Fair value measurement

12 Months Ended

Dec. 31, 2022

Fair Value Disclosures

Fair Value Measurement

Note 28 – Fair value measurement

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:

●

Level 1

- Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to

access at the measurement date. Valuation on these instruments does not necessitate a significant degree of judgment

since valuations are based on quoted prices that are readily available in an active market.

●

Level 2

- Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs

include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or

liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable

market data for substantially the full term of the financial instrument.

●

Level 3

- Inputs are unobservable and significant to the fair value measurement. Unobservable inputs reflect the

Corporation’s own judgements about assumptions that market participants would use in pricing the asset or liability.

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. 

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.

Fair Value on a Recurring and Nonrecurring Basis

The following fair value hierarchy tables present information about the Corporation’s assets and liabilities measured at fair value on

a recurring basis at December 31, 2022 and 2021:

At December 31, 2022

(In thousands)

Level 1

Level 2

Level 3

Measured at NAV

Total

RECURRING FAIR VALUE MEASUREMENTS

Assets 

Debt securities available-for-sale:

U.S. Treasury securities

$

1,908,589

$

9,272,359

$

-

$

-

$

11,180,948

Collateralized mortgage obligations - federal

agencies

-

165,196

-

-

165,196

Mortgage-backed securities

-

6,456,459

711

-

6,457,170

Other

-

60

1,000

-

1,060

Total debt securities available-for-sale

$

1,908,589

$

15,894,074

$

1,711

$

-

$

17,804,374

Trading account debt securities, excluding

derivatives:

U.S. Treasury securities

$

13,069

$

-

$

-

$

-

$

13,069

Obligations of Puerto Rico, States and political

subdivisions

-

64

-

-

64

Collateralized mortgage obligations

-

47

113

-

160

Mortgage-backed securities

-

14,008

215

-

14,223

Other

-

-

207

-

207

Total trading account debt securities, excluding

derivatives

$

13,069

$

14,119

$

535

$

-

$

27,723

Equity securities

$

-

$

29,302

$

-

$

330

$

29,632

Mortgage servicing rights

-

-

128,350

-

128,350

Derivatives 

-

19,229

-

-

19,229

Total assets measured at fair value on a

recurring basis

$

1,921,658

$

15,956,724

$

130,596

$

330

$

18,009,308

Liabilities

Derivatives

$

-

$

(17,000)

$

-

$

-

$

(17,000)

Total liabilities measured at fair value on a

recurring basis

$

-

$

(17,000)

$

-

$

-

$

(17,000)

At December 31, 2021

(In thousands)

Level 1

Level 2

Level 3

Measured at NAV

Total

RECURRING FAIR VALUE MEASUREMENTS

Assets 

Debt securities available-for-sale:

U.S. Treasury securities

$

-

$

15,859,030

$

-

$

-

$

15,859,030

Obligations of U.S. Government sponsored

entities

-

70

-

-

70

Collateralized mortgage obligations - federal

agencies

-

221,265

-

-

221,265

Mortgage-backed securities

-

8,886,950

826

-

8,887,776

Other

-

128

-

-

128

Total debt securities available-for-sale

$

-

$

24,967,443

$

826

$

-

$

24,968,269

Trading account debt securities, excluding

derivatives:

U.S. Treasury securities

$

6,530

$

-

$

-

$

-

$

6,530

Obligations of Puerto Rico, States and political

subdivisions

-

85

-

-

85

Collateralized mortgage obligations

-

59

198

-

257

Mortgage-backed securities

-

22,559

-

-

22,559

Other

-

-

280

-

280

Total trading account debt securities, excluding

derivatives

$

6,530

$

22,703

$

478

$

-

$

29,711

Equity securities

$

-

$

32,429

$

-

$

77

$

32,506

Mortgage servicing rights

-

-

121,570

-

121,570

Derivatives 

-

26,093

-

-

26,093

Total assets measured at fair value on a

recurring basis

$

6,530

$

25,048,668

$

122,874

$

77

$

25,178,149

Liabilities

Derivatives

$

-

$

(22,878)

$

-

$

-

$

(22,878)

Contingent consideration

-

-

(9,241)

-

(9,241)

Total liabilities measured at fair value on a

recurring basis

$

-

$

(22,878)

$

(9,241)

$

-

$

(32,119)

The fair value information included in the following tables is not as of period end, but as of the date that the fair value measurement

was recorded during the years ended December 31, 2022, 2021 and 2020 and excludes nonrecurring fair value measurements of

assets no longer outstanding as of the reporting date.

