FAIR VALUE

3 Months Ended

Mar. 31, 2023

FAIR VALUE [Abstract]

FAIR VALUE [Text Block]

NOTE 18 – FAIR VALUE

Fair Value Measurement

ASC Topic 820, “Fair Value Measurement,” defines fair value as the exchange price that would be received for an asset or paid to

transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction

between market participants on the measurement date. This guidance also establishes a fair value hierarchy for classifying assets and

liabilities, which is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable.

One of three levels of inputs may be used to measure fair value:

Level 1 

Valuations of Level 1 assets and liabilities are obtained from readily-available pricing sources for market

transactions involving identical assets or liabilities in active markets.

Level 2 

Va

luations of Level 2 assets and liabilities are based on observable inputs other than Level 1 prices, such as quoted

prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market

data for substantially the full term of the assets or liabilities.

Level 3 

Va

luations of Level 3 assets and liabilities are based on unobservable inputs that are supported by little or no market

activity and are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial

instruments whose value is determined by using pricing models for which the determination of fair value requires

significant management judgment as to the estimation.

 See Note 25 – Fair Value , to the audited consolidated financial statements included in the 2022 Annual Report on Form 10-K for a

description of the valuation methodologies used to measure financial instruments at fair value on a recurring basis.

Assets and liabilities measured at fair value on a recurring basis are summarized below as of March 31, 2023 and December 31,

2022:

As of March 31, 2023

As of December 31, 2022

Fair Value Measurements Using 

Fair Value Measurements Using 

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

(In thousands)

Assets:

Debt securities available for sale:

U.S. Treasury securities

$

140,422

$

-

$

-

$

140,422

$

138,875

$

-

$

-

$

138,875

Noncallable U.S. agencies debt securities

-

428,675

-

428,675

-

389,787

-

389,787

Callable U.S. agencies debt securities

-

1,962,535

-

1,962,535

-

1,963,566

-

1,963,566

MBS

-

3,050,019

5,402

(1)

3,055,421

-

3,098,797

5,794

(1)

3,104,591

Puerto Rico government obligations

-

-

2,203

2,203

-

-

2,201

2,201

Other investments

-

-

-

-

-

-

500

500

Equity securities

4,926

-

-

4,926

4,861

-

-

4,861

Derivative assets

-

628

-

628

-

633

-

633

Liabilities:

Derivative liabilities

-

645

-

645

-

476

-

476

(1) Related to private label MBS.

The table below presents a reconciliation of the beginning and ending balances of all assets measured at fair value on a recurring

basis using significant unobservable inputs (Level 3) for the quarters ended March 31, 2023 and 2022:

Quarter Ended March 31, 

2023

2022

Level 3 Instruments Only 

Securities Available for Sale

(1)

Securities Available for Sale

(1)

(In thousands)

Beginning balance

$

8,495

$

11,084

 Total gains (losses):

 Included in other comprehensive loss (unrealized)

(162)

(287)

 Included in earnings (unrealized)

(2)

9

388

 Principal repayments and amortization

(3)

(737)

(538)

Ending balance

$

7,605

$

10,647

___________________

(1)

Amounts mostly related to private label MBS.

(2)

Changes in unrealized gains included in earnings were recognized within provision for credit losses - expense (benefit) and relate to assets still held as of the reporting date.

(3)

Includes the $

0.5

 million repayment of a matured debt security.

