Exhibit 99.2

Santander BanCorp

and Subsidiaries

(A wholly owned subsidiary of Santander Holding USA, Inc.)

Interim Condensed Consolidated Financial Statements (unaudited)

June 30, 2020 and December 31, 2019

Santander BanCorp and Subsidiaries

(A wholly owned subsidiary of Santander Holding USA, Inc.)

Interim Condensed Consolidated Financial Statements (unaudited)

June 30, 2020 and December 31, 2019

Santander BanCorp and Subsidiaries

(A wholly owned subsidiary of Santander Holding USA, Inc.)

Interim Condensed Consolidated Balance Sheets (Unaudited)

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The accompanying notes are an integral part of these condensed consolidated financial statements.

Santander BanCorp and Subsidiaries

(A wholly owned subsidiary of Santander Holding USA, Inc.)

Interim Condensed Consolidated Statements of Cash Flows (Unaudited)

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The accounting and reporting policies of Santander BanCorp (“SBC”) and subsidiaries (the “Corporation”), a wholly owned subsidiary of Santander Holding USA, Inc. (“SHUSA” or the “Parent”), conform with accounting principles generally accepted in the United States of America (hereafter referred to as “generally accepted accounting principles” or “sU.S. GAAP”) and with general practices within the financial services industry. Santander Holdings USA, Inc. (“SHUSA”), is a wholly owned subsidiary of Banco Santander, S.A. (“Santander Spain” or the “Ultimate Parent”).

On October 21, 2019, SHUSA announced it entered into a stock purchase agreement with a non-related third party (the “Agreement”) where SHUSA agreed to sell its retail and commercial banking franchise in Puerto Rico within the Corporation (including the Bank), for a total cash consideration of approximately $1.1 billion, subject to adjustment based on the Corporation’s condensed consolidated balance sheet at closing. The transaction requires the sale of all non-performing assets (non-performing loans and repossessed assets), among other considerations precedent to the closing.

Effective December 31, 2019, the Corporation executed a sale agreement with Santander Financial Services, an affiliate, for its nonperforming loans and repossessed assets. The carrying amount of non-performing assets sold amounted to $114.5 million of non-performing loans (comprising $75 million of mortgage and $39.5 million of commercial loans) and $30.1MM of repossessed assets. Those assets were sold at fair market value as of December 31, 2019 which approximated its book value. The non-performing assets sold had a significantly higher tax basis than book associated to provisions and asset write-downs which are not tax deductible until realization of the deferred tax assets. The Corporation had in books $23 million of deferred tax assets attributable to these book-tax differences, which were realized due to the sale. Additional sale of new non-peforming assets will be expected prior to the execution of the stock purchase agreement.

 

Effective December 31, 2019, the Corporation also executed another asset sale agreement with a non-related third party to sell the right, tittle and interest in substantially all of its Jet Blue branded credit card portfolio. The proceeds from the sale of this credit card portfolio amounted to $73 million recognizing a gain of approximately $4 million.

 

Effective June 1, 2020, the Corporation sold its wholly owned interest in Santander Assets Management (SAM) to an affiliate Santander Financial Services (SFS). The assets and liabilities were sold for a total cash consideration of $1.4 million. The net assets transferred to SFS approximates $1.3 million and $103,000 were recognized by the Corporation as a capital contribution.

Other matters

Early in January 2020, Puerto Rico experienced a significant earthquake followed by a series of seismic events with minor intensities during the month. The earthquake and related aftershocks damaged several structures, including residences, buildings, utilities infrastructure and several roads concentrated in the southwestern part of Puerto Rico. However, damages on the Bank’s facilities and OREO properties in the affected areas were minor and the Bank does not believe that such damages would be material to the Bank’s financial position, results of operations and cash flows.

Also, in late 2019, an outbreak of the coronavirus (COVID-19, or the “virus”) was identified in Wuhan, China. This virus has since spread within China and infections have been found in a number of countries around the world causing it to be declared a pandemic by the World Health Organization. The spread of this virus caused business disruption, reduction in commodity prices, travel restrictions, global economy downward trend, and death increasing trend, among others. The first case of the virus was identified in Puerto Rico during March 2020. As a result, the government implemented and reinforced precautionary measures, including, but not limited to, an island-wide curfew, nonessential business shutdown, denied access to cruise ships, and urging citizens to stay at home. Pandemic evolution is being closely monitored as the government has been relaxing the measures established during the curfew. This close monitoring aims to provide effective measures ensuring business continuity under a controlled environment to safeguard the Corporation’s  employees and customers health and well-being. The Puerto Rico governor signed resolutions requiring the banks and anothers credit granting entities to provide payments accommodation to customers.

 

In response to the economic fallout of the COVID-19 pandemic, the US Congress approved the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act which represent near $2.2 trillion economic stimulus. This Act was signed into law by the President Donald Trump on March 27, 2020.  The CARES Act provides fast and direct economic assistance for American workers, families, and small businesses in order to preserve jobs,  protecting people from the public health and economic impacts of COVID-19.

