ASC Subtopic 820-10 “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels in order to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is based upon quoted market prices when available. If listed prices or quotes are not available, the Corporation employs internally-developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument's fair value is adequately representative of the price that would be received or paid in the marketplace. These adjustments include amounts that reflect counterparty credit quality, the Corporation's credit standing, constraints on liquidity and unobservable parameters that are applied consistently. There have been no changes in the Corporation's methodologies used to estimate the fair value of assets and liabilities since December 31, 2013. Refer to the Critical Accounting Policies / Estimates in the 2012 Annual Report for additional information on the accounting guidance and the Corporation's policies or procedures related to fair value measurements.

The estimated fair value may be subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in calculating fair value could significantly affect the results.

The following fair value hierarchy tables present information about the Corporation's assets and liabilities measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013 and on a nonrecurring basis in periods subsequent to initial recognition for the nine months ended September 30, 2014 and 2013:

At September 30, 2014

(In thousands)	Level 1		Level 2		Level 3		Total

RECURRING FAIR VALUE MEASUREMENTS

Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	-	$	592,810	$	-	$	592,810
Obligations of U.S. Government sponsored entities		-		1,973,405		-		1,973,405
Obligations of Puerto Rico, States and political subdivisions		-		66,118		-		66,118
Collateralized mortgage obligations - federal agencies		-		2,135,074		-		2,135,074
Collateralized mortgage obligations - private label		-		6		-		6
Mortgage-backed securities		-		938,643		5,926		944,569
Equity securities		303		3,938		-		4,241
Other		-		11,543		-		11,543
Total investment securities available-for-sale	$	303	$	5,721,537	$	5,926	$	5,727,766

Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	-	$	8,194	$	-	$	8,194
Collateralized mortgage obligations		-		300		1,449		1,749
Mortgage-backed securities - federal agencies		-		110,468		7,534		118,002
Other		-		16,047		1,351		17,398
Total trading account securities	$	-	$	135,009	$	10,334	$	145,343
Mortgage servicing rights	$	-	$	-	$	152,282	$	152,282
Derivatives		-		25,850		-		25,850
Total assets measured at fair value on a recurring basis	$	303	$	5,882,396	$	168,542	$	6,051,241
Liabilities
Derivatives	$	-	$	(23,796)	$	-	$	(23,796)
Contingent consideration		-		-		(126,473)		(126,473)
Total liabilities measured at fair value on a recurring basis	$	-	$	(23,796)	$	(126,473)	$	(150,269)

At December 31, 2013

(In thousands)	Level 1		Level 2		Level 3		Total

RECURRING FAIR VALUE MEASUREMENTS

Assets
Investment securities available-for-sale:
U.S. Treasury securities	$	-	$	28,482	$	-	$	28,482
Obligations of U.S. Government sponsored entities		-		1,629,205		-		1,629,205
Obligations of Puerto Rico, States and political subdivisions		-		66,377		-		66,377
Collateralized mortgage obligations - federal agencies		-		2,418,296		-		2,418,296
Collateralized mortgage obligations - private label		-		513		-		513
Mortgage-backed securities		-		1,129,118		6,523		1,135,641
Equity securities		412		3,704		-		4,116
Other		-		12,170		-		12,170
Total investment securities available-for-sale	$	412	$	5,287,865	$	6,523	$	5,294,800

Trading account securities, excluding derivatives:
Obligations of Puerto Rico, States and political subdivisions	$	-	$	7,586	$	-	$	7,586
Collateralized mortgage obligations		-		426		1,423		1,849
Mortgage-backed securities - federal agencies		-		302,952		9,799		312,751
Other		-		15,545		1,929		17,474
Total trading account securities	$	-	$	326,509	$	13,151	$	339,660
Mortgage servicing rights	$	-	$	-	$	161,099	$	161,099
Derivatives		-		34,793		-		34,793
Total assets measured at fair value on a recurring basis	$	412	$	5,649,167	$	180,773	$	5,830,352
Liabilities
Derivatives	$	-	$	(32,378)	$	-	$	(32,378)
Contingent consideration		-		-		(128,299)		(128,299)
Total liabilities measured at fair value on a recurring basis	$	-	$	(32,378)	$	(128,299)	$	(160,677)

