FAIR VALUE

3 Months Ended

Mar. 31, 2024

FAIR VALUE [Abstract]

FAIR VALUE

NOTE 17 – 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 2023 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.

 There were no transfers of assets and liabilities measured at fair value between Level 1 and Level 2 measurements during the

quarters ended March 31, 2024 and 2023.

Assets and liabilities measured at fair value on a recurring basis are summarized below as of March 31,2024 and December 31, 2023:

As of March 31, 2024

As of December 31, 2023

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

$

116,068

$

-

$

-

$

116,068

$

135,393

$

-

$

-

$

135,393

Noncallable U.S. agencies debt securities

-

467,940

-

467,940

-

433,437

-

433,437

Callable U.S. agencies debt securities

-

1,785,476

-

1,785,476

-

1,874,960

-

1,874,960

MBS

-

2,671,420

4,724

(1)

2,676,144

-

2,779,994

4,785

(1)

2,784,779

Puerto Rico government obligation

-

-

1,551

1,551

-

-

1,415

1,415

Equity securities

4,871

-

-

4,871

4,893

-

-

4,893

Derivative assets

-

239

-

239

-

341

-

341

Liabilities:

Derivative liabilities

-

242

-

242

-

317

-

317

(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, 2024 and 2023:

Quarter Ended March 31,

2024

2023

Level 3 Instruments Only 

Securities Available

for Sale

(1)

Securities Available

for Sale

(1)

(In thousands)

Beginning balance

$

6,200

$

8,495

 Total gains (losses):

 Included in other comprehensive income (loss) (unrealized)

239

(162)

 Included in earnings (unrealized)

(2)

69

9

 Principal repayments and amortization

(3)

(233)

(737)

Ending balance

$

6,275

$

7,605

(1)

Amounts related to private label MBS and a Puerto Rico government obligation.

(2)

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

(3)

 For the quarter ended March 31, 2023 includes a $

0.5

 million repayment related to 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 31,2024 and December 31, 2023:

March 31, 2024

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted

Average

Minimum 

Maximum

(Dollars in thousands)

Available-for-sale debt securities:

 Private label MBS

$

4,724

Discounted cash flows

Discount rate

16.4%

16.4%

16.4%

Prepayment rate

0.0%

6.9%

3.7%

Projected cumulative loss rate

0.2%

10.5%

3.8%

 Puerto Rico government obligation

$

1,551

Discounted cash flows

Discount rate

13.0%

13.0%

13.0%

Projected cumulative loss rate

21.3%

21.3%

21.3%

December 31, 2023

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted

Average

Minimum 

Maximum

(Dollars in thousands)

Available-for-sale debt securities:

 Private label MBS

$

4,785

Discounted cash flows

Discount rate

16.1%

16.1%

16.1%

Prepayment rate

0.0%

6.9%

3.7%

Projected cumulative loss rate

0.1%

10.9%

4.2%

 Puerto Rico government obligation

$

1,415

Discounted cash flows

Discount rate

14.1%

14.1%

14.1%

Projected cumulative loss rate

25.8%

25.8%

25.8%

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 Obligation: The significant unobservable input used in the fair value measurement is the assumed loss rate of

the underlying residential mortgage loans that collateralize a pass-through MBS guaranteed by the PRHFA. A significant increase

(decrease) in the assumed rate would lead to a (lower) higher fair value estimate. See Note 2 – “Debt Securities” for information on

the methodology used to calculate the fair value of these debt securities.

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

For the quarters ended March 31, 2024 and 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, 2024 and 2023, as shown in the following table:

Carrying value as of March 31,

Related to losses recorded for the Quarter Ended

March 31,

2024

2023

2024

2023

(In thousands)

Level 3:

Loans receivable

 (1)

$

9,654

$

3,486

$

(41)

$

(60)

OREO

(2)

859

814

(163)

(33)

(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. There were no significant haircuts applied on appraisals for the quarters ended March 31, 2024 and

2023.

(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. The haircuts applied ranged from

2

% to

21

% for the quarter ended March 31, 2024 and from

10

% to

28

% for the quarter ended March 31, 2023.

See Note 25 – “Fair Value,” to the audited consolidated financial statements included in the 2023 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 31,2024 and December 31, 2023:

Total Carrying Amount

in Statement of

Financial Condition as

of March 31, 2024

Fair Value Estimate as of

March 31, 2024

Level 1

Level 2

Level 3

(In thousands)

Assets:

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

$

684,519

$

684,519

$

684,519

$

-

$

-

Available-for-sale debt securities (fair value)

5,047,179

5,047,179

116,068

4,924,836

6,275

Held-to-maturity debt securities:

 Held-to-maturity debt securities (amortized cost)

349,330

 Less: ACL on held-to-maturity debt securities

(1,235)

 Held-to-maturity debt securities, net of ACL

$

348,095

338,120

-

228,237

109,883

Equity securities (amortized cost)

46,519

46,519

-

46,519

(1)

-

Other equity securities (fair value)

4,871

4,871

4,871

-

-

Loans held for sale (lower of cost or market)

12,080

12,173

-

12,173

-

Loans held for investment:

 Loans held for investment (amortized cost)

12,311,448

 Less: ACL for loans and finance leases

(263,592)

 Loans held for investment, net of ACL

$

12,047,856

11,953,468

-

-

11,953,468

MSRs (amortized cost)

26,355

44,764

-

-

44,764

Derivative assets (fair value)

 (2)

239

239

-

239

-

Liabilities:

Deposits (amortized cost)

$

16,545,511

$

16,546,891

$

-

$

16,546,891

$

-

Advances from the FHLB (amortized cost):

 Long-term

500,000

496,672

-

496,672

-

Other long-term borrowings (amortized cost)

161,700

160,199

-

-

160,199

Derivative liabilities (fair value)

 (2)

242

242

-

242

-

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

34.6

 million, which is 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,

2023

Fair Value Estimate as of

December 31, 2023

Level 1

Level 2

Level 3

(In thousands)

Assets:

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

$

663,164

$

663,164

$

663,164

$

-

$

-

Available-for-sale debt securities (fair value)

5,229,984

5,229,984

135,393

5,088,391

6,200

Held-to-maturity debt securities:

 Held-to-maturity debt securities (amortized cost)

354,178

 Less: ACL on held-to-maturity debt securities

(2,197)

 Held-to-maturity debt securities, net of ACL

$

351,981

346,132

-

235,239

110,893

Equity securities (amortized cost)

44,782

44,782

-

44,782

(1)

-

Other equity securities (fair value)

4,893

4,893

4,893

-

-

Loans held for sale (lower of cost or market)

7,368

7,476

-

7,476

-

Loans held for investment: 

 Loans held for investment (amortized cost)

12,185,483

 Less: ACL for loans and finance leases

(261,843)

 Loans held for investment, net of ACL

$

11,923,640

11,762,855

-

-

11,762,855

MSRs (amortized cost)

26,941

45,244

-

-

45,244

Derivative assets (fair value)

(2)

341

341

-

341

-

Liabilities:

Deposits (amortized cost)

$

16,555,985

$

16,565,435

$

-

$

16,565,435

$

-

Advances from the FHLB (amortized cost)

 Long-term

500,000

500,522

-

500,522

-

Other long-term borrowings (amortized cost)

161,700

159,999

-

-

159,999

Derivative liabilities (fair value)

(2)

317

317

-

317

-

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

34.6

 million, which is considered restricted.

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