 

Payment Accommodation Program

In response to an outbreak of respiratory disease caused by COVID 19 virus, the Corporation activated a Payment Accommodation Program (“the Program”) for commercial, consumer (personal and credit cards) and residential mortgage portfolios to assist borrowers that could not fulfill their contractual obligations as a result of the Pandemic and earthquakes events. The Program was implemented during the second quarter of 2020 and remained active until June 30, 2020 for all products, except for residential mortgages which was extended to August 31, 2020 in compliance with local Government Resolution.  As of June 30, 2020 approximately 36% or $992 million of loans held for investment across all loan portfolios were granted payment deferrals. The main description of the Program, by type of product, is presented as a follows:

 

Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the Act), Section 1102 and 1106 temporarily adds a new product, titled the “Paycheck Protection Program,” (PPP) to the U.S. Small Business Administration’s (SBA’s) loan program. The PPP authorizes loans to small businesses to help meet payroll costs and pay other eligible expenses during the COVID-19 outbreak. The program is administered by the SBA. The section 1106 of the Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP. The PPP and loan forgiveness are intended to provide economic relief to small businesses nationwide adversely impacted under the Covid-19. The loans and accrued interest are forgivable as long as the borrower uses at least 60% of the proceeds of the loan for eligible purposes, such as payroll, benefits, rent and utilities, and maintains employee and payroll levels. The loans were originated with a two-year maturity, unless extended by mutual agreement between the lender and borrower. Loans made on or after June 5, 2020 have a five-year maturity. In July 2020, the PPP was extended through August 8, 2020. The Corporation granted loans in the first and second rounds of PPP.  The Corporation had assisted around 1,500 business customers in receiving PPP loans for more than $77 milllion in funding as of June 30, 2020.

 

Following is a summary of the Corporation’s most significant accounting policies:

 

Nature of Operations and Use of Estimates

SBC is a financial holding company offering a full range of financial services through its wholly owned banking subsidiary Banco Santander Puerto Rico and its subsidiary Santander Insurance Agency, Inc. (the “Bank”).  The Corporation engaged in porftfolio management and advisory services through its wholly owned subsidiary SAM up to June 1, 2020.  The Corporation is a member of a group controlled by Banco Santander, S.A.  In addition, the Corporation engages in transactions with other unconsolidated affiliate member of the entity group (Santander Financial Services, Inc), among others.

 

In the opinion of the Corporation, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of June 30, 2020, and its results of operations for the six months ended June 30, 2020 and 2019, and cash flows for the six months ended June 30, 2020 and 2019. The condensed consolidated balance sheet at December 31, 2019, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements.

 

In preparing the condensed consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and the differences may be material to the condensed consolidated financial statements.  Main estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of other intangible assets, liability for uncertain tax positions and valuation allowance of deferred tax assets, pension and postretirement benefit obligations, and the valuation of other real estate owned properties, and financial instruments.

 

Credit Losses

The Corporation adopted the ASC 326, Financial Instruments Current Expected Credit Losses (CECL)  as of January 1, 2020. As a result, the Corporation updated its significant accounting policies for the measurement of credit losses. The CECL model applies to financial assets measured at amortized cost that are subject to credit losses and certain off-balance sheet exposures. CECL establishes a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first acquired. Under the revised methodology, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. The Corporation adopted the new CECL accounting standard effective on January 1, 2020. As a result of the adoption, the Corporation recorded an increase in its allowance for credit losses related to its loan portfolio of $78.5 million, and a $0.2 million increase in the allowance for credit losses for unfunded commitments which is recorded in Other Liabilities. Therefore, the adjustments to record the increase in the allowance for credit losses was recorded as a decrease to the opening balance of retained earnings of the year of implementation of $49.2 million net of income taxes of $29.5 million. Refer to Note 5 for more information related to the impact of the adoption of ASC 326 on the Corporation’s condensed consolidated financial statement.

 

Principles of Consolidation

The condensed consolidated financial statements include the accounts of SBC, the Bank, Santander Insurance Agency, Inc. (“SIA”) and SAM up to June 1, 2020.  All intercompany balances and transactions have been eliminated in consolidation.

 

Cash and Cash Equivalents

Cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing deposits in other banks. All highly liquid instruments with a maturity of three months or less, when acquired or generated, are considered cash equivalents. The Corporation maintained the main cash and cash equivalents deposited in highly rated institutions, mainly in the Federal Reserve Bank of NY.The Corporation has maintained balances in various operating and money market accounts in excess of federally insured limits. The cash and cash equivalents includes  cash amounted to $100.9 million and 68.8 million as of June 30, 2020 and December 31, 2019, respectively, and interest bearing deposits in other banks amounted to $1.9 billion and 891.6 million as of June 30, 2020 and December 31, 2019, respectively.

 

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Investment Securities

Investment securities are classified into three categories and accounted for as follows:

 

 

 

 

The amortization of premiums is deducted and the accretion of discounts is added to net interest income based on a method which approximates the interest method, over the outstanding life of the related investment securities.  The cost of investment securities sold is determined by specific identification.  For investment securities available-for-sale, investment held-to-maturity, and other investment securities, the Corporation reports separately in the condensed consolidated statements of income, net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any.

 

Derivative Financial Instruments

The Corporation uses derivative financial instruments to manage interest rate risk and changes in the fair value of assets and liabilities through interest rate swaps and interest rate caps instruments.

 

The Corporation enters into certain derivative transactions to provide derivative products to customers, which includes interest rate caps and swaps, and simultaneously covers the Corporation’s position with related and unrelated third parties under substantially the same terms and conditions.  These derivatives are not linked to specific assets and liabilities in the condensed consolidated balance sheets or to forecasted transactions in an accounting hedge relationship, and therefore, do not qualify for hedge accounting.  These derivatives are carried at fair value with changes in fair value recorded as part of other income.  Also, the Corporation enters into loan commitments with customers to extend mortgage loans at a specified rate.  These loan commitments are written options and are measured at fair value pursuant to FASB ASC Topic 820 and FASB ASC Topic 815, Derivatives and Hedging.

