INVESTMENT SECURITIES

3 Months Ended

Mar. 31, 2015

INVESTMENT SECURITIES

NOTE 5 – INVESTMENT SECURITIES

Investment Securities Available for Sale

The amortized cost, non-credit loss component of other-than-temporary impairment (“OTTI”)recorded in other comprehensive income (“OCI”), gross unrealized gains and losses recorded in OCI, approximate fair value, weightedaverage yield and contractual maturities of investment securities available for sale as of March 31, 2015 and December 31, 2014were as follows:

		March 31, 2015
		Amortized cost		Noncredit Loss Component of OTTI Recorded in OCI		Gross						Fair value		Weighted average yield%
								Unrealized
								gains			losses
		(Dollars in thousands)
U.S. Treasury securities:
	Due within one year	$	7,500	$	-	$	-		$	-		$	7,500	0.11
Obligations of U.S.
government-sponsored
agencies:
	After 1 to 5 years		278,054		-		318			1,918			276,454	1.25
	After 5 to 10 years		102,745		-		850			1,037			102,558	1.93
Puerto Rico government
obligations:
	After 1 to 5 years		39,836		-		-			16,922			22,914	4.49
	After 5 to 10 years		875		-		-			-			875	5.20
	After 10 years		24,821		-		1			7,148			17,674	5.37
United States and Puerto
Rico government
obligations:			453,831		-		1,169			27,025			427,975	1.90
Other (1)
Mortgage-backed securities:
FHLMC certificates:
	After 1 to 5 years		432		-		46			-			478	4.95
	After 10 years		304,628		-		2,733			560			306,801	2.17
			305,060		-		2,779			560			307,279	2.17
GNMA certificates:
	Due within one year		17		-		-			-			17	3.52
	After 1 to 5 years		55		-		2			-			57	3.93
	After 5 to 10 years		24,189		-		956			-			25,145	3.62
	After 10 years		316,122		-		21,942			-			338,064	3.85
			340,383		-		22,900			-			363,283	3.83
FNMA certificates:
	After 1 to 5 years		3,743		-		155			-			3,898	3.37
	After 5 to 10 years		16,924		-		646			31			17,539	2.90
	After 10 years		814,520		-		10,059			2,251			822,328	2.35
			835,187		-		10,860			2,282			843,765	2.37
Collateralized mortgage
	obligations issued or
	guaranteed by the FHLMC:
Other mortgage pass-through
trust certificates:
	Over 5 to 10 years		108		-		-			-			108	7.26
	After 10 years		43,012		11,296		-			-			31,716	2.15
			43,120		11,296		-			-			31,824	2.15
Total mortgage-backed
securities			1,523,750		11,296		36,539			2,842			1,546,151	2.65
Other (1)
	After 1 to 5 years		100		-		-			-			100	1.50
Total investment securities
	available for sale	$	1,977,681	$	11,296	$	37,708		$	29,867		$	1,974,226	2.48
(1)	Represents investment in a Community Investment Fund.

		December 31, 2014
		Amortized cost		Noncredit Loss Component of OTTI Recorded in OCI		Gross						Fair value		Weighted average yield%
								Unrealized
								gains			losses
		(Dollars in thousands)
U.S. Treasury securities:
	Due within one year	$	7,498	$	-	$	1		$	-		$	7,499	0.11
Obligations of U.S.
government-sponsored
agencies:
	After 1 to 5 years		260,889		-		42			4,219			256,712	1.22
	After 5 to 10 years		78,234		-		246			2,077			76,403	1.72
Puerto Rico government
obligations:
	After 1 to 5 years		39,827		-		-			12,419			27,408	4.49
	After 5 to 10 years		886		-		1			-			887	5.20
	After 10 years		20,498		-		-			5,571			14,927	5.83
United States and Puerto
Rico government
obligations:			407,832		-		290			24,286			383,836	1.86
Mortgage-backed securities:
FHLMC certificates:
	After 10 years		315,311		-		1,743			1,260			315,794	2.17
GNMA certificates:
	After 1 to 5 years		39		-		1			-			40	3.26
	After 5 to 10 years		17,108		-		501			-			17,609	3.65
	After 10 years		338,842		-		20,957			-			359,799	3.83
			355,989		-		21,459			-			377,448	3.83
FNMA certificates:
	After 1 to 5 years		4,160		-		181			-			4,341	3.40
	After 5 to 10 years		9,584		-		521			5			10,100	3.49
	After 10 years		837,597		-		7,756			4,854			840,499	2.36
			851,341		-		8,458			4,859			854,940	2.37
Collateralized mortgage
	obligations issued or
	guaranteed by the FHLMC:
Other mortgage pass-through
trust certificates:
	Over 5 to 10 years		111		-		1			-			112	7.27
	After 10 years		45,677		12,141		-			-			33,536	2.17
			45,788		12,141		1			-			33,648	2.17
Total mortgage-backed
	securities		1,568,429		12,141		31,661			6,119			1,581,830	2.66
Equity securities (without
Total investment securities
	available for sale	$	1,976,261	$	12,141	$	31,951		$	30,405		$	1,965,666	2.49

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. 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 noncredit 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 March 31, 2015 and December 31, 2014. The tables also include debt securities for which an OTTI was recognized and only the amount related to a credit loss was recognized in earnings. Unrealized losses for which OTTI had been recognized have been reduced by any subsequent recoveries in fair value.