Nine months ended September 30, 2014

(In thousands)		Level 1		Level 2		Level 3		Total

NONRECURRING FAIR VALUE MEASUREMENTS
Assets											Write-downs
	Loans^[1]	$	-	$	-	$	53,796	$	53,796	$	(31,037)
	Loans held-for-sale^[2]		-		-		87,427		87,427		(38)
	Other real estate owned^[3]		-		4,605		74,631		79,236		(26,895)
	Other foreclosed assets^[3]		-		-		1,612		1,612		(1,269)
Total assets measured at fair value on a nonrecurring basis		$	-	$	4,605	$	217,466	$	222,071	$	(59,239)

1] Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35. Costs to sell are excluded from the reported fair value amount

[2] Relates to lower of cost or fair value adjustments on loans held-for-sale and loans transferred from loans held-in-portfolio to loans held-for-sale. Costs to sell are excluded from the reported fair value amount.

[3] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount.

Nine months ended September 30, 2013

(In thousands)		Level 1		Level 2		Level 3		Total

NONRECURRING FAIR VALUE MEASUREMENTS
Assets											Write-downs
	Loans^[1]	$	-	$	-	$	31,628	$	31,628	$	(29,847)
	Loans held-for-sale^[2]		-		-		-		-		(364,820)
	Other real estate owned^[3]		-		3,094		74,114		77,208		(37,833)
	Other foreclosed assets^[3]		-		-		407		407		(261)
Total assets measured at fair value on a nonrecurring basis		$	-	$	3,094	$	106,149	$	109,243	$	(432,761)

[1] Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35.Costs to sell are excluded from the reported fair value amount.

[3] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount.

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters and nine months ended September 30, 2014 and 2013.

	Quarter ended September 30, 2014
		MBS						Other
		classified		CMOs				securities
		as investment		classified		MBS		classified
		securities		as trading		classified as		as trading		Mortgage
		available-		account		trading account		account		servicing		Total		Contingent		Total
(In thousands)		for-sale		securities		securities		securities		rights		assets		consideration		liabilities
Balance at June 30, 2014		$	6,169	$	1,494	$	7,802	$	1,283	$	151,951	$	168,699	$	(127,551)	$	(127,551)
Gains (losses) included in earnings			(1)		2		(20)		70		(2,588)		(2,537)		1,078		1,078
Gains (losses) included in OCI			(20)		-		-		-		-		(20)		-		-
Additions			-		7		127		-		2,919		3,053		-		-
Settlements			(222)		(55)		(376)		-		-		(653)		-		-
Balance at September 30, 2014		$	5,926	$	1,448	$	7,533	$	1,353	$	152,282	$	168,542	$	(126,473)	$	(126,473)
Changes in unrealized gains
	(losses) included in earnings
	relating to assets still held
	at September 30, 2014	$	-	$	2	$	(4)	$	107	$	2,528	$	2,633	$	1,078	$	1,078

	Nine months ended September 30, 2014
		MBS						Other
		classified		CMOs				securities
		as investment		classified		MBS		classified
		securities		as trading		classified as		as trading		Mortgage
		available-		account		trading account		account		servicing		Total		Contingent		Total
(In thousands)		for-sale		securities		securities		securities		rights		assets		consideration		liabilities
Balance at January 1, 2014		$	6,523	$	1,423	$	9,799	$	1,929	$	161,099	$	180,773	$	(128,299)	$	(128,299)
Gains (losses) included in earnings			(4)		(9)		(134)		(576)		(18,424)		(19,147)		1,040		1,040
Gains (losses) included in OCI			(100)		-		-		-		-		(100)		-		-
Additions			-		270		778		-		9,611		10,659		-		-
Sales			-		-		(1,109)		-		-		(1,109)		-		-
Settlements			(493)		(236)		(1,801)		-		(4)		(2,534)		786		786
Balance at September 30, 2014		$	5,926	$	1,448	$	7,533	$	1,353	$	152,282	$	168,542	$	(126,473)	$	(126,473)
Changes in unrealized gains
	(losses) included in earnings
	relating to assets still held
	at September 30, 2014	$	-	$	(5)	$	(70)	$	(424)	$	(3,314)	$	(3,813)	$	1,040	$	1,040

