FAIR VALUE (Tables)

3 Months Ended

Sep. 30, 2014

Assets and Liabilities Measured at Fair Value on Recurring Basis

Assets and liabilities measured at fair value on a recurring basis, are summarized below:

	As of September 30, 2014								As of December 31, 2013
	Fair Value Measurements Using								Fair Value Measurements Using
(In thousands)	Level 1		Level 2		Level 3		Assets/Liabilities at Fair Value		Level 1		Level 2		Level 3		Assets/Liabilities at Fair Value

Assets:
Securities available for sale :
Equity securities	$	14	$	-	$	-	$	14	$	33	$	-	$	-	$	33
U.S. Treasury Securities		7,498		-		-		7,498		7,499		-		-		7,499
Noncallable U.S. agency debt		-		220,856		-		220,856		-		200,903		-		200,903
Callable U.S. agency debt and MBS		-		1,666,264		-		1,666,264		-		1,677,651		-		1,677,651
Puerto Rico government obligations		-		43,623		2,766		46,389		-		48,904		2,426		51,330
Private label MBS		-		-		36,116		36,116		-		-		40,866		40,866
Derivatives, included in assets:
Interest rate swap agreements		-		67		-		67		-		162		-		162
Purchased interest rate cap agreements		-		18		-		18		-		58		-		58
Forward contracts		-		17		-		17		-		174		-		174
Liabilities:
Derivatives, included in liabilities:
Interest rate swap agreements		-		2,877		-		2,877		-		3,965		-		3,965
Written interest rate cap agreement		-		18		-		18		-		58		-		58
Forward contracts		-		16		-		16		-		-		-		-

Schedule of Changes in Fair Value

The tables below summarize changes in unrealized gains and losses recorded in earnings for the quarters and nine-month periods ended September 30, 2014 and 2013 for Level 3 assets and liabilities that are still held at the end of each period:

	Changes in Unrealized Losses		Changes in Unrealized Losses
	Quarter ended September 30, 2014		Quarter ended September 30, 2013
Level 3 Instruments Only	Securities		Securities
(In thousands)	Available For Sale		Available For Sale

Changes in unrealized losses relating to assets still held at reporting date:
Net impairment losses on available-for-sale investment securities (credit component)	$	(245)	$	0

		Changes in Unrealized Losses		Changes in Unrealized Losses
		Nine-Month Period Ended September 30, 2014		Nine-Month Period Ended September 30, 2013
Level 3 Instruments Only	Securities		Securities
(In thousands)	Available For Sale		Available For Sale

Changes in unrealized losses relating to assets still held at reporting date:
Net impairment losses on available-for-sale investment securities (credit component)	$	(245)	$	(117)

Fair Value of Assets and Liabilities Measured on Recurring Basis

		Total Fair Value Measurements
		Quarter ended September 30,
		2014		2013
Level 3 Instruments Only		Securities		Securities
(In thousands)		Available For Sale⁽¹⁾		Available For Sale⁽¹⁾

Beginning balance		$	40,918	$	48,660
Total gains or (losses) (realized/unrealized):
Included in earnings			(245)		0
Included in other comprehensive income			333		903
Principal repayments and amortization			(2,124)		(4,643)
Ending balance		$	38,882	$	44,920

(1)	Amounts mostly related to private label mortgage-backed securities.

		Total Fair Value Measurements
		Nine-Month Period Ended September 30,
		2014		2013
Level 3 Instruments Only		Securities		Securities
(In thousands)		Available For Sale⁽¹⁾		Available For Sale⁽¹⁾

Beginning balance		$	43,292	$	54,617
Total gains or (losses) (realized/unrealized):
Included in earnings			(245)		(117)
Included in other comprehensive income			2,026		1,763
Purchases			5,123		-
Sales			(4,855)		-
Principal repayments and amortization			(6,459)		(11,343)
Ending balance		$	38,882	$	44,920

(1)	Amounts mostly related to private label mortgage-backed securities.

Impairment or Valuation Adjustments were Recorded for Assets Recognized at Fair Value

As of September 30, 2014, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table:

		Carrying value as of September 30, 2014						(Losses) Gain recorded for the Quarter Ended September 30, 2014		(Losses) Gain recorded for the Nine Month Period Ended September 30, 2014
		Level 1		Level 2		Level 3
			(In thousands)

Loans receivable⁽¹⁾		$	-	$	-	$	461,882	$	(6,495)	$	(30,376)
OREO⁽²⁾			-		-		112,803		(2,287)		(10,544)
Mortgage servicing rights⁽³⁾			-		-		22,503		(46)		(226)
Loans Held For Sale⁽⁴⁾			-		-		54,641		0		0

(1)	Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral. The fair value was derived from external appraisals that take 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 fair value was derived from appraisals that take 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)	Fair value adjustments to mortgage servicing rights were mainly due to assumptions associated with mortgage prepayment rates. The Corporation carries its mortgage servicing rights at the lower of cost or market, measured at fair value on a non-recurring basis. Assumptions for the value of mortgage servicing rights include: Prepayment rate 9.71%, Discount Rate 10.63%.
(4)	The value of these loans was derived from external appraisals, adjusted for specific characteristics of the loans, and for loans with signed sale agreements, the value was determined based on the sales price on such agreements.