	As of March 31, 2015
	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:
Puerto Rico government obligations	$	-	$	-	$	36,314	$	24,070	$	36,314	$	24,070
U.S. government agencies obligations		4,999		-		261,252		2,955		266,251		2,955
Mortgage-backed securities:
FNMA		311,339		1,195		99,932		1,087		411,271		2,282
FHLMC		110,475		352		21,419		208		131,894		560
Collateralized mortgage
obligations issued or
Other mortgage pass-through
trust certificates		-		-		31,716		11,296		31,716		11,296
Corporate bonds
	$	426,813	$	1,547	$	450,633	$	39,616	$	877,446	$	41,163
	As of December 31, 2014
	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:
Puerto Rico government obligations	$	-	$	-	$	42,335	$	17,990	$	42,335	$	17,990
U.S. government agencies obligations		46,436		74		257,996		6,222		304,432		6,296
Mortgage-backed securities:
FNMA		2,038		5		541,642		4,854		543,680		4,859
FHLMC		-		-		135,277		1,260		135,277		1,260
Collateralized mortgage
obligations issued or
Other mortgage pass-through
trust certificates		-		-		33,536		12,141		33,536		12,141
	$	48,474	$	79	$	1,010,786	$	42,467	$	1,059,260	$	42,546

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 an 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 otherthantemporary.

OTTI losses 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 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 theTreasury accounted for approximately96% of the total available-for-sale portfolio as of March 31, 2015 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation's assessment for OTTI was concentrated mainly on private label mortgage-backed securities (“MBS”) with an amortized cost of $43.0million for which credit losses are evaluated on a quarterly basis and on Puerto Rico Government obligations held as part of the available-for-sale securities portfolio. 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 on 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.

The Corporation recorded OTTI losses on available-for-sale debt securities as follows:

	Private Label MBS
	Quarter ended March 31,
	2015		2014
(In thousands)
Total other-than-temporary impairment losses	$	-	$	-
Credit loss on debt securities for which an OTTI was not previously recognized
Portion of other-than-temporary impairment losses
previously recognized in OCI		(156)		-
Net impairment losses recognized in earnings	$	(156)	$	-

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:
	Quarter ended March 31,
	2015		2014
(In thousands)
Credit losses at the beginning of the period	$	5,777	$	5,389
Additions:
Credit losses on debt securities for which an
OTTI was previously recognized		156		-
Ending balance of credit losses on debt securities held for
which a portion of an OTTI was recognized in OCI	$	5,933	$	5,389

For the first quarter of 2015, the $156thousandcredit related impairment loss is related to private label MBS, which are collateralized by fixed-rate mortgages on single-family residential properties in the United States. The interest rates on these private-label MBS are 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 were as follows:

	March 31, 2015		December 31, 2014
	Weighted		Weighted
	Average	Range	Average	Range
Discount rate	14.5%	14.5%	14.5%	14.5%
Prepayment rate	32%	18.04%-100.00%	32%	19.89%-100.00%
Projected Cumulative Loss Rate	7.3%	0.00%-80.00%	7.9%	0.64%-80.00%

As of March 31, 2015, the Corporation held approximately $65.5million of Puerto Rico government and agenciesbond obligations, mainly bonds of the Government Development Bank (“GDB”) and the Puerto Rico Building Authority, as part of its available-for-sale investment securities portfolio, which were reflected at their aggregate fair value of $41.5million. During the first quarter of 2015, the fair value of these obligation decreased by $6.1 million. In February and March 2014, Standard & Poor's (“S&P”), Moody's Investor Service (“Moody's”) and Fitch Ratings (“Fitch”) downgraded the Commonwealth of Puerto Rico general obligations bonds and other obligations of Puerto Rico instrumentalities to non-investment grade categories.In February and April 2015, Moody's and S&P downgraded the Puerto Rico's general obligation debt further and right now is ratedseven notches below investment grade.

The issuers of Puerto Rico government and agencies bonds held by the Corporation have not defaulted, and the contractual payments on these securities have been made as scheduled. The Corporation has the ability and intent to hold these securities until a recovery of the fair value occurs, and it is not more likely than not that the Corporation will be required to sell the securities prior to such recovery. It is uncertain how the financial markets may react to any potential further rating downgrade of Puerto Rico's debt. However, further deterioration in the fiscal situation could further adversely affect the value of Puerto Rico's government obligations. The Corporation will continue to closely monitor Puerto Rico's political and economic status and evaluate the portfolio for any declines in value thatcould be considered other-than-temporary.