Fair value of financial instruments

9 Months Ended

Sep. 30, 2017

Note 26 – Fair value of financial instruments

The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. For those financial instruments with no quoted market prices available, fair values have been estimated using present value calculations or other valuation techniques, as well as management’s best judgment with respect to current economic conditions, including discount rates, estimates of future cash flows, and prepayment assumptions. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions.

The fair values reflected herein have been determined based on the prevailing rate environment at September 30, 2017 and December 31, 2016, as applicable. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial instruments. In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation’s value as a going concern. There have been no changes in the Corporation’s valuation methodologies and inputs used to estimate the fair values for each class of financial assets and liabilities not measured at fair value, but for which the fair value is disclosed from those disclosed in the 2016 Form 10-K.

The following tables present the carrying amount and estimated fair values of financial instruments with their corresponding level in the fair value hierarchy. The aggregate fair value amounts of the financial instruments disclosed do not represent management’s estimate of the underlying value of the Corporation.

		September 30, 2017
		Carrying
(In thousands)		amount		Level 1		Level 2		Level 3		Fair value
Financial Assets:
Cash and due from banks		$	517,437	$	517,437	$	-	$	-	$	517,437
Money market investments			5,488,212		5,479,268		8,944		-		5,488,212
Trading account securities, excluding
	derivatives^[1]		45,951		-		44,787		1,164		45,951
Investment securities available-for-sale^[1]			9,061,001		-		9,059,713		1,288		9,061,001
Investment securities held-to-maturity:
	Obligations of Puerto Rico, States
	and political subdivisions	$	92,369	$	-	$	-	$	73,460	$	73,460
	Collateralized mortgage
	obligation-federal agency		69		-		-		73		73
	Other		1,000		-		742		237		979
Total investment securities
	held-to-maturity	$	93,438	$	-	$	742	$	73,770	$	74,512
Other investment securities:
	FHLB stock	$	64,208	$	-	$	64,208	$	-	$	64,208
	FRB stock		94,644		-		94,644		-		94,644
	Trust preferred securities		13,198		-		13,198		-		13,198
	Other investments		1,915		-		-		5,091		5,091
Total other investment securities		$	173,965	$	-	$	172,050	$	5,091	$	177,141
Loans held-for-sale		$	68,864	$	-	$	-	$	70,499	$	70,499
Loans not covered under loss sharing
	agreement with the FDIC		22,559,594		-		-		20,896,277		20,896,277
Loans covered under loss sharing
	agreements with the FDIC		491,797		-		-		483,155		483,155
FDIC loss share asset			48,470		-		-		37,703		37,703
Mortgage servicing rights			180,157		-		-		180,157		180,157
Derivatives			14,234		-		14,234		-		14,234
		September 30, 2017
		Carrying
(In thousands)		amount		Level 1		Level 2		Level 3		Fair value
Financial Liabilities:
Deposits:
	Demand deposits	$	26,636,413	$	-	$	26,636,413	$	-	$	26,636,413
	Time deposits		7,612,523		-		7,504,546		-		7,504,546
Total deposits		$	34,248,936	$	-	$	34,140,959	$	-	$	34,140,959
Assets sold under agreements to
	repurchase	$	374,405	$	-	$	374,377	$	-	$	374,377
Other short-term borrowings^[2]		$	240,598	$	-	$	240,598	$	-	$	240,598
Notes payable:
	FHLB advances	$	629,072	$	-	$	629,538	$	-	$	629,538
	Unsecured senior debt securities		446,351		-		470,043		-		470,043
	Junior subordinated deferrable
	interest debentures (related to
	trust preferred securities)		439,344		-		411,776		-		411,776
	Others		17,294		-		-		17,294		17,294
Total notes payable		$	1,532,061	$	-	$	1,511,357	$	17,294	$	1,528,651
Derivatives		$	12,841	$	-	$	12,841	$	-	$	12,841
Contingent consideration		$	166,876	$	-	$	-	$	166,876	$	166,876

[1] Refer to Note 25 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level.