 

Loans Held for Sale

Loans held for sale are recorded at the lower of cost or market computed on the aggregate portfolio basis.  Fair values for loans held for sale are based on observable inputs, such as observable market prices, credit spreads, and interest rate yield curves, when available.  In instances when significant valuation assumptions are not readily observable in the market, instruments are valued based on the best available data in order to approximate fair value.  This data may be internally developed and considers types of loans, conformity of loans, delinquency statistics, and risk premiums that a market participant would require, and accordingly, may be classified as Level 3 in a nonrecurring fair value measurement.  The amount by which cost exceeds market value, if any, is accounted for as a valuation allowance with changes included in the determination of results of operations for the period in which the change occurs.  The amounts of loan origination cost and fees are deferred at origination of the loans and recognized as part of the gain and loss on sale of the loans in the condensed consolidated statements of income as part of other income.  The Corporation disposes loans held for sale through securitizations mainly conducted with agencies and pass-through sales.  The Corporation’s limitation for holding mortgages in the held for sale portfolio is 365 days from the date the loan enters the portfolio.  If a mortgage is held for sale beyond this period, it is automatically transferred to the loan held for investment portfolio.

 

The Corporation rebooked certain individual delinquent GNMA loans (over 90 days past due), previously accounted for as sold, as loan held-for-sale pursuant to the GNMA Mortgage-Backed Securities Guide.  The rebooking of GNMA loans is required (together with a liability for the same amount) regardless of whether the Corporation, as seller-servicer, intends to exercise the repurchase (buy-back option) since the Corporation is deemed to have regained effective control over these loans.  The Corporation intends to re-sell this portfolio in a reasonable period of time. As of June 30, 2020 and December 31, 2019, the unpaid principal balance of the GNMA portfolio rebooked amounted to $5.6 million and $5.4 million, respectively.

 

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, unearned finance charges, and any deferred fees or costs on originated loans.

 

Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and amortized using methods that approximate the interest method over the term of the loans as an adjustment to interest yield, except for credit cards.  Credit cards origination fees and origination costs are amortized on a straight-line basis over one year.  Unamortized amounts are recognized as an adjustment to interest yield at the time loans receivable are paid in full. Discounts and premiums on purchased loans are amortized to results of operations over the expected lives of the loans using a method that approximates the interest method.

 

The accrual of interest on commercial loans, mortgage and closed-end consumer loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, but in no event it is recognized after 90 days in arrears on payments of principal or interest.  Income is generally recognized on open-end (revolving credit) consumer loans until 120 days past due. For all others loans, when interest accrual is discontinued, unpaid interest is reversed.  Interest income is subsequently recognized only to the extent that it is collected.  The nonaccrual status is discontinued when loans are below 90 days in arrears.  Interest income collected on mortgage Troubled Debt Restructuring (“TDRs”) loans with nonaccrual status is recognized as a deferred item until accrual status is met.  The classification of nonaccrual status of TDRs portfolio is maintained until the customer demonstrates a sustained period of performance which consists of six consecutive payments.

 

The Corporation restructures certain loans, principally, through the modification of loan terms to accommodate the borrower payments. For the year ended December 31, 2019 these loans met the definition of TDRs, as stated in FASB ASC Topic 310, Receivables. However, loan modification terms executed during the six month period ended June 30, 2020 are evaluated by the Corporation to identify if loans meet the TDR definition or a modification under the CARES Act. As a result, certain loans modified due to COVID-19 related hardships are not being reported as past due as of June 30, 2020 based on the contractual terms of the loan, even where borrowers may not be making payments on their loans during the modification period. Loan modifications due to COVID-19 related hardships that permanently reduce either the contractual interest rate or the principal balance of a loan do not qualify for TDR relief under the CARES Act or the interagency guidance. FASB ASC Topic 310 states that a restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection.  These concessions stem from an agreement between the creditor and the debtor or are imposed by law or a court.  Classification of loan modifications as TDRs involves a degree of judgment.  Indicators that the debtor is experiencing financial difficulties include, for example (i) the debtor is currently in default on any of its debt; (ii) the debtor has declared, or is in the process of declaring, bankruptcy; (iii) there is significant doubt as to whether the debtor will continue to be a going concern; (iv) currently, the debtor has securities that have been delisted, are in the process of being delisted, or are under threat of being delisted from an exchange; and (v) based on estimates and projections that only encompass the current business capabilities, the debtor forecasts that its entity-specific cash flows will be insufficient to service the debt (both interest and principal) in accordance with the contractual terms of the existing agreement through maturity; and absent the current modification, the debtor cannot obtain funds from sources other than the existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a nontroubled debtor. Once a loan is determined to be a TDR, then various effects must be considered, such as identifying the loan as impaired, performing an impairment analysis, applying proper revenue recognition accounting, and reviewing its regulatory credit risk grading (see Note 5 for further information).

 

Off-Balance Sheet Instruments

In the ordinary course of business, the Corporation enters into off-balance sheet instruments consisting of commitments to extend credit, standby letters of credit, and financial guarantees.  Such financial instruments are recorded in the condensed consolidated financial statements when they are funded or when related fees are incurred or received.  The Corporation periodically evaluates the credit risks inherent in these commitments and establishes loss allowances for such risks if and when these are deemed necessary.

 

The Corporation recognized as liabilities the fair value of the obligations undertaken in issuing the guarantees under the standby letters of credit, net of the related amortization at inception.  The fair value approximates the unamortized fees received from the customers for issuing the standby letters of credit.  The fees are deferred and recognized on a straight-line basis over the commitment period.  Standby letters of credit outstanding had terms ranging from four months to two years as of June 30, 2020 and December 31, 2019.

 

Fees received for providing loan commitments and letters of credit that result in loans are deferred and amortized to interest income over the life of the related loan. Fees on commitments and letters of credit are amortized to other income as banking fees and commissions over the commitment period.