Year ended December 31, 2022

(In thousands)

Level 1

Level 2

Level 3

Total

NONRECURRING FAIR VALUE MEASUREMENTS

Assets 

Write-downs

Loans

[1]

$

-

$

-

$

11,215

$

11,215

$

(2,067)

Other real estate owned

[2]

-

-

3,992

3,992

(1,026)

Other foreclosed assets

[2]

-

-

13

13

(1)

Long-lived assets held-for-sale

[3]

-

-

1,178

1,178

(2,155)

Total assets measured at fair value on a nonrecurring basis

$

-

$

-

$

16,398

$

16,398

$

(5,249)

[1] Relates mainly 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. Costs to sell are

excluded from the reported fair value amount.

[2] 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.

[3] Represents the fair value of long-lived assets held-for-sale that were written down to their fair value.

Year ended December 31, 2021

(In thousands)

Level 1

Level 2

Level 3

Total

NONRECURRING FAIR VALUE MEASUREMENTS

Assets 

Write-downs

Loans

[1]

$

-

$

-

$

21,167

$

21,167

$

(3,721)

Other real estate owned

[2]

-

-

7,727

7,727

(1,579)

Other foreclosed assets

[2]

-

-

68

68

(33)

Long-lived assets held-for-sale

[3]

-

-

9,007

9,007

(5,320)

Trademark

[4]

-

-

156

156

(5,404)

Total assets measured at fair value on a nonrecurring basis

$

-

$

-

$

38,125

$

38,125

$

(16,057)

[1] Relates mainly 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. Costs to sell are

excluded from the reported fair value amount.

[2] 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.

[3] Represents the fair value of long-lived assets held-for-sale that were written down to their fair value.

[4] Represents the fair value of a trademark due to a write-down on impairment.

Year ended December 31, 2020

(In thousands)

Level 1

Level 2

Level 3

Total

NONRECURRING FAIR VALUE MEASUREMENTS

Assets 

Write-downs

Loans

[1]

$

-

$

-

$

74,511

$

74,511

$

(15,290)

Loans held-for-sale

[2]

-

-

2,738

2,738

(1,311)

Other real estate owned

[3]

-

-

20,123

20,123

(3,325)

Other foreclosed assets

[3]

-

-

116

116

(148)

ROU assets

[4]

-

-

446

446

(15,920)

Leasehold improvements

[4]

-

-

126

126

(2,084)

Total assets measured at fair value on a nonrecurring basis

$

-

$

-

$

98,060

$

98,060

$

(38,078)

[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. Costs to sell are

excluded from the reported fair value amount.

[2] Relates to a quarterly valuation on 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.

[4] The impairment was measured based on the sublease rental value of the branches that were subject to the strategic realignment of PB's New

Metro Branch network.

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the years

ended December 31, 2022, 2021, and 2020.

