FAIR VALUE (Tables)

9 Months Ended

Sep. 30, 2016

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, 2016								As of December 31, 2015
	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	$	419	$	-	$	-	$	419	$	-	$	-	$	-	$	-
U.S. Treasury Securities		7,514		-		-		7,514		7,497		-		-		7,497
Noncallable U.S. agency debt		-		366,838		-		366,838		-		315,467		-		315,467
Callable U.S. agency debt and MBS		-		1,419,951		-		1,419,951		-		1,509,807		-		1,509,807
Puerto Rico government obligations		-		24,653		2,167		26,820		-		26,327		1,890		28,217
Private label MBS		-		-		22,211		22,211		-		-		25,307		25,307
Other investments		-		-		100		100		-		-		100		100
Derivatives, included in assets:
Purchased interest rate cap agreements		-		191		-		191		-		806		-		806
Forward contracts		-		4		-		4		-		-		-		-
Liabilities:
Derivatives, included in liabilities:
Written interest rate cap agreement		-		191		-		191		-		798		-		798
Forward contracts		-		144		-		144		-		123		-		123

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, 2016 and 2015 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, 2016)		(Quarter ended September 30, 2015)
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)	$	-	$	(231)

	Changes in Unrealized Losses		Changes in Unrealized Losses
	(Nine-Month Period Ended September 30, 2016)		(Nine-Month Period Ended September 30, 2015)
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)	$	(387)	$	(628)

Fair Value of Assets and Liabilities Measured on Recurring Basis

		Quarter Ended September 30,
		2016		2015
Level 3 Instruments Only		Securities		Securities
(In thousands)		Available For Sale⁽¹⁾		Available For Sale⁽¹⁾

Beginning balance		$	26,020	$	31,640
Total gains or (losses) (realized/unrealized):
Included in earnings			-		(231)
Included in other comprehensive income			(477)		345
Principal repayments and amortization			(1,065)		(2,046)
Ending balance		$	24,478	$	29,708

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

		Nine-Month Period Ended September 30,
		2016		2015
Level 3 Instruments Only		Securities		Securities
(In thousands)		Available For Sale⁽¹⁾		Available For Sale⁽¹⁾

Beginning balance		$	27,297	$	36,212
Total gains or (losses) (realized/unrealized):
Included in earnings			(387)		(628)
Included in other comprehensive income			1,339		1,489
Purchases			-		100
Principal repayments and amortization			(3,771)		(7,465)
Ending balance		$	24,478	$	29,708

(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, 2016, 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, 2016						(Losses) recorded for the Quarter Ended September 30, 2016		(Losses) recorded for the Nine-Month Period Ended September 30, 2016
		Level 1		Level 2		Level 3
			(In thousands)

Loans receivable⁽¹⁾		$	-	$	-	$	426,444	$	(13,912)	$	(41,621)
OREO⁽²⁾			-		-		139,446		(1,702)		(6,580)
Mortgage servicing rights⁽³⁾			-		-		25,475		(263)		(387)

(1)	Consist mainly of 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 of 6.34%, Discount Rate of 11.18%.

As of September 30, 2015, 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, 2015						(Losses) recorded for the Quarter Ended September 30, 2015		(Losses) recorded for the Nine-Month Period Ended September 30, 2015
		Level 1		Level 2		Level 3
		(In thousands)

Loans receivable⁽¹⁾		$	-	$	-	$	332,688	$	(7,864)	$	(22,431)
OREO⁽²⁾			-		-		124,442		(4,025)		(8,790)
Mortgage servicing rights⁽³⁾			-		-		23,960		(23)		(170)
Loans Held For Sale⁽⁴⁾			-		-		8,027		-		-

(1)	Consist mainly of 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 of 9.32%, Discount Rate of 10.64%.
(4)	The value of these loans was derived from external appraisals, adjusted for specific characteristics of the loans.

Estimated Fair Value and Carrying Value of Financial Instruments

The following tables present the carrying value and the estimated fair value of financial instruments as of September 30, 2016 and December 31, 2015:

	Total Carrying Amount in Statement of Financial Condition September 30, 2016		Fair Value Estimate September 30, 2016		Level 1		Level 2		Level 3

	(In thousands)

Assets:
Cash and due from banks and money
market investments	$	528,943	$	528,943	$	528,943	$	-	$	-
Investment securities available
for sale		1,843,853		1,843,853		7,933		1,811,442		24,478
Investment securities held to maturity		156,190		132,241		-		-		132,241
Other equity securities		28,717		28,717		-		28,717		-
Loans held for sale		56,779		60,283		-		50,497		9,786
Loans held for investment		8,863,654
Less: allowance for loan and lease losses		(214,070)
Loans held for investment, net of allowance	$	8,649,584		8,462,434		-		-		8,462,434
Derivatives, included in assets		195		195		-		195		-

Liabilities:
Deposits		8,981,313		9,003,706		-		9,003,706		-
Securities sold under agreements to repurchase		600,000		646,505		-		646,505		-
Advances from FHLB		355,000		356,925		-		356,925		-
Other borrowings		216,187		174,997		-		-		174,997
Derivatives, included in liabilities		335		335		-		335		-

	Total Carrying Amount in Statement of Financial Condition December 31, 2015		Fair Value Estimate December 31, 2015		Level 1		Level 2		Level 3

	(In thousands)

Assets:
Cash and due from banks and money
market investments	$	752,458	$	752,458	$	752,458	$	-	$	-
Investment securities available
for sale		1,886,395		1,886,395		7,497		1,851,601		27,297
Investment securities held to maturity		161,483		131,544		-		-		131,544
Other equity securities		32,169		32,169		-		32,169		-
Loans held for sale		35,869		36,844		-		28,709		8,135
Loans held for investment		9,112,382
Less: allowance for loan and lease losses		(240,710)
Loans held for investment, net of allowance	$	8,871,672		8,768,152		-		-		8,768,152
Derivatives, included in assets		806		806		-		806		-

Liabilities:
Deposits		9,338,124		9,334,073		-		9,334,073		-
Securities sold under agreements to repurchase		700,000		752,048		-		752,048		-
Advances from FHLB		455,000		453,182		-		453,182		-
Other borrowings		226,492		142,846		-		-		142,846
Derivatives, included in liabilities		921		921		-		921		-

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 is as follows:

	September 30, 2016
	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 of 6.34%; weighted average discount rate of 11.18%

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

The table below presents qualitative information for significant assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2016:

	September 30, 2016
(In thousands)	Fair Value		Valuation Technique	Unobservable Input	Range

Investment securities available-for-sale:

Private label MBS	$	22,130	Discounted cash flow	Discount rate	13.3%
				Prepayment rate	6.5% -22.5% (Weighted Average 13.7%)
				Projected cumulative loss rate	0.2% -9.1% (Weighted Average 4.0%)
Puerto Rico Government Obligations		2,167	Discounted cash flow	Prepayment rate	3.00%