 

The Corporation’s off-balance sheet commitments and letters of credit are subject to credit risk.  Prior to the adoption of ASC 326, credit losses related to these instruments were accounted for in accordance with ASC 450. Credit losses related to these instruments are accounted for in accordance with ASC 326, and are recorded separately from the allowance for loan losses and reported as other liabilities in the condensed consolidated financial statements.  The reserve for unfunded lending commitments represents probable losses for the Corporation’s unfunded lending commitments and other off-balance sheet instruments.

 

Allowance For Credit Losses

The allowance for loan  losses (ALLL) and reserve for off-balance sheet commitments, together, the allowance for credit losses, (ACL) are maintained at levels that represent management’s best estimate of expected credit losses in the Corporation’s loan portfolios, excluding the loans held for sale. The allowance for expected credit losses (ECL) is measured based on a lifetime expected loss model, which means that it is not necessary for a loss event to occur before a credit loss is recognized. Management’s estimate of expected credit losses is based on an evaluation of relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amounts based upon macroeconomics scenarios. Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, delinquency trends, economic forecasts and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the ACL may be necessary if conditions differ substantially from the assumptions used in making the evaluations.

The Corporation used multiple weighted macroeconomics scenarios in the loss projection process for CECL. Also includes significant assumptions including the reasonable and supportable economic forecast period, which considers the availability of forward-looking scenarios and their respective time horizons, as well as the reversion method to historical losses. The economic scenarios used by the Corporation are available up to the contractual maturities of the assets, and therefore the Corporation can project losses through the respective contractual maturities, using an input reversion approach. This method results in a single, quantitatively consistent credit model across the entire projection period as the macroeconomic effects in the historical data are controlled for the estimate of the long-run loss level. Since the confidence intervals of the scenario forecasts become much broader beyond two to three years and given that the scenarios start to converge after approximately three years, the Corporation defined the reasonable and supportable period as three years.

Provisions for credit losses are charged to provision expense in amounts sufficient to maintain the ACL at levels considered adequate to cover expected credit losses in the Corporation’s loan portfolios. The ALLL is a valuation account that is deducted from, or added to, the amortized cost basis to present the net amount expected to be collected on the Corporation’s loan portfolios. The reserve for off-balance sheet commitments represents the ECL for unfunded lending commitments and financial guarantees, and is presented within other liabilities on the Corporation's condensed consolidated balance sheet.

The Corporation measures expected losses of all components of the amortized cost basis of its loans. For all loans, except for credit cards, the Corporation has elected to exclude accrued interest receivable balances from the measurement of expected credit losses because it applies a nonaccrual policy that results in the timely write off of accrued interest.

Off-balance sheet commitments which are not unconditionally cancellable by the Corporation are subject to credit risk. Additions to the reserve for off-balance sheet commitments are made by charges to the provison for credit losses. The Corporation does not calculate a liability for expected credit losses for off-balance sheet credit exposures which are unconditionally cancellable by the lender, because these instruments do not expose the Corporation to credit risk.

The Corporation uses several methodologies for the measurement of ACL. The Corporation generally uses a discounted cash flows (DCF) approach for determining the ALLL for TDRs and other individually assessed loans, and advance credit metrics for other loans (metrics such as probability of default (PD), loss given default (LGD) and exposure at default (EAD) based on statistical models or assumptions). The methodologies utilized by the Corporation to estimate expected credit losses may vary by product type.

Expected credit losses are estimated on a collective basis when similar risk characteristics exist. Expected credit losses are estimated on an individual basis only if the individual asset or exposure does not share similar risk attributes with other financial assets or exposures, including when an asset is treated as a collateral dependent asset. The estimate of expected credit losses reflects information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of reported amounts. This information includes internal information, external information, or a combination of both.

The Corporation uses a statistical methodology based on an ECL approach that focuses on forecasting the ECL components (i.e., PD, payoff, loss given default and exposure at default) on a loan level basis to estimate the expected future lifetime losses. The individual loan balances used in the models are measured on an amortized cost basis.  In calculating the PD and payoff, the Corporation developed model forecasts which consider variables such as delinquency status, loan tenor and credit quality as measured by regulatory risk ratings assigned to individual loans and credit facilities. The loss given default component forecasts the extent of losses given that a default has occurred and considers variables such as collateral, LTV and credit quality. The exposure at default component captures the effects of expected partial prepayments and underpayments that are expected to occur during the forecast period based on historical experience.

When using a non-DCF method to measure the ACL, the Corporation measures ECL over the asset’s contractual term, adjusted for (i) expected prepayments, (ii) expected extensions associated with assets for which management has a reasonable expectation at the reporting date that it will execute a TDR with the borrower, and (iii) expected extensions or renewal options (excluding those that are accounted for as derivatives) included in the original or modified contract at the reporting date that are not unconditionally cancellable by  the Corporation.

In addition to the ALLL, management estimates expected losses related to off-balance sheet commitments using the same models and procedures used to estimate expected loan losses. The models, in conjunction with a forecast of expected usage of committed amounts and an analysis of historical loss experience, reasonable and supportable forecasts of economic conditions, performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for off-balance sheet commitments.

A loan is considered a collateral-dependent financial asset when: (i) the Corporation determines foreclosure is probable or the borrower is experiencing financial difficulty and (ii) the Corporation expects repayment to be provided substantially through the operation or sale of the collateral. For all collateral-dependent loans, the Corporation measures the allowance for expected credit losses as the difference between the asset’s amortized cost basis and the fair value of the underlying collateral as of the reporting date, adjusted for expected costs to sell if repayment of the asset depends on the sale of the collateral. If repayment or satisfaction of the loan is dependent only on the operation, rather than the sale, of the collateral, the measure of credit losses does not incorporate estimated costs to sell. A collateral dependent loan is charged-off to the fair value of the collateral adjusted for costs to sell (if repayment from sale is expected.) Any subsequent increase or decrease in the collateral’s fair value less cost to sell is recognized as an adjustment to the related loan’s ACL. Negative ACLs are limited to the amount previously charged-off.