Year ended December 31, 2022

MBS

Other

classified

classified

CMOs

MBS 

Other

as debt

as debt

classified

classified

securities

securities

securities

as trading

as trading

classified as

Mortgage

available-

available-

account debt

account debt

trading account

servicing

Total

Contingent

Total

(In thousands)

for-sale

for-sale

securities

securities

debt securities

rights

assets

Consideration

liabilities

Balance at January 1, 2022

$

826

$

-

$

198

$

-

$

280

$

121,570

$

122,874

$

(9,241)

$

(9,241)

Gains (losses) included in

earnings

-

-

(2)

4

(73)

166

95

9,241

9,241

Gains (losses) included in OCI

(15)

-

-

-

-

-

(15)

-

-

Additions

-

1,000

5

211

-

6,614

7,830

-

-

Settlements

(100)

-

(88)

-

-

-

(188)

-

-

Balance at December 31, 2022

$

711

$

1,000

$

113

$

215

$

207

$

128,350

$

130,596

$

-

$

-

Changes in unrealized gains

(losses) included in earnings

relating to assets still held at

December 31, 2022

$

-

$

-

$

(2)

$

4

$

(23)

$

11,964

$

11,943

$

-

$

-

Year ended December 31, 2021

MBS

Other

classified

CMOs

securities

as debt

classified

classified

securities

as trading

as trading

Mortgage

available-

account debt

account debt 

servicing

Total

Contingent

Total

(In thousands)

for-sale

securities

securities

rights

assets

Consideration

liabilities

Balance at January 1, 2021

$

1,014

$

278

$

381

$

118,395

$

120,068

$

-

$

-

Gains (losses) included in earnings

-

(1)

(101)

(10,216)

(10,318)

-

-

Gains (losses) included in OCI

(13)

-

-

-

(13)

-

-

Additions

-

29

-

13,391

13,419

(9,241)

(9,241)

Settlements

(175)

(107)

-

-

(282)

-

-

Balance at December 31, 2021

$

826

$

198

$

280

$

121,570

$

122,874

$

(9,241)

$

(9,241)

Changes in unrealized gains (losses) included in

earnings relating to assets still held at December 31,

2021

$

-

$

(1)

$

(45)

$

6,410

$

6,364

$

-

$

-

Year ended December 31, 2020

MBS

Other

classified

CMOs

securities

as debt

classified

classified

securities

as trading

as trading

Mortgage

available-

account debt

account debt 

servicing

Total

(In thousands)

for-sale

securities

securities

rights

assets

Balance at January 1, 2020

$

1,182

$

530

$

440

$

150,906

$

153,058

Gains (losses) included in earnings

-

(1)

(59)

(42,055)

(42,115)

Gains (losses) included in OCI

(18)

-

-

-

(18)

Additions

-

4

-

9,544

9,548

Settlements

(150)

(255)

-

-

(405)

Balance at December 31, 2020

$

1,014

$

278

$

381

$

118,395

$

120,068

Changes in unrealized gains (losses) included in earnings relating to assets still

held at December 31, 2020

$

-

$

-

$

27

$

(19,327)

$

(19,300)

Gains and losses (realized and unrealized) included in earnings for the years ended December 31, 2022, 2021, and 2020 for Level

3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:

2022

2021

2020

Total

Changes in unrealized

Total

Changes in unrealized

Total

Changes in unrealized

gains (losses)

gains (losses) 

gains (losses)

gains (losses) 

gains (losses)

gains (losses) 

included

relating to assets still

included

relating to assets still

included

relating to assets still 

(In thousands)

in earnings

held at reporting date

in earnings

held at reporting date

in earnings

held at reporting date

Mortgage banking activities

$

166

$

11,964

$

(10,216)

$

6,410

$

(42,055)

$

(19,327)

Trading account (loss) profit 

(71)

(21)

(102)

(46)

(60)

27

Other operating income

9,241

-

-

-

-

-

Total 

$

9,336

$

11,943

$

(10,318)

$

6,364

$

(42,115)

$

(19,300)

The following tables include 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 at December 31, 2022 and 2021.