As of September 30, 2013, impairment or valuation adjustments were recorded for assets recognized at fair value on a non-recurring basis as shown in the following table:

		Carrying value as of September 30, 2013						(Losses) Gain recorded for the Quarter Ended September 30, 2013		(Losses) Gain recorded for the Nine-Month Period Ended September 30, 2013
		Level 1		Level 2		Level 3
		(In thousands)


Loans receivable⁽¹⁾		$	-	$	-	$	450,267	$	(7,034)	$	(24,431)
OREO⁽²⁾			-		-		133,284		(4,479)		(15,505)
Mortgage servicing rights⁽³⁾			-		-		21,885		32		589
Loans Held For Sale⁽⁴⁾			-		-		80,234		(397)		(10,073)

(1)	Mainly impaired commercial and construction loans. The impairment was generally measured based on the fair value of the collateral. The fair value was derived from external appraisals that take 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 fair value was derived from appraisals that take 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)	Fair value adjustments to the mortgage servicing rights were mainly due to assumptions associated with mortgage prepayments rates. The Corporation carries its mortgage servicing rights at the lower of cost or market, measured at fair value on a non-recurring basis. Assumptions for the value of mortgage servicing rights include: Prepayment Rate 9.37%, Discount Rate 10.59%.
(4)	The value of these loans was derived from external appraisals, adjusted for specific characteristics of the loans, and, for loans with signed sale agreements, the value was determined based on the sales price on such agreements.

Estimated Fair Value and Carrying Value of Financial Instruments

The following table presents the estimated fair value and carrying value of financial instruments as of September 30, 2014 and December 31, 2013:

	Total Carrying Amount in Statement of Financial Condition September 30, 2014		Fair Value Estimate September 30, 2014		Level 1		Level 2		Level 3

	(In thousands)

Assets:
Cash and due from banks and money
market investments	$	969,995	$	969,995	$	969,995	$	-	$	-
Investment securities available
for sale		1,977,137		1,977,137		7,512		1,930,743		38,882
Other equity securities		25,752		25,752		-		25,752		-
Loans held for sale		80,014		80,937		-		26,296		54,641
Loans, held for investment		9,315,402
Less: allowance for loan and lease losses		(225,434)
Loans held for investment, net of allowance	$	9,089,968		8,853,184		-		-		8,853,184
Derivatives, included in assets		102		102		-		102		-

Liabilities:
Deposits		9,703,174		9,702,567		-		9,702,567		-
Securities sold under agreements to repurchase		900,000		964,946		-		964,946		-
Advances from FHLB		325,000		323,656		-		323,656		-
Other borrowings		231,959		137,127		-		-		137,127
Derivatives, included in liabilities		2,911		2,911		-		2,911		-

	Total Carrying Amount in Statement of Financial Condition December 31, 2013		Fair Value Estimate December 31, 2013		Level 1		Level 2		Level 3

	(In thousands)

Assets:
Cash and due from banks and money
market investments	$	655,671	$	655,671	$	655,671	$	-	$	-
Investment securities available
for sale		1,978,282		1,978,282		7,532		1,927,458		43,292
Other equity securities		28,691		28,691		-		28,691		-
Loans held for sale		75,969		76,684		-		21,883		54,801
Loans, held for investment		9,636,170
Less: allowance for loan and lease losses		(285,858)
Loans held for investment, net of allowance	$	9,350,312		9,127,234		-		-		9,127,234
Derivatives, included in assets		394		394		-		394		-

Liabilities:
Deposits		9,879,924		9,898,615		-		9,898,615		-
Securities sold under agreements to repurchase		900,000		976,151		-		976,151		-
Advances from FHLB		300,000		297,523		-		297,523		-
Other borrowings		231,959		106,772		-		-		106,772
Derivatives, included in liabilities		4,023		4,023		-		4,023		-

Fair Value, Assets and Liabilities Measured on Nonrecurring Basis, Valuation Techniques [Table Text Block]

Qualitative information regarding the fair value measurements for Level 3 financial instruments are as follows:

	September 30, 2014
	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
Mortgage servicing rights	Discounted Cash Flow	Weighted average prepayment rate 9.71%; weighted average discount rate 10.63%

Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Table Text Block]

The table below presents qualitative information for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2014:

	September 30, 2014
(In thousands)	Fair Value		Valuation Technique	Unobservable Input	Range

Investment securities available-for-sale:

Private label MBS	$	36,116	Discounted cash flow	Discount rate	14.5%
				Prepayment rate	19.21% -100% (Weighted Average 31%)
				Projected cumulative loss rate	0.94% -80.00% (Weighted Average 7.6%)
Puerto Rico Government Obligations		2,766	Discounted cash flow	Prepayment speed	5.57%

- Definition

Tabular disclosure of the fair value measurement of assets using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets) and gains or losses recognized in other comprehensive income (loss), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs), by class of asset.

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- Definition

Tabular disclosure of the fair value of financial instruments, including financial assets and financial liabilities, and the measurements of those instruments, assets, and liabilities.

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