Investment Securities

6 Months Ended

Jun. 30, 2011

4 — INVESTMENT SECURITIES

Investment Securities Available for Sale

The amortized cost, non-credit loss component of other-than-temporary impairment (“OTTI”) on securities recorded in other comprehensive income (“OCI”), gross unrealized gains and losses recorded in OCI, approximate fair value, weighted-average yield and contractual maturities of investment securities available for sale as of June 30, 2011 and December 31, 2010 were as follows:


	June 30, 2011												December 31, 2010
			Non-Credit												Non-Credit
			Loss Component		Gross						Weighted				Loss Component		Gross						Weighted
	Amortized		of OTTI		Unrealized				Fair		average		Amortized		of OTTI		Unrealized				Fair		average
	cost		Recorded in OCI		gains		losses		value		yield%		cost		Recorded in OCI		gains		losses		value		yield%
											(Dollars in thousands)
U.S. Treasury securities:
Due within one year	$	932,474	$	—	$	2,607	$	—	$	935,081		0.50	$	—	$	—	$	—	$	—	$	—		—
After 1 to 5 years		200,200		—		6,394		—		206,594		1.95		599,987		—		8,727		—		608,714		1.34

Obligations of U.S. Government sponsored agencies:
Due within one year		300,999		—		2,231		—		303,230		1.15		—		—		—		—		—		—
After 1 to 5 years		253,014		—		—		701		252,313		1.02		604,630		—		2,714		3,991		603,353		1.17

Puerto Rico Government obligations:
Due within one year		721		—		11		—		732		6.68		—		—		—		—		—		—
After 1 to 5 years		38,875		—		1,456		87		40,244		5.08		26,768		—		522		—		27,290		4.70
After 5 to 10 years		111,397		—		284		232		111,449		5.21		104,352		—		432		—		104,784		5.18
After 10 years		9,395		—		495		—		9,890		5.88		4,746		—		21		—		4,767		6.22

United States and Puerto Rico Government obligations		1,847,075		—		13,478		1,020		1,859,533		1.24		1,340,483		—		12,416		3,991		1,348,908		1.65

Mortgage-backed securities:
FHLMC certificates:
After 1 to 5 years		1,606		—		21		—		1,627		3.70		—		—		—		—		—		—
After 10 years		1,447		—		110		—		1,557		5.00		1,716		—		101		—		1,817		5.00

		3,053		—		131		—		3,184		4.32		1,716		—		101		—		1,817		5.00

GNMA certificates:
Due within one year		10		—		—		—		10		6.05		30		—		—		—		30		6.49
After 1 to 5 years		269		—		12		—		281		3.89		—		—		—		—		—		—
After 5 to 10 years		636		—		46		—		682		4.30		1,319		—		74		—		1,393		4.80
After 10 years		766,183		—		26,048		225		792,006		3.97		962,246		—		31,105		3,396		989,955		4.25

		767,098		—		26,106		225		792,979		3.97		963,595		—		31,179		3,396		991,378		4.25

FNMA certificates:
After 1 to 5 years		1,671		—		80		—		1,751		3.85		—		—		—		—		—		—
After 5 to 10 years		49,030		—		2,215		—		51,245		3.79		75,547		—		3,987		—		79,534		4.50
After 10 years		54,245		—		2,865		—		57,110		5.62		126,847		—		8,678		—		135,525		5.51

		104,946		—		5,160		—		110,106		4.74		202,394		—		12,665		—		215,059		5.13

Collateralized Mortgage Obligations issued or guaranteed by FHLMC, FNMA and GNMA:
After 10 years		—		—		—		—		—		—		112,989		—		1,926		—		114,915		0.99


Other mortgage pass-through trust certificates:
After 10 years		92,584		25,763		1		—		66,822		2.28		100,130		27,814		1		—		72,317		2.31


Total mortgage-backed securities		967,681		25,763		31,398		225		973,091		3.89		1,380,824		27,814		45,872		3,396		1,395,486		3.97


Corporate bonds:
After 10 years		2,000		—		—		621		1,379		5.80		—		—		—		—		—		—


Equity securities (without contractual maturity) (1)		77		—		6		—		83		—		77		—		—		18		59		—


Total investment securities available for sale	$	2,816,833	$	25,763	$	44,882	$	1,866	$	2,834,086		2.15	$	2,721,384	$	27,814	$	58,288	$	7,405	$	2,744,453		2.83


(1)		Represents common shares of other financial institutions in Puerto Rico.

Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options as was the case with $50 million of U.S. agency debt securities called during 2011. The weighted-average yield on investment securities available for sale is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gain or loss on securities available for sale and the non-credit loss component of OTTI are presented as part of OCI.

The following tables show the Corporation’s available-for-sale investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2011 and December 31, 2010. It also includes debt securities for which an OTTI was recognized and only the amount related to a credit loss was recognized in earnings:


	As of June 30, 2011
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
					(In thousands)
Debt securities:
U.S. Government agencies obligations	$	259,799	$	701	$	—	$	—	$	259,799	$	701
Puerto Rico Government obligations		109,681		319		—		—		109,681		319
Mortgage-backed securities:
GNMA		14,311		225		—		—		14,311		225
Other mortgage pass-through trust certificates		—		—		66,621		25,763		66,621		25,763
Corporate bonds		—		—		1,379		621		1,379		621

	$	383,791	$	1,245	$	68,000	$	26,384	$	451,791	$	27,629


	As of December 31, 2010
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
					(In thousands)
Debt securities:
U.S. Government agencies obligations	$	249,026	$	3,991	$	—	$	—	$	249,026	$	3,991
Mortgage-backed securities:
GNMA		192,799		3,396		—		—		192,799		3,396
Other mortgage pass-through trust certificates		—		—		72,101		27,814		72,101		27,814
Equity securities		59		18		—		—		59		18

	$	441,884	$	7,405	$	72,101	$	27,814	$	513,985	$	35,219

Investments Held to Maturity

On March 7, 2011, the Corporation sold $330 million of mortgage-backed securities that were originally intended to be held to maturity, consistent with deleveraging initiatives included in the Corporation’s Capital Plan. The Corporation realized a gain of $18.7 million associated with this transaction. After the sale, in line with the Corporation’s ongoing capital management strategy, the remaining $89 million of investment securities held in the held-to-maturity portfolio was reclassified to the available-for-sale portfolio.

The amortized cost, gross unrealized gains and losses, approximate fair value, weighted-average yield and contractual maturities of investment securities held to maturity as of December 31, 2010 were as follows:


	December 31, 2010
			Gross						Weighted
	Amortized		Unrealized				Fair		average
	cost		gains		losses		value		yield%
			(Dollars in thousands)
U.S. Treasury securities:
Due within 1 year	$	8,487	$	5	$	—	$	8,492		0.30
Puerto Rico Government obligations:
After 5 to 10 years		19,284		795		—		20,079		5.87
After 10 years		4,665		49		—		4,714		5.50

United States and Puerto
Rico Government obligations		32,436		849		—		33,285		4.36


Mortgage-backed securities:
FHLMC certificates:
After 1 to 5 years		2,569		42		—		2,611		3.71
FNMA certificates:
After 1 to 5 years		2,525		130		—		2,655		3.86
After 5 to 10 years		391,328		21,946		—		413,274		4.48
After 10 years		22,529		885		—		23,414		5.33

Mortgage-backed securities		418,951		23,003		—		441,954		4.52


Corporate bonds:
After 10 years		2,000		—		723		1,277		5.80


Total investment securities held-to-maturity	$	453,387	$	23,852	$	723	$	476,516		4.51

From time to time the Corporation has securities held to maturity with an original maturity of three months or less that are considered cash and cash equivalents and classified as money market investments in the Consolidated Statement of Financial Condition. As of June 30, 2011, the Corporation had $100 million in held to maturity U.S. Treasury bills with an original maturity of 3 months and a yield of 0.05% that were classified as cash and cash equivalents.