Fair value at

 December 31,

(In thousands)

2022

Valuation technique

Unobservable inputs

Weighted average (range) [1]

CMO's - trading

$

113

Discounted cash flow model

Weighted average life

0.4

 years (

0.1

 -

0.6

 years)

Yield

4.9

% (

4.9

% -

5.4

%)

Prepayment speed

10.2

% (

9.1

% -

32

%)

Other - trading

$

207

Discounted cash flow model

Weighted average life

2.5

 years

Yield

12.0%

Prepayment speed

10.8%

Loans held-in-portfolio

$

5,087

[2]

External appraisal

Haircut applied on

external appraisals

8.3

% (

5.0

% -

10.4

%)

Other real estate owned

$

528

[3]

External appraisal

Haircut applied on

external appraisals

18.4

% (

5.0

% -

35

%)

[1] 

Weighted average of significant unobservable inputs used to develop Level 3 fair value measurements were calculated by relative fair value.

[2]

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

[3]

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

Fair value at

 December 31,

(In thousands)

2021

Valuation technique

Unobservable inputs

Weighted average (range) [1]

CMO's - trading

$

198

Discounted cash flow model

Weighted average life

0.8

 years (

0.4

 -

1

 years)

Yield

3.6

% (

3.6

% -

4.1

%)

Prepayment speed

11.4

% (

10.1

% -

17.2

%)

Other - trading

$

280

Discounted cash flow model

Weighted average life

2.9

 years

Yield

12.0%

Prepayment speed

10.8%

Loans held-in-portfolio

$

20,041

[2]

External appraisal

Haircut applied on

external appraisals

5

.0%

Other real estate owned

$

3,631

[3]

External appraisal

Haircut applied on

external appraisals

22.3

% (

5.0

% -

35.0

%)

[1] 

Weighted average of significant unobservable inputs used to develop Level 3 fair value measurements were calculated by relative fair value.

[2]

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

[3]

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

Effective the fourth quarter 2021, the mortgage servicing rights fair value was provided by a third-party valuation specialist. Refer to

Note 11 to the Consolidated Financial Statements for additional information on MSRs.

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.

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

.

Following is a description of the Corporation’s valuation methodologies used for assets and liabilities measured at fair value. The

disclosure requirements exclude certain financial instruments and all non-financial instruments. Accordingly, the aggregate fair value

amounts of the financial instruments disclosed do not represent management’s estimate of the underlying value of the Corporation.

Trading account debt securities and debt securities available-for-sale 

●

 U.S. Treasury securities: The fair value of U.S. Treasury notes is based on yields that are interpolated from the constant

maturity treasury curve. These securities are classified as Level 2. U.S. Treasury bills are classified as Level 1 given the

high volume of trades and pricing based on those trades. 

●

 Obligations of U.S. Government sponsored entities: The Obligations of U.S. Government sponsored entities include U.S.

agency securities, which fair value is based on an active exchange market and on quoted market prices for similar

securities. The U.S. agency securities are classified as Level 2. 

●

 Obligations of Puerto Rico, States and political subdivisions: Obligations of Puerto Rico, States and political subdivisions

include municipal bonds. The bonds are segregated and the like characteristics divided into specific sectors. Market

inputs used in the evaluation process include all or some of the following: trades, bid price or spread, two sided markets,

quotes, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, market data feeds

such as those obtained from municipal market sources, discount and capital rates, and trustee reports. The municipal

bonds are classified as Level 2.

●

 Mortgage-backed securities: Certain agency mortgage-backed securities (“MBS”) are priced based on a bond’s theoretical

value derived from similar bonds defined by credit quality and market sector. Their fair value incorporates an option

adjusted spread. The agency MBS are classified as Level 2. Other agency MBS such as GNMA Puerto Rico Serials are

priced using an internally-prepared pricing matrix with quoted prices from local brokers dealers. These particular MBS are

classified as Level 3.

●

 Collateralized mortgage obligations: Agency collateralized mortgage obligations (“CMOs”) are priced based on a bond’s

theoretical value derived from similar bonds defined by credit quality and market sector and for which fair value

incorporates an option adjusted spread. The option adjusted spread model includes prepayment and volatility

assumptions, ratings (whole loans collateral) and spread adjustments. These CMOs are classified as Level 2. Other

CMOs, due to their limited liquidity, are classified as Level 3 due to the insufficiency of inputs such as executed trades,

credit information and cash flows. 