The tables below present quantitative information for significant assets measured at fair value on a recurring basis using significant

unobservable inputs (Level 3) as of March 31, 2023 and December 31, 2022:

March 31, 2023

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted

Average

Minimum 

Maximum

(Dollars in thousands)

Available-for-sale debt securities:

 Private label MBS

$

5,402

Discounted cash flows

Discount rate

16.0%

16.0%

16.0%

Prepayment rate

1.6%

12.6%

9.2%

Projected cumulative loss rate

0.2%

14.9%

5.2%

 Puerto Rico government obligations

$

2,203

Discounted cash flows

Discount rate

12.8%

12.8%

12.8%

Projected cumulative loss rate

19.0%

19.0%

19.0%

December 31, 2022

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted

Average

Minimum 

Maximum

(Dollars in thousands)

Available-for-sale debt securities:

 Private label MBS

$

5,794

Discounted cash flows

Discount rate

16.2%

16.2%

16.2%

Prepayment rate

1.5%

15.2%

11.8%

Projected cumulative loss rate

0.3%

15.6%

5.6%

 Puerto Rico government obligations

$

2,201

Discounted cash flows

Discount rate

12.9%

12.9%

12.9%

Projected cumulative loss rate

19.3%

19.3%

19.3%

Information about Sensitivity to Changes in Significant Unobservable Inputs

Private label MBS: The significant unobservable inputs in the valuation include probability of default, the loss severity assumption,

and prepayment rates. Shifts in those inputs would result in different fair value measurements. Increases in the probability of default,

loss severity assumptions, and prepayment rates in isolation would generally result in an adverse effect on the fair value of the

instruments. The Corporation modeled meaningful and possible shifts of each input to assess the effect on the fair value estimation.

Puerto Rico Government Obligations: The significant unobservable input used in the fair value measurement is the assumed loss rate

of the underlying residential mortgage loans that collateralize these obligations, which are guaranteed by the PRHFA. A significant

increase (decrease) in the assumed rate would lead to a (lower) higher fair value estimate. The fair value of these bonds was based on

a discounted cash flow methodology that considers the structure and terms of the debt security. The Corporation utilizes PDs and

LGDs that consider, among other things, historical payment performance, loan-to value attributes, and relevant current and forward-

looking macroeconomic variables, such as regional unemployment rates, the housing price index, and expected recovery of the

PRHFA guarantee. Under this approach, expected cash flows (interest and principal) are discounted at the Treasury yield curve plus a

spread as of the reporting date and compared to the amortized cost.

Additionally, fair value is used on a nonrecurring basis to evaluate certain assets in accordance with GAAP.

As of March 31, 2023, the Corporation recorded losses or valuation adjustments for assets recognized at fair value on a non-

recurring basis and still held at March 31, 2023, as shown in the following table:

Carrying value as of March 31, 

Related to losses recorded for the Quarter Ended

March 31, 

2023

2022

2023

2022

(In thousands)

Level 3:

Loans receivable

 (1)

$

3,486

$

25,951

$

(60)

$

(3,539)

OREO

(2)

814

1,432

(33)

(73)

(1)

Consists mainly of collateral dependent commercial and construction loans. The Corporation generally measured losses based on the fair value of the collateral. The Corporation derived

the fair values from external appraisals that took 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 Corporation derived the fair values from appraisals that took 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.

See Note 25 – Fair Value, to the audited consolidated financial statements to the audited consolidated financial statements included in

the 2022 Annual Report on Form 10-K for qualitative information regarding the fair value measurements for Level 3 financial

instruments measured at fair value on nonrecurring basis.

The following tables present the carrying value, estimated fair value and estimated fair value level of the hierarchy of financial

instruments as of March 31, 2023 and December 31, 2022:

Total Carrying Amount

in Statement of

Financial Condition as

of March 31, 2023

Fair Value Estimate as of

March 31, 2023

Level 1

Level 2

Level 3

(In thousands)

Assets:

Cash and due from banks and money market investments (amortized cost)

$

823,601

$

823,601

$

823,601

$

-

$

-

Available-for-sale debt securities (fair value)

5,589,256

5,589,256

140,422

5,441,229

7,605

Held-to-maturity debt securities (amortized cost)

431,395

Less: ACL on held-to-maturity debt securities

(7,646)

Held-to-maturity debt securities, net of ACL

$

423,749

419,752

-

255,209

164,543

Equity securities (amortized cost)