	Quarter ended September 30, 2013
		MBS						Other
		classified		CMOs				securities
		as investment		classified		MBS		classified
		securities		as trading		classified as		as trading		Mortgage
		available-		account		trading account		account		servicing		Total		Contingent		Total
(In thousands)		for-sale		securities		securities		securities		rights		assets		consideration		liabilities
Balance at June 30, 2013		$	6,756	$	1,653	$	10,335	$	2,042	$	153,444	$	174,230	$	(119,253)	$	(119,253)
Gains (losses) included in earnings			(2)		(4)		83		(69)		3,879		3,887		(5,322)		(5,322)
Gains (losses) included in OCI			44		-		-		-		-		44		-		-
Additions			-		-		343		-		4,910		5,253		-		-
Sales			-		(103)		(100)		-		-		(203)		-		-
Settlements			(100)		(67)		(625)		-		(788)		(1,580)		-		-
Balance at September 30, 2013		$	6,698	$	1,479	$	10,036	$	1,973	$	161,445	$	181,631	$	(124,575)	$	(124,575)
Changes in unrealized gains
	(losses) included in earnings
	relating to assets still held
	at September 30, 2013	$	-	$	1	$	135	$	-	$	9,342	$	9,478	$	(5,322)	$	(5,322)

	Nine months ended September 30, 2013
		MBS						Other
		classified		CMOs				securities
		as investment		classified		MBS		classified
		securities		as trading		classified as		as trading		Mortgage
		available-		account		trading account		account		servicing		Total		Contingent		Total
(In thousands)		for-sale		securities		securities		securities		rights		assets		consideration		liabilities
Balance at January 1, 2013		$	7,070	$	2,499	$	11,818	$	2,240	$	154,430	$	178,057	$	(112,002)	$	(112,002)
Gains (losses) included in earnings			(5)		(3)		(91)		(267)		(6,862)		(7,228)		(12,573)		(12,573)
Gains (losses) included in OCI			(42)		-		-		-		-		(42)		-		-
Additions			-		25		601		-		15,107		15,733		-		-
Sales			-		(802)		(100)		-		-		(902)		-		-
Settlements			(325)		(240)		(2,192)		-		(1,230)		(3,987)		-		-
Balance at September 30, 2013		$	6,698	$	1,479	$	10,036	$	1,973	$	161,445	$	181,631	$	(124,575)	$	(124,575)
Changes in unrealized gains
	(losses) included in earnings
	relating to assets still held
	at September 30, 2013	$	-	$	4	$	90	$	(7)	$	13,355	$	13,442	$	(12,573)	$	(12,573)

There were no transfers in and / or out of Level 1, Level 2, or Level 3 for financial instruments measured at fair value on a recurring basis during the quarters and nine months ended September 30, 2014 and 2013.

Gains and losses (realized and unrealized) included in earnings for the quarter and nine months ended September 30, 2014 and 2013 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:

	Quarter ended September 30, 2014				Nine months ended September 30, 2014
			Changes in unrealized				Changes in unrealized
	Total gains		gains (losses) relating to		Total gains		gains (losses) relating to
	(losses) included		assets still held at		(losses) included		assets still held at
(In thousands)	in earnings		reporting date		in earnings		reporting date
Interest income	$	(1)	$	-	$	(4)	$	-
FDIC loss share (expense) income		1,078		1,078		1,040		1,040
Mortgage banking activities		(2,588)		2,528		(18,424)		(3,314)
Trading account profit (loss)		52		105		(719)		(499)
Total	$	(1,459)	$	3,711	$	(18,107)	$	(2,773)

	Quarter ended September 30, 2013				Nine months ended September 30, 2013
			Changes in unrealized				Changes in unrealized
	Total gains		gains (losses) relating to		Total gains		gains (losses) relating to
	(losses) included		assets still held at		(losses) included		assets still held at
(In thousands)	in earnings		reporting date		in earnings		reporting date
Interest income	$	(2)	$	-	$	(5)	$	-
FDIC loss share (expense) income		(5,322)		(5,322)		(12,573)		(12,573)
Mortgage banking activities		3,879		9,342		(6,862)		13,355
Trading account profit (loss)		10		136		(361)		87
Total	$	(1,435)	$	4,156	$	(19,801)	$	869

The following table includes quantitative information about significant unobservable inputs used to derive the fair value of Level 3 instruments, excluding those instruments for which the unobservable inputs were not developed by the Corporation such as prices of prior transactions and/or unadjusted third-party pricing sources.