Negative allowance is defined as the amount of future recovery expected for accounts that have already been charged off. The Corporation performs an analysis of the actual historical recovery values to determine the pattern of recovery and expected rate of recovery over a given historic period, and uses the results of this analysis to determine negative allowance. Negative allowance reduces the ACL.

Regardless of the extent of the Corporation's analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Corporation may establish a qualitative reserve to the ACL to recognize the existence of these exposures. Imprecisions include a loss estimate that may not have been discreetly contemplated in the modelled approach to the allowance, as well as potential variability in the forecast horizon. The qualitative adjustment is also established in consideration of several factors such as changes in the Corporation’s underwriting standards, the interpretation of economic trends, delays in obtaining information regarding a customer's financial condition and changes in its unique business conditions. This analysis is conducted at least quarterly, and the Corporation revises the allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a loan pool classification. The Corporation’s policies for estimating the ACL also apply to TDRs. The Corporation reflects the impact of the concession in the ALLL for TDRs. Interest rate concessions and significant term deferrals can only be captured within the ALLL by using a DCF method. Therefore, in circumstances in which the Corporation offers such extensions in its TDR modification, it uses a DCF method to calculate the ALLL. The Corporation recognizes the impact of a TDR modification to the ALLL when the Corporation has a reasonable expectation that the TDR modification will be executed.

The Corporation analyzes its exposure to debt from municipalities separately since it represents a different risk than regular commercial portfolio loans, maintaining a segregated allowance for loan losses balance. The Corporation established an approach to determine the reserve under the assumption that municipalities are covered under PROMESA Title III or VI. This approach focuses on understanding and assessing new developments in the municipalities, probabilities of default based on an updated risk rating analysis and type of debt owed by each municipality.

 

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

Transfers of financial assets are accounted for as sales, when control over the transferred assets is deemed to be surrendered: (i) the assets have been isolated from the Corporation, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before the maturity.  The Corporation recognizes the financial assets and servicing assets it controls and the liabilities it has incurred.  At the same time, it ceases to recognize financial assets when control has been surrendered and liabilities when they are extinguished.

 

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation and amortization, which is computed utilizing the straight-line method over the estimated useful lives of the assets that range between three and 30 years.  Leasehold improvements are stated at cost and are amortized using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is lower.  Gains or losses on dispositions are reflected in current operations.  Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are charged to expense as incurred.  Costs of renewals and improvements are capitalized.  When assets are sold or disposed of, their cost and related accumulated depreciation are removed from the accounts, and any gain or loss is reflected in earnings when realized. Measurement of an impairment loss is based on the fair value of the asset or assets group compared to its carrying value. If the fair value of the asset is determined to be less than the carrying value, an impairment loss is incurred. Impairment losses, if any, are reflected in operating expenses in the condensed consolidated statements of income.

 

Real Estate Held for Sale

The Corporation owns certain real estate properties held for sale which are carried at the lower of cost or fair value, less estimated disposition costs. Each property is appraised or evaluated annually to provide an estimate of the property’s fair value. The fair value is substantiated by a current appraisal or evaluation prepared by an independent, qualified appraiser. The decline in fair value is reflected in operating expense in the condensed consolidated statements of income.

 

Other Real Estate Owned Properties

The Corporation recognizes as other real estate owned properties (OREO), real estate acquired through purchases at sales under judgments, decrees, or mortgages where the property was originally security for debts previously contracted; a real estate which a borrower conveys to the Corporation to fully or partially satisfy a debt previously contracted (i.e., acceptance of a deed in lieu of foreclosure); real estate which the Corporation obtains in exchange for future advances to an existing borrower to fully satisfy or partially satisfy debts previously contracted; real estate which the Corporation takes possession of collateral in a collateral-dependent real estate loan (i.e., in-substance foreclosure).  Other real estate received in satisfaction of a loan is recorded at fair value less estimated cost of disposal. The difference between the carrying amount of the loan and the fair value less cost to sell is recorded as an adjustment to the allowance for loan losses. The Corporation recognizes legal fees and other direct costs related to a foreclosure when they are incurred  and are reflected in operating expense in the condensed consolidated statements of income.  Each OREO is appraised or evaluated at acquisition, and annually thereafter, to provide an estimate of the property’s fair value.  The fair value is substantiated by a current appraisal or evaluation prepared by an independent, qualified appraiser.  Subsequent declines in fair value are separately reserved until the property is sold.

 

The Corporation disposes of OREO through third party sales.  Gains and losses resulting from a sale of OREO properties are recognized immediately and included in the condensed consolidated statements of operations, as part of the other income.  The Corporation should evaluate certain conditions prior to the recognition of the sale, in order to determine the proper accounting treatment of the transaction, such as: (i) the collectability of the sales price and down payment are reasonably assured, and (ii) the seller is not obligated to perform significant activities after the sale to earn the profit.  If both conditions are met at the time of sale, the Corporation is required to recognize the transaction as a disposition of an asset. On December 31, 2019 the Corporation sold its entire OREO portfolio amounting to $30.1 million to an affiliate.The new foreclosed acquired during 2020 amounted to 129,000.

 

Mortgage Servicing Rights

Mortgage servicing rights (“MSRs”) represent the cost of acquiring the contractual rights to service loans for others. The Corporaton recognizes the right to service mortgage loans for others as a separate asset whenever those servicing rights are acquired.  The Corporation acquires MSRs by purchasing or originating loans and selling or securitizing those loans (with the servicing rights retained).

