INVESTMENT SECURITIES

3 Months Ended

Mar. 31, 2016

NOTE 4 – 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, and weighted average yield of investment securities available for sale by contractual maturities as of March 31, 2016 and December 31, 2015 were as follows:

		March 31, 2016
		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:
	After 1 to 5 years	$	7,525	$	-	$	-		$	7		$	7,518	0.57

Obligations of U.S.
government-sponsored
agencies:
	Due within one year		14,626		-		10			-			14,636	0.68
	After 1 to 5 years		385,103		-		2,148			-			387,251	1.32
	After 5 to 10 years		51,089		-		1,131			-			52,220	2.42
	After 10 years		13,930		-		14			20			13,924	0.84

Puerto Rico Government
obligations:
	After 1 to 5 years		21,423		11,501		-			-			9,922	4.38
	After 5 to 10 years		855		-		1			-			856	5.20
	After 10 years		21,141		3,962		147			1,656			15,670	5.38

United States and Puerto
Rico Government
obligations			515,692		15,463		3,451			1,683			501,997	1.69

Other (1)

Mortgage-backed securities:
FHLMC certificates:
	After 5 to 10 years		321		-		31			-			352	4.95
	After 10 years		277,487		-		4,063			5			281,545	2.15
			277,808		-		4,094			5			281,897	2.15

GNMA certificates:
	Due within one year		1		-		-			-			1	1.78
	After 1 to 5 years		100		-		4			-			104	4.29
	After 5 to 10 years		112,732		-		2,839			-			115,571	3.07
	After 10 years		157,658		-		13,095			6			170,747	4.38
			270,491		-		15,938			6			286,423	3.83
FNMA certificates:
	After 1 to 5 years		30,223		-		63			21			30,265	1.50
	After 5 to 10 years		21,429		-		835			-			22,264	2.73
	After 10 years		744,660		-		11,641			-			756,301	2.35
			796,312		-		12,539			21			808,830	2.33
Collateralized mortgage
	obligations issued or
	guaranteed by the FHLMC:


Other mortgage pass-through
trust certificates:
	After 5 to 10 years		89		-		-			-			89	7.26
	After 10 years		32,962		8,457		-			-			24,505	2.34
			33,051		8,457		-			-			24,594	2.34
Total mortgage-backed
securities			1,377,662		8,457		32,571			32			1,401,744	2.59

Other
	After 1 to 5 years		100		-		-			-			100	1.50


Equity securities ⁽¹⁾			408		-		6			-			414	-

Total investment securities
	available for sale	$	1,893,862	$	23,920	$	36,028		$	1,715		$	1,904,255	2.34

__________
(1)	Equity securities consisted of investment in a Community Reinvestment Act Qualified Investment Fund.

		December 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:
	After 1 to 5 years	$	7,530	$	-	$	-		$	33		$	7,497	0.57

Obligations of U.S.
government-sponsored
agencies:
	Due within one year		14,624		-		4			10			14,618	0.68
	After 1 to 5 years		384,323		-		174			4,305			380,192	1.32
	After 5 to 10 years		58,150		-		343			242			58,251	2.34

Puerto Rico Government
obligations:
	After 1 to 5 years		25,663		14,662		-			-			11,001	4.38
	After 5 to 10 years		855		-		-			-			855	5.20
	After 10 years		23,162		5,255		134			1,680			16,361	5.40

United States and Puerto
Rico Government
obligations			514,307		19,917		655			6,270			488,775	1.75

Mortgage-backed securities:
FHLMC certificates:
	After 5 to 10 years		336		-		31			-			367	4.95
	After 10 years		287,711		-		1,073			1,706			287,078	2.14
			288,047		-		1,104			1,706			287,445	2.15

GNMA certificates:
	Due within one year		2		-		-			-			2	1.70
	After 1 to 5 years		109		-		5			-			114	4.26
	After 5 to 10 years		120,298		-		3,182			-			123,480	3.07
	After 10 years		165,175		-		12,822			20			177,977	4.38
			285,584		-		16,009			20			301,573	3.83
FNMA certificates:
	After 1 to 5 years		2,552		-		74			-			2,626	3.32
	After 5 to 10 years		21,557		-		433			233			21,757	2.73
	After 10 years		759,247		-		5,628			6,063			758,812	2.34
			783,356		-		6,135			6,296			783,195	2.35
Collateralized mortgage
	obligations issued or
	guaranteed by the FHLMC:


Other mortgage pass-through
trust certificates:
	After 5 to 10 years		92		-		1			-			93	7.26
	After 10 years		34,905		9,691		-			-			25,214	2.26
			34,997		9,691		1			-			25,307	2.26
Total mortgage-backed
	securities		1,391,984		9,691		23,249			8,022			1,397,520	2.61



Other
After 1 to 5 years			100		-		-			-			100	1.50

Total investment securities
	available for sale	$	1,906,391	$	29,608	$	23,904		$	14,292		$	1,886,395	2.38

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 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 March 31, 2016 and December 31, 2015. 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 was recognized, the related credit loss was charged against the amortized cost basis of the debt security.

	As of March 31, 2016
	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	$	-	$	-	$	21,243	$	17,119	$	21,243	$	17,119
U.S. Treasury and U.S. government agencies
obligations		17,764		27		-		-		17,764		27
Mortgage-backed securities:
FNMA		28,015		21		-		-		28,015		21
FHLMC		-		-		922		5		922		5
GNMA		-		-		1,055		6		1,055		6
Collateralized mortgage
obligations issued or
Other mortgage pass-through
trust certificates		-		-		24,505		8,457		24,505		8,457
Corporate bonds
Equity securities		1		-		-		-		1		-
	$	45,780	$	48	$	47,725	$	25,587	$	93,505	$	25,635


	As of December 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	$	-	$	-	$	23,008	$	21,597	$	23,008	$	21,597
U.S. Treasury and U.S. government agencies
obligations		198,243		929		210,504		3,661		408,747		4,590
Mortgage-backed securities:
FNMA		437,305		4,516		88,013		1,780		525,318		6,296
FHLMC		141,890		1,338		19,306		368		161,196		1,706
GNMA		1,047		20		-		-		1,047		20
Collateralized mortgage
obligations issued or
Other mortgage pass-through
trust certificates		-		-		25,214		9,691		25,214		9,691
	$	778,485	$	6,803	$	366,045	$	37,097	$	1,144,530	$	43,900

Assessment for OTTI

Debt securities issued by U.S. government agencies, U.S. government-sponsored entities and the U.S. Treasury accounted for approximately 97% of the total available-for-sale portfolio as of March 31, 2016 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation's OTTI assessment was concentrated mainly on Puerto Rico Government debt securities, with an amortized