The following tables show the Corporation’s held-to-maturity investments’ fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2010:


	As of December 31, 2010
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
					(In thousands)
Corporate bonds	$	—	$	—	$	1,277	$	723	$	1,277	$	723

Assessment for OTTI

On a quarterly basis, the Corporation performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered OTTI. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Corporation to assess whether the unrealized loss is other-than-temporary.

OTTI losses for debt securities must be recognized in earnings if an investor has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.

An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of an OTTI, if any, is recorded as a component of Net impairment losses on investment securities in the accompanying consolidated statements of (loss) income, while the remaining portion of the impairment loss is recognized in OCI, provided the Corporation does not intend to sell the underlying debt security and it is “more likely than not” that the Corporation will not have to sell the debt security prior to recovery.

Debt securities issued by U.S. government agencies, government-sponsored entities and the U.S. Treasury accounted for more than 92% of the total available-for-sale portfolio as of June 30, 2011 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation’s assessment was concentrated mainly on private label mortgage-backed securities (“MBS”) of approximately $93 million for which the Corporation evaluates credit losses on a quarterly basis. The Corporation considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

	•		The length of time and the extent to which the fair value has been less than the amortized cost basis.

	•		Changes in the near term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions;

	•		The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

	•		Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.

For the quarter and six-month period ended June 30, 2011, the Corporation recorded OTTI losses on available-for-sale debt securities as follows:


	Private label MBS
	June 30, 2011
(In thousands)
Total other-than-temporary impairment losses	$	—
Unrealized other-than-temporary impairment losses recognized in OCI (1)		(607	)

Net impairment losses recognized in earnings (2)	$	(607	)


(1)		Represents the noncredit component impact of the OTTI on available-for-sale debt securities

(2)		Represents the credit component of the OTTI on available-for-sale debt securities

No OTTI losses on available for sale debt securities were recorded for the first half of 2010.

The following table summarizes the roll-forward of credit losses on debt securities held by the Corporation for which a portion of an OTTI is recognized in OCI:


	June 30, 2011
(In thousands)
Credit losses at the beginning of the period	$	1,852
Additions:
Credit losses related to debt securities for which an OTTI was not previously recognized		—
Credit losses related to debt securities for which an OTTI was previously recognized		607

Ending balance of credit losses on debt securities held for which a portion of an OTTI was recognized in OCI	$	2,459

Private label MBS are collateralized by fixed-rate mortgages on single family residential properties in the United States. The interest rate on these private-label MBS is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The underlying mortgages are fixed-rate single family loans with original high FICO scores (over 700) and moderate original loan-to-value ratios (under 80%), as well as moderate delinquency levels.

Based on the expected cash flows derived from the model, and since the Corporation does not have the intention to sell the securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, only the credit loss component was reflected in earnings. Significant assumptions in the valuation of the private label MBS as of June 30, 2011 and December 31, 2010 were as follow:


	June 30, 2011						December 31, 2010
	Weighted						Weighted
	Average			Range			Average			Range
Discount rate		14.5	%		14.5	%		14.5	%		14.5	%
Prepayment rate		25	%		18.45% - 32.04	%		24	%		18.2% - 43.73	%
Projected Cumulative Loss Rate		6	%		1.52% - 11.37	%		6	%		1.49% - 16.25	%

For the six-month period ended on June 30, 2010, the Corporation recorded OTTI of approximately $0.4 million on certain equity securities held in its available-for-sale investment portfolio related to financial institutions in Puerto Rico, no OTTI losses on equity securities were recognized for the first half of 2011. Management concluded that the declines in value of the securities were other-than-temporary; as such, the cost basis of these securities was written down to the market value as of the date of the analysis and is reflected in earnings as a realized loss.

Total proceeds from the sale of securities available for sale during the first half of 2011 amounted to approximately $487.1 million (2010 —$733.9 million excluding $296.5 million of unsettled securities sold).