 

On a quarterly basis, the Corporation evaluates its MSRs for impairment and charges any such impairment to current period earnings.  In order to evaluate its MSRs, the Corporation stratifies the related mortgage loans on the basis of their risk characteristics, which have been determined to be: type of loan (government-guaranteed, conventional, conforming, and nonconforming), interest rates, and maturities.  Impairment of MSRs is determined by estimating the fair value of each stratum and comparing it to its carrying value.  No impairment loss was recognized during the six- month period ended June 30, 2020 and year ended December 31, 2019.

 

MSRs are also subject to periodic amortization.  The amortization of MSRs is based on the amount and timing of estimated cash flows to be recovered with respect to the MSRs over their expected lives.  Amortization may be accelerated or decelerated to the extent that changes in interest rates or prepayment rates warrant.

 

Mortgage Banking

Mortgage loan servicing includes collecting monthly mortgagor payments, forwarding payments and related accounting reports to investors, collecting escrow deposits for the payment of mortgagor property taxes and insurance, and paying taxes and insurance from escrow funds when due.  No asset or liability is recorded by the Corporation for mortgages serviced, except for MSRs arising from the sale of mortgages, advances to investors, and escrow advances. Mortgage loan servicing fees, which are based on a percentage of the principal balances of the mortgages serviced, are credited to income as mortgage payments are collected.

 

As of June 30, 2020 and December 31, 2019, the unpaid principal balances of mortgage loans serviced for others amounted to approximately $992 million and $889 million, respectively.  In connection with these mortgage servicing activities, the Corporation administered escrow and other custodial funds, which amounted to approximately $2.9 million as of June 30, 2020 and December 31, 2019.

 

Revenue Recognition

In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration to which the Corporation expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC Topic 606, the Corporation: (i) identifies the contract(s) with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the Corporation satisfies a performance obligation and when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services transferred to the customer. At contract inception, once the contract is determined to be within the scope of ASC Topic 606, the Corporation assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct.  Refer to Note 24 for additional details.

 

Trust Services

The Corporation administers and is custodian of assets amounting to approximately $121 million and $107 million as of June 30, 2020 and December 31, 2019.  Due to the nature of trust activities, these assets are not included in the Corporation’s condensed consolidated balance sheets.  The Corporation’s trust division focuses its business in transfer paying agent and individual retirement account (IRA) services.

 

Insurance Commissions

The Corporation’s insurance agency operation earns commissions on the sale of insurance policies issued by unaffiliated insurance companies.  Commissions are recognized as revenues based on the insurance policies’ effective date in accordance with individual agreements with the insurance companies. Commission revenue is reported net of the provision for commission returns on insurance policy cancellations, which is based on management’s estimate of future insurance policy cancellations as a result of historical turnover rates by types of credit facilities subject to insurance.

 

Advisory Fees

The Corporation also engaged in porftfolio management and advisory services. Revenues from portfolio, management and advisory fees resulting from the assets’s management and administration of certain funds and institutional accounts. The advisory fees are recognized over the period that services are rendered.

 

Income Taxes

The Corporation uses the asset and liability balance sheet method for the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s condensed consolidated financial statements or tax returns.  Deferred income tax assets and liabilities are determined for differences between financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future.  The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized.

 

The Corporation accounts for uncertain tax positions in accordance with FASB ASC Topic 740, Income Taxes.  Accordingly, the Corporation reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.  The Corporation recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

 

Recently Issued Accounting Standards

Effective January 1, 2020, the Corporation adopted the following FASB Accounting Standards Updates (“ASU”):

 

•

FASB ASU No. 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.

The adoption of the following acounting pronouncements may have an impact on the Corporation’s condensed consolidated financial statements and disclosures. The Corporation is evaluating the impact that the following recently issued accounting pronouncements may have on its condensed consolidated financial statements and disclosures.

•

FASB ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. In January 2020, the FASB issued this Update to clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period, (1) for public business entities for periods for which financial statements have not yet been issued and (2) for all other entities for periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively. Under a prospective transition, an entity should apply the amendments at the beginning of the interim period that includes the adoption date. The Corporation is currently assessing if this update will have an impact on its condensed consolidated financial statements, if any.

 

2.	Trading Securities

 

Proceeds from sales of trading securities during the six month period ended June 30, 2020 and the year ended December 31, 2019, were approximately $1,524,000 and $5,894,000, respectively.  Gross gains of approximately $30,000 and $160,000 were realized during the six month period ended June 30, 2020 and the year ended December 31, 2019. There were no trading securities as of June 30, 2020 and December 31, 2019, since the Corporation is committed to perform GNMA loan securitization and execute the sale in a short term.

 

3.	Investment Securities Available for Sale

 

The amortized cost, gross unrealized gains and losses, fair value and weighted-average yield of investment securities available for sale by contractual maturity as of June 30, 2020 and December 31, 2019, were as follows:

 

		June 30, 2020
(in thousands of dollars)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Weighted- Average Yield
U.S. Treasury bills/notes - within one year		$	334,165			$	3,623			$	-			$	337,788				2.10	%
U.S. Treasury bills/notes - after one but within five years			489,230				9,099				-				498,329				1.62	%
Mortgage-backed securities - after five years but within ten years			42,891				1,596				-				44,487				2.22	%
Mortgage-backed securities - over ten years			287,540				3,554				-				291,094				2.98	%
Total investment securities available for sale		$	1,153,826			$	17,872			$	-			$	1,171,698				2.12	%

		December 31,2019
(in thousands of dollars)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Weighted- Average Yield
U.S. Treasury bills/notes - within one year		$	1,092,039			$	1,375			$	-			$	1,093,414				1.85	%
U.S. Treasury bills/notes - after one but within five years			707,593				1,401				167				708,827				1.71	%
Mortgage-backed securities - after five years but within ten years			49,245				494				164				49,575				2.20	%
Mortgage-backed securities - over ten years			339,804				714				597				339,921				2.98	%
Total investment securities available for sale		$	2,188,681			$	3,984			$	928			$	2,191,737				1.99	%

 

The average duration of mortgage-backed securities is approximately 2.2 and 3.3 years at June 30, 2020 and December 31, 2019, respectively.