[2] Refer to Note 17 to the Consolidated Financial Statements for the composition of other short-term borrowings.

		December 31, 2016
		Carrying
(In thousands)		amount		Level 1		Level 2		Level 3		Fair value
Financial Assets:
Cash and due from banks		$	362,394	$	362,394	$	-	$	-	$	362,394
Money market investments			2,890,217		2,854,777		35,440		-		2,890,217
Trading account securities, excluding
	derivatives^[1]		59,796		-		53,118		6,678		59,796
Investment securities available-for-sale^[1]			8,209,806		-		8,208,414		1,392		8,209,806
Investment securities held-to-maturity:
	Obligations of Puerto Rico, States
	and political subdivisions	$	96,027	$	-	$	-	$	73,540	$	73,540
	Collateralized mortgage
	obligation-federal agency		74		-		-		78		78
	Other		2,000		-		1,738		220		1,958
Total investment securities
	held-to-maturity	$	98,101	$	-	$	1,738	$	73,838	$	75,576
Other investment securities:
	FHLB stock	$	58,033	$	-	$	58,033	$	-	$	58,033
	FRB stock		94,672		-		94,672		-		94,672
	Trust preferred securities		13,198		-		13,198		-		13,198
	Other investments		1,915		-		-		4,987		4,987
Total other investment securities		$	167,818	$	-	$	165,903	$	4,987	$	170,890
Loans held-for-sale		$	88,821	$	-	$	504	$	89,509	$	90,013
Loans not covered under loss sharing
	agreement with the FDIC		22,263,446		-		-		20,578,904		20,578,904
Loans covered under loss sharing
	agreements with the FDIC		542,528		-		-		515,808		515,808
FDIC loss share asset			69,334		-		-		63,187		63,187
Mortgage servicing rights			196,889		-		-		196,889		196,889
Derivatives			14,094		-		14,094		-		14,094
		December 31, 2016
		Carrying
(In thousands)		amount		Level 1		Level 2		Level 3		Fair value
Financial Liabilities:
Deposits:
	Demand deposits	$	22,786,682	$	-	$	22,786,682	$	-	$	22,786,682
	Time deposits		7,709,542		-		7,708,724		-		7,708,724
Total deposits		$	30,496,224	$	-	$	30,495,406	$	-	$	30,495,406
Assets sold under agreements to
	repurchase	$	479,425	$	-	$	479,439	$	-	$	479,439
Other short-term borrowings^[2]		$	1,200	$	-	$	1,200	$	-	$	1,200
Notes payable:
	FHLB advances	$	672,670	$	-	$	671,872	$	-	$	671,872
	Unsecured senior debt		444,788		-		466,263		-		466,263
	Junior subordinated deferrable
	interest debentures (related to
	trust preferred securities)		439,323		-		399,370		-		399,370
	Others		18,071		-		-		18,071		18,071
Total notes payable		$	1,574,852	$	-	$	1,537,505	$	18,071	$	1,555,576
Derivatives		$	12,842	$	-	$	12,842	$	-	$	12,842
Contingent consideration		$	153,158	$	-	$	-	$	153,158	$	153,158

[1] Refer to Note 25 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level.

[2] Refer to Note 17 to the Consolidated Financial Statements for the composition of other short-term borrowings.

The notional amount of commitments to extend credit at September 30, 2017 and December 31, 2016 is $ 7.3 billion and $ 7.8 billion, respectively, and represents the unused portion of credit facilities granted to customers. The notional amount of letters of credit at September 30, 2017 and December 31, 2016 is $ 34 million and $ 36 million, respectively, and represents the contractual amount that is required to be paid in the event of nonperformance. The fair value of commitments to extend credit and letters of credit, which are based on the fees charged to enter into those agreements, are not material to Popular’s financial statements.