF methodology. DCF is a valuation method that uses the concept of the time value of money. The methodology uses the future cash flows discounted through a yield to obtain a net present value. Assumptions applied in the model are obtained from Moody’s Default Trends.
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, 2023 and December 31, 2022 was as follows:
March 31,December 31,
20232022
Fair
Value		Carrying
Value		Fair
Value		Carrying
Value
(In thousands)
Financial Assets:
Level 1
Cash and cash equivalents$847,352 $847,352 $550,307 $550,307 
Restricted cash$142 $142 $157 $157 
Investment securities available-for-sale$242,098 $242,098 $309,133 $309,133 
Level 2
Financial Assets:
Trading securities$10 $10 $9 $9 
Investment securities available-for-sale$1,110,595 $1,110,595 $1,103,237 $1,103,237 
Investment securities held-to-maturity$471,615 $530,880 $469,186 $535,070 
Federal Home Loan Bank (FHLB) stock$14,983 $14,983 $6,005 $6,005 
Equity securities$18,235 $18,235 $17,662 $17,662 
Derivative assets$275 $275 $406 $406 
Level 3
Financial Assets:
Investment securities available for sale$413 $413 $406 $406 
Total loans (including loans held-for-sale)$6,471,463 $6,735,281 $6,467,878 $6,723,236 
Accrued interest receivable$62,140 $62,140 $62,402 $62,402 
Servicing assets$49,345 $49,345 $50,921 $50,921 
Accounts receivable and other assets$66,196 $66,196 $61,014 $61,014 
Financial Liabilities:
Deposits$8,558,961 $8,565,421 $8,556,300 $8,568,364 
Advances from FHLB$225,612 $226,661 $26,716 $26,716 
Other borrowings$128 $128 $318 $318 
Accrued expenses and other liabilities$119,777 $119,777 $124,999 $124,999 
The following methods and assumptions were used to estimate the fair values of significant financial instruments at March 31, 2023 and December 31, 2022:
•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 stock are valued at their redemption value.
•The fair value of investment securities, including trading securities, 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. Equity securities do not have readily available fair values and are measured at cost, less any impairment. The estimated fair value of the convertible note in other debt securities available for sale is determined by using an adjusted third-party cash flow valuation model to calculate the present value of projected future cash flows. The assumptions used, which are highly uncertain and require a high degree of judgment, include primarily market discount rates, current spreads, duration, leverage, default, and loss rates. The assumptions used are drawn from a wide array of data sources, including the performance of the collateral underlying each deal. The valuation, which is obtained at least on a quarterly basis, is analyzed and its assumptions are evaluated and incorporated in either an internal-based valuation model, when deemed necessary, or compared to counterparties’ prices and agreed by management.
•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 loans and leases. 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 advances from FHLB 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.