 

The number of positions, fair value, and unrealized losses of investment securities available for sale that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more as of December 31, 2019 were as follows:

 

		December 31, 2019
		Less Than 12 Months												12 Months or More												Total
(in thousands)		Number of Positions				Fair Value				Unrealized Losses				Number of Positions				Fair Value				Unrealized Losses				Number of Positions				Fair Value				Unrealized Losses
U.S. Treasury bills/notes			2			$	200,096				(167	)															2			$	200,096			$	(167	)
Mortgage-backed securities			6				178,103				(505	)			6				60,546				(256	)			12				238,649				(761	)
			8			$	378,199			$	(672	)			6			$	60,546				(256	)			14			$	438,745			$	(928	)

There were no positions of investment securities available for sale that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more as of June 30, 2020.

 

The Corporation did not record an allowance for credit-related losses on investment securities available for sale against its investments at June 30, 2020 or December 31, 2019. Management has concluded that the unrealized losses on its investments for which it has not recorded an allowance are not credit related since (i) they are not related to the underlying credit quality of the issuers, (ii) the entire contractual principal and interest due on these securities is currently expected to be recoverable, (iii) the Corporation does not intend to sell these investments at a loss and (iv) it is more likely than not that the Corporation will not be required to sell the investments before recovery of the amortized cost basis, which for the Corporation’s investment securities may be at maturity.

 

The unrealized losses in the Corporation’s investments in debt securities were caused by changes in market interest rates and not credit quality.  All debt securities are investment grade, as rated by major rating agencies.  Prior to the adoption of ASC 326, the Corporation evaluated debt securities for other-than-temporary impairment based on any of the following triggering events: (i) the intent to sell the security, (ii) it is more likely than not that the Corporation will be required to sell the security before recovery, or (iii) the Corporation did not expect to recover the entire amortized cost basis of the security.  Upon evaluation of these triggering events, the Corporation believed that none of such conditions were presented as of December 31, 2019, because the Corporation has sufficient capital and liquidity to operate its business, it has no requirements or needs to sell such securities, and the Corporation is not subject to any contractual arrangements that would require the Corporation to sell such securities.

 

Contractual maturities on certain securities, including mortgage-backed securities, could differ from actual maturities since certain issuers may have the right to call or prepay these securities.

 

There were no sales of investment securities available for sale during the first half 2020 and 2019.

 

4.	Assets Pledged

 

As of June 30, 2020 and December 31, 2019, investment securities and loans were pledged to secure deposits of public funds and FHLB advances.  The classification and carrying amount of pledged assets, which the secured parties are not permitted to sell or repledge as of June 30, 2020 and December 31, 2019, were as follows:

 

(in thousands)		June 30, 2020				December 31, 2019
Investment securities available for sale		$	1,084,685			$	1,555,063
Residential mortgage and commercial loans			1,004,776				1,018,507
		$	2,089,461			$	2,573,570

On June 30, 2020 and December 31, 2019, there were no pledged securities that the creditor has the right or contract to repledge.

Santander BanCorp and Subsidiaries

5.	Loans and Allowance for Loan Losses

 

The Corporation’s loan portfolio as of June 30, 2020 and December 31, 2019, consists of the following:

 

(in thousands)		June 30, 2020				December 31, 2019
Commercial loans:
Commercial real estate		$	1,141,524			$	1,157,776
Commercial and industrial			464,848				402,952
Multifamily			48,100				47,173
Total commercial loans			1,654,472				1,607,901
Residential mortgages			851,968				879,230
Consumer			152,248				166,671
Credit cards			79,500				91,857
			2,738,188				2,745,659
Allowance for loan losses			(146,756	)			(67,344	)
		$	2,591,432			$	2,678,315

Total loans held for investment includes deferred loan fees, net of deferred orignation cost and unamortized purchases premiun, net of discounts as well as other accounting adjustments. These items resulted in a net decrease in the loan balances of $5.1 million and $5.4 million as of June 30, 2020 and December 31, 2019, respectively.

 

As of December 31, 2019, the Corporation sold to an affiliate $115 million of non-performing loans which comprise $40 million of commercial and $75 of mortgage loans. No gain or loss was recorded in this transaction since the book value of assets sold approximated their fair value. Also, during December 2019, the Corporation sold $73 million of credit cards to an unrelated third party with a gain of approximately $4 million.

 

The amortized cost basis of the loan portfolio that are either non-accrual with related expected credit loss or nonaccrual without related expected credit loss disaggregated by type of loan and other non-performing assets is as follows:

 

 

(in thousands)		Non accrual loans as of:								Non-accrual loans with no allowance				Interest Income recognized on non-accrual loans
		June 30, 2020				December 31, 2019				June 30, 2020				June 30, 2020
Non-accrual loans:
Commercial loans:
Commercial real estate		$	13,156			$	-			$	2,686			$	-
Commercial and industrial			157				18				36				-
Multifamily			-				-				-				-
Total commercial loans			13,313				18				2,722				-
Residential mortgages			17,749				4,940				1,529				-
Consumer			991				662				221				-
Credit cards			1,810				1,550				145				-
Total non-accrual loans			33,863				7,170				4,617				-
Foreclosed real estate			129				-				-				-
Total non-performing assets		$	33,992			$	7,170			$	4,617			$	-

The Corporation generally considers an account delinquent when an obligor fails to pay substantially all of the scheduled payment by the due date. The age of amortized cost in past due loans and accruing loans 90 days or greater past due disaggregated by type of loan is summarized as follows:

 

(in thousands)		June 30, 2020
Category		30-59 Days past due				60-89 Days past due				Greater than 90 days				Total loan past due				Current				Total Recorded Investment				Accruing loan Past Due 90 Days or more
Commercial loans: Commercial real estate		$	13,697			$	464			$	12,619			$	26,780			$	1,114,744			$	1,141,524			$	-
Commercial and industrial			39								157				196				464,652				464,848
Multifamily			-				-				-				-				48,100				48,100				-
Total commercial loans			13,736				464				12,776				26,976				1,627,496				1,654,472				-
Residential mortgages			23,101				8,842				15,076				47,019				804,949				851,968				-
Consumer			855				1,135				1,026				3,016				149,232				152,248				35
Credit cards			558				726				1,810				3,094				76,406				79,500				-
		$	38,250			$	11,167			$	30,688			$	80,105			$	2,658,083			$	2,738,188			$	35

(in thousands)		December 31, 2019
Category		30-59 Days past due				60-89 Days past due				Greater than 90 days				Total Past Due				Current				Total Recorded Investment				Accruing loan past due 90 Days or more
Commercial loans: Commercial real estate		$	202			$	370			$	-			$	572			$	1,157,204			$	1,157,776			$	-
Commercial and industrial			36				12				18				66				402,886				402,952				-
Multifamily			-				-				-				-				47,173				47,173				-
Total commercial loans			238				382				18				638				1,607,263				1,607,901				-
Residential mortgages			28,851				8,773				4,954				42,578				836,652				879,230				-
Consumer			1,584				842				697				3,123				163,548				166,671				35
Credit cards			724				776				1,550				3,050				88,807				91,857				-
		$	31,397			$	10,773			$	7,219			$	49,389			$	2,696,270			$	2,745,659			$	35

Credit Quality Indicators

As part of the ongoing monitoring of the credit quality of the Corporation’s loan portfolio, management tracks certain credit quality indicators.  The model for monitoring credit quality for commercial clients with commitments with common collateral and total exposure over $250,000, denominated by the Corporation as “nonstandardized loans,” has an analytical focus where areas must be evaluated independently.  Each area of analysis is assessed for each borrower individually, to arrive at certain weighted quantitative and qualitative factors.  These factors are: (i) product/demand/market: evaluates the sector in which the company operates and analyze the company’s position within the sector; (ii) shareholder/management: evaluates shareholders’ willingness and ability to support the company (at financial, commercial, or technological levels) and management team’s experience in both the company and the sector; (iii) access to credit: evaluates the capacity of obtaining financing from the banking system and from the capital markets; (iv) profitability: evaluates the company’s capacity to generate profits in the short and long term; (v) cash flows generation: evaluates the company’s capacity to generate cash from its normal operations in order to service its debt, investments in both fixed assets and current assets, to pay taxes and to offer return on capital; and (vi) solvency: evaluates the company’s capacity to maintain, in the mid and long term, its position in the market, its liquidity, and its capacity to generate cash.

 

The Corporation performs a credit analysis and classifies certain loans over an internal threshold based on the commercial lending classifications described below:

 

Non-Adversely Classified Loans:

Santander BanCorp and Subsidiaries

 Adversely Classified Loans:

Each commercial loan is evaluated to determine its risk rating at least annually. The indicators represent the rating for loans as of the date presented based on the most recent assessment performed. Amortized cost basis of loans in the commercial portfolio segment by credit quality indicator, type of loans, and year of origination are summarized as follows:

(in thousands)		December 31, 2019
Regulatory Rating:		Commercial real estate				Commercial and industrial				Multifamily				Total
Pass		$	685,421			$	168,934			$	47,139			$	901,494
Special mention			75,195				66,826				-				142,021
Watch list			285,528				159,136				34				444,698
Substandard			111,632				8,056				-				119,688
Doubtful / Loss			-				-				-				-
Total commercial real estate		$	1,157,776			$	402,952			$	47,173			$	1,607,901

---

6.	Premises and Equipment

7.	Real Estate Held for Sale

8.	Mortgage Servicing Rights

10.	Other Assets

11.

Deposits

12.	FHLB Advances

13.	Reserve Fund

14.	Preferred and Common Stock Transactions

15.	Other Comprehensive (Loss) Income

16.	Income Taxes

17.	Contingencies and Commitments

18.	Related-Party Transactions

19.	Derivative Financial Instruments

22.	Fair Value of Financial Instruments

a.

U.S. Treasury Bills/Notes — The Corporation values its U.S. Treasuries utilizing observable unadjusted market quotes. The Corporation obtains vendor trading platform data (actual prices) from a number of live data sources, including interdealer brokers. For those investments not  valued by pricing vendors, other trusted market sources are utilized. U.S. Treasury bills are classified as Level 2.

b.

Mortgage-Backed Securities — These securities are priced using observable market inputs (To Be Announced transactions (TBA) prices, monthly pre-payment information, and treasury spot rates) based on the characteristics of the bond. TBA prices indicate where the mortgage market is currently trading. Using these prices, the process derives option-adjusted spreads (OAS) for pass-through mortgage-backed securities across various weighted average maturities and Monte Carlo simulation process. This process derives a price based on the prepayments modeled over the range of interest rate paths sampled, discounted at  the treasury spot rates plus TBA-based OAS. Mortgage-backed  securities  are  classified  as  Level 2.

a.

NonCallable Interest Rate Swaps — Fair value is computed using a discounted cash flow model based on interest rate yield curves and floating indexes from the market (observable inputs). For long term derivatives, no extrapolation of the interest rate curve is employed in the derivative models. Noncallable interest rate swaps are classified as Level 2.