61,788

61,788

-

61,788

(1)

-

Other equity securities (fair value)

4,926

4,926

4,926

-

-

Loans held for sale (lower of cost or market)

15,183

15,214

-

15,214

-

Loans held for investment (amortized cost)

11,577,985

Less: ACL for loans and finance leases

(265,567)

Loans held for investment, net of ACL

$

11,312,418

11,030,421

-

-

11,030,421

MSRs (amortized cost)

28,431

45,270

-

-

45,270

Derivative assets (fair value)

 (2)

628

628

-

628

-

Liabilities:

Deposits (amortized cost)

$

16,051,965

$

16,039,550

$

-

$

16,039,550

$

-

Short-term securities sold under agreements to repurchase (amortized cost)

172,982

173,936

-

173,936

-

Advances from the FHLB (amortized cost):

 Short-term

425,000

426,665

-

426,665

-

 Long-term

500,000

501,990

-

501,990

-

Other long-term borrowings (amortized cost)

183,762

187,183

-

-

187,183

Derivative liabilities (fair value)

 (2)

645

645

-

645

-

(1) Includes FHLB stock with a carrying value of $

54.2

 million, which are considered restricted.

(2) Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.

Total Carrying

Amount in Statement

of Financial Condition

as of December 31,

2022

Fair Value Estimate as of

December 31, 2022

Level 1

Level 2

Level 3

(In thousands)

Assets:

Cash and due from banks and money market investments (amortized cost)

$

480,505

$

480,505

$

480,505

$

-

$

-

Available-for-sale debt securities (fair value)

5,599,520

5,599,520

138,875

5,452,150

8,495

Held-to-maturity debt securities (amortized cost)

437,537

Less: ACL on held-to-maturity debt securities

(8,286)

Held-to-maturity debt securities, net of ACL

$

429,251

427,115

-

260,106

167,009

Equity securities (amortized cost)

50,428

50,428

-

50,428

(1)

-

Other equity securities (fair value)

4,861

4,861

4,861

-

-

Loans held for sale (lower of cost or market)

12,306

12,306

-

12,306

-

Loans held for investment (amortized cost)

11,552,825

Less: ACL for loans and finance leases

(260,464)

Loans held for investment, net of ACL

$

11,292,361

11,106,809

-

-

11,106,809

MSRs (amortized cost)

29,037

44,710

-

-

44,710

Derivative assets (fair value)

(2)

633

633

-

633

-

Liabilities:

Deposits (amortized cost)

$

16,143,467

$

16,139,937

$

-

$

16,139,937

$

-

Short-term securities sold under agreements to repurchase (amortized cost)

75,133

75,230

-

75,230

-

Advances from the FHLB (amortized cost)

 Short-term

475,000

474,731

-

474,731

-

 Long-term

200,000

199,865

-

199,865

-

Other long-term borrowings (amortized cost)

183,762

187,246

-

-

187,246

Derivative liabilities (fair value)

(2)

476

476

-

476

-

(1) Includes FHLB stock with a carrying value of $

42.9

 million, which are considered restricted.

(2) Includes interest rate swap agreements, interest rate caps, forward contracts, interest rate lock commitments, and forward loan sales commitments.

The short-term nature of certain assets and liabilities result in their carrying value approximating fair value. These include cash and

cash due from banks and other short-term assets, such as FHLB stock. Certain assets, the most significant being premises and

equipment, goodwill and other intangible assets, are not considered financial instruments and are not included above. Accordingly,

this fair value information is not intended to, and does not, represent the Corporation’s underlying value. Many of these assets and

liabilities that are subject to the disclosure requirements are not actively traded, requiring management to estimate fair values. These

estimates necessarily involve the use of assumptions and judgment about a wide variety of factors, including but not limited to,

relevancy of market prices of comparable instruments, expected future cash flows, and appropriate discount rates.