●

 Corporate securities (included as “other” in the “available-for-sale” category): Given that the quoted prices are for similar

instruments, these securities are classified as Level 2. 

●

 Corporate securities and interest-only strips (included as “other” in the “trading account debt securities” category): For

corporate securities, quoted prices for these security types are obtained from broker dealers. Given that the quoted prices

are for similar instruments or do not trade in highly liquid markets, these securities are classified as Level 2. Given that the

fair value was estimated based on a discounted cash flow model using unobservable inputs, interest-only strips are

classified as Level 3. 

Equity securities

Equity securities are comprised principally of shares in closed-ended and open-ended mutual funds and other equity securities.

Closed-end funds are traded on the secondary market at the shares’ market value. Open-ended funds are considered to be liquid,

as investors can sell their shares continually to the fund and are priced at NAV. Mutual funds are classified as Level 2. Other equity

securities that do not trade in highly liquid markets are also classified as Level 2, except for one equity security that do not have

readily determinable fair value and is under an investment company is measured at NAV.

Mortgage servicing rights 

Mortgage servicing rights (“MSRs”) do not trade in an active market with readily observable prices. MSRs are priced using a

discounted cash flow model valuation performed by a third party. The discounted cash flow model incorporates assumptions that

market participants would use in estimating future net servicing income, including portfolio characteristics, prepayments

assumptions, discount rates, delinquency and foreclosure rates, late charges, other ancillary revenues, cost to service and other

economic factors. Prepayment speeds are adjusted for the loans’ characteristics and portfolio behavior. Due to the unobservable

nature of certain valuation inputs, the MSRs are classified as Level 3. 

Derivatives 

Interest rate caps and indexed options are traded in over-the-counter active markets. These derivatives are indexed to an

observable interest rate benchmark, such as LIBOR or equity indexes, and are priced using an income approach based on present

value and option pricing models using observable inputs. Other derivatives are liquid and have quoted prices, such as forward

contracts or “to be announced securities” (“TBAs”). All of these derivatives are classified as Level 2. The non-performance risk is

determined using internally-developed models that consider the collateral held, the remaining term, and the creditworthiness of the

entity that bears the risk, and uses available public data or internally-developed data related to current spreads that denote their

probability of default.

Contingent consideration liability

The fair value of the contingent consideration, which relates to earnout payments that could be payable to K2 over a three-year

period, was calculated based on a discounted cash flow technique using the probability-weighted average from likely scenarios. 

This contingent consideration is classified as Level 3.

Loans held-in-portfolio that are collateral dependent

The impairment is 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 and which could be subject to internal adjustments.

These collateral dependent loans are classified as Level 3. 

Loans measured at fair value pursuant to lower of cost or fair value adjustments

Loans measured at fair value on a nonrecurring basis pursuant to lower of cost or fair value were priced based on secondary market

prices and discounted cash flow models which incorporate internally-developed assumptions for prepayments and credit loss

estimates. These loans are classified as Level 3. 

Other real estate owned and other foreclosed assets 

Other real estate owned includes real estate properties securing mortgage, consumer, and commercial loans. Other foreclosed

assets include primarily automobiles securing auto loans. The fair value of foreclosed assets may be determined using an external

appraisal, broker price opinion, or an internal valuation. These foreclosed assets are classified as Level 3 since they are subject to

internal adjustments.

ROU assets and leasehold improvements

The impairment was measured based on the sublease rental value of the branches that were subject to the strategic realignment of

PB’s New York Metro Branch network. These ROU assets and leasehold improvements are classified as Level 3.

Long-lived assets held-for-sale

The Corporation evaluates for impairment its long-lived assets, whenever events or changes in circumstances indicate that the

carrying amount of an asset may not be recoverable and records a write down for the difference between the carrying amount and

the fair value less cost to sell. These long-lived assets held-for-sale are classified as Level 3.

Trademark

The write-down on impairment of a trademark was based on the discontinuance of origination thru e-loan platform. This trademark is

classified as Level 3.