		Fair value
		at September 30,
(In thousands)		2014	Valuation technique	Unobservable inputs	Weighted average (range)
CMO's - trading	$	1,449	Discounted cash flow model	Weighted average life	2.2 years (0.6 - 5.0 years)
				Yield	3.9% (1.4% - 4.7%)
				Constant prepayment rate	23.9% (19.5% - 27.1%)
Other - trading	$	816	Discounted cash flow model	Weighted average life	5.5	years
				Yield	12.0	%
				Constant prepayment rate	10.8	%
Mortgage servicing rights	$	152,282	Discounted cash flow model	Prepayment speed	7.8% (5.6% - 23.1%)
				Weighted average life	12.8 years (4.3- 18.0 years)
				Discount rate	11.3% (9.5% - 15.0%)
Contingent consideration	$	(126,473)	Discounted cash flow model	Credit loss rate on covered loans	8.1% (0.0% - 100.0%)
				Risk premium component
				of discount rate	5.0	%
Loans held-in-portfolio	$	53,136^[1]	External appraisal	Haircut applied on
				external appraisals	16.5% (15.0% - 25.0%)
Other real estate owned	$	79,236^[2]	External appraisal	Haircut applied on
				external appraisals	15.5% (5.0% -35.0%)
Other foreclosed assets	$	1,465^[3]	External appraisal	Haircut applied on
				external appraisals	3.0% (1.0% -6.0%)

[1] Loans held-in-portfolio in which haircuts were not applied to external appraisals were excluded from this table.

[2] Other real estate owned in which haircuts were not applied to external appraisals were excluded from this table.

[3] Other foreclosed assets in which haircuts were not applied to external appraisals were excluded from this table.

The significant unobservable inputs used in the fair value measurement of the Corporation's collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are yield, constant prepayment rate, and weighted average life. Significant increases (decreases) in any of those inputs in isolation would result in significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the constant prepayment rate will generate a directionally opposite change in the weighted average life. For example, as the average life is reduced by a higher constant prepayment rate, a lower yield will be realized, and when there is a reduction in the constant prepayment rate, the average life of these collateralized mortgage obligations will extend, thus resulting in a higher yield. These particular financial instruments are valued internally by the Corporation's investment banking and broker-dealer unit utilizing internal valuation techniques. The unobservable inputs incorporated into the internal discounted cash flow models used to derive the fair value of collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are reviewed by the Corporation's Corporate Treasury unit on a quarterly basis. In the case of Level 3 financial instruments which fair value is based on broker quotes, the Corporation's Corporate Treasury unit reviews the inputs used by the broker-dealers for reasonableness utilizing information available from other published sources and validates that the fair value measurements were developed in accordance with ASC Topic 820. The Corporate Treasury unit also substantiates the inputs used by validating the prices with other broker-dealers, whenever possible.

The significant unobservable inputs used in the fair value measurement of the Corporation's mortgage servicing rights are constant prepayment rates and discount rates. Increases in interest rates may result in lower prepayments. Discount rates vary according to products and / or portfolios depending on the perceived risk. Increases in discount rates result in a lower fair value measurement. The Corporation's Corporate Comptroller's unit is responsible for determining the fair value of MSRs, which is based on discounted cash flow methods based on assumptions developed by an external service provider, except for prepayment speeds, which are adjusted internally for the local market based on historical experience. The Corporation's Corporate Treasury unit validates the economic assumptions developed by the external service provider on a quarterly basis. In addition, an analytical review of prepayment speeds is performed quarterly by the Corporate Comptroller's unit. Significant variances in prepayment speeds are investigated by the Corporate Treasury unit. The Corporation's MSR Committee analyzes changes in fair value measurements of MSRs and approves the valuation assumptions at each reporting period. Changes in valuation assumptions must also be approved by the MSR Committee. The fair value of MSRs are compared with those of the external service provider on a quarterly basis in order to validate if the fair values are within the materiality thresholds established by management to monitor and investigate material deviations. Back-testing is performed to compare projected cash flows with actual historical data to ascertain the reasonability of the projected net cash flow results.