Fair value of financial instruments

6 Months Ended

Jun. 30, 2018

Note 25 – 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 June 30, 2018 and December 31, 2017, 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 2017 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.

		June 30, 2018
		Carrying
(In thousands)		amount		Level 1		Level 2		Level 3		Fair value
Financial Assets:
Cash and due from banks		$	400,568	$	400,568	$	-	$	-	$	400,568
Money market investments			8,628,442		8,617,121		11,321		-		8,628,442
Trading account debt securities, excluding
	derivatives^[1]		41,637		4,956		35,462		1,219		41,637
Debt securities available-for-sale^[1]			10,542,010		552,388		9,988,358		1,264		10,542,010
Debt securities held-to-maturity:
	Obligations of Puerto Rico, States
	and political subdivisions	$	90,928	$	-	$	-	$	93,390	$	93,390
	Collateralized mortgage
	obligation-federal agency		61		-		-		65		65
	Trust preferred securities		13,198		-		13,198		-		13,198
	Other		750		-		743		-		743
Total debt securities
	held-to-maturity	$	104,937	$	-	$	13,941	$	93,455	$	107,396
Equity securities:
	FHLB stock	$	56,099	$	-	$	56,099	$	-	$	56,099
	FRB stock		88,817		-		88,817		-		88,817
	Other investments		14,101		-		12,798		5,602		18,400
Total equity securities		$	159,017	$	-	$	157,714	$	5,602	$	163,316
Loans held-for-sale		$	73,859	$	-	$	-	$	74,719	$	74,719
Loans not covered under loss sharing
	agreement with the FDIC		23,965,498		-		-		21,825,495		21,825,495
Mortgage servicing rights			164,025		-		-		164,025		164,025
Derivatives			15,763		-		15,763		-		15,763
		June 30, 2018
		Carrying
(In thousands)		amount		Level 1		Level 2		Level 3		Fair value
Financial Liabilities:
Deposits:
	Demand deposits	$	31,954,476	$	-	$	31,954,476	$	-	$	31,954,476
	Time deposits		7,423,085		-		7,220,074		-		7,220,074
Total deposits		$	39,377,561	$	-	$	39,174,550	$	-	$	39,174,550
Assets sold under agreements to
	repurchase	$	306,911	$	-	$	306,941	$	-	$	306,941
Other short-term borrowings^[2]		$	1,200	$	-	$	1,200	$	-	$	1,200
Notes payable:
	FHLB advances	$	656,150	$	-	$	649,118	$	-	$	649,118
	Unsecured senior debt securities		447,915		-		460,463		-		460,463
	Junior subordinated deferrable
	interest debentures (related to
	trust preferred securities)		439,364		-		416,875		-		416,875
	Others		18,234		-		-		18,234		18,234
Total notes payable		$	1,561,663	$	-	$	1,526,456	$	18,234	$	1,544,690
Derivatives		$	14,223	$	-	$	14,223	$	-	$	14,223

[1] Refer to Note 24 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level.

[2] Refer to Note 16 to the Consolidated Financial Statements for the composition of other short-term borrowings.

		December 31, 2017
		Carrying
(In thousands)		amount		Level 1		Level 2		Level 3		Fair value
Financial Assets:
Cash and due from banks		$	402,857	$	402,857	$	-	$	-	$	402,857
Money market investments			5,255,119		5,245,346		9,773		-		5,255,119
Trading account debt securities, excluding
	derivatives^[1]		33,746		261		32,384		1,101		33,746
Debt securities available-for-sale^[1]			10,176,923		503,385		9,672,250		1,288		10,176,923
Debt securities held-to-maturity:
	Obligations of Puerto Rico, States
	and political subdivisions	$	92,754	$	-	$	-	$	83,239	$	83,239
	Collateralized mortgage
	obligation-federal agency		67		-		-		71		71
	Trust preferred securities		13,198		-		13,198		-		13,198
	Other		1,000		-		750		243		993
Total debt securities
	held-to-maturity	$	107,019	$	-	$	13,948	$	83,553	$	97,501
Equity securities:
	FHLB stock	$	57,819	$	-	$	57,819	$	-	$	57,819
	FRB stock		94,308		-		94,308		-		94,308
	Other investments		12,976		-		11,076		5,214		16,290
Total equity securities		$	165,103	$	-	$	163,203	$	5,214	$	168,417
Loans held-for-sale		$	132,395	$	-	$	-	$	134,839	$	134,839
Loans not covered under loss sharing
	agreement with the FDIC		23,702,612		-		-		21,883,003		21,883,003
Loans covered under loss sharing
	agreements with the FDIC		484,030		-		-		465,893		465,893
FDIC loss share asset			45,192		-		-		33,323		33,323
Mortgage servicing rights			168,031		-		-		168,031		168,031
Derivatives			16,719		-		16,719		-		16,719
		December 31, 2017
		Carrying
(In thousands)		amount		Level 1		Level 2		Level 3		Fair value
Financial Liabilities:
Deposits:
	Demand deposits	$	27,938,630	$	-	$	27,938,630	$	-	$	27,938,630
	Time deposits		7,514,878		-		7,381,232		-		7,381,232
Total deposits		$	35,453,508	$	-	$	35,319,862	$	-	$	35,319,862
Assets sold under agreements to
	repurchase	$	390,921	$	-	$	390,752	$	-	$	390,752
Other short-term borrowings^[2]		$	96,208	$	-	$	96,208	$	-	$	96,208
Notes payable:
	FHLB advances	$	631,490	$	-	$	628,839	$	-	$	628,839
	Unsecured senior debt		446,873		-		463,554		-		463,554
	Junior subordinated deferrable
	interest debentures (related to
	trust preferred securities)		439,351		-		406,883		-		406,883
	Others		18,642		-		-		18,642		18,642
Total notes payable		$	1,536,356	$	-	$	1,499,276	$	18,642	$	1,517,918
Derivatives		$	14,431	$	-	$	14,431	$	-	$	14,431
Contingent consideration		$	164,858	$	-	$	-	$	164,858	$	164,858

[1] Refer to Note 24 to the Consolidated Financial Statements for the fair value by class of financial asset and its hierarchy level.

[2] Refer to Note 16 to the Consolidated Financial Statements for the composition of other short-term borrowings.

The notional amount of commitments to extend credit at June 30, 2018 and December 31, 2017 is $7.2 billion and $7.6 billion, respectively, and represents the unused portion of credit facilities granted to customers. The notional amount of letters of credit at June 30, 2018 and December 31, 2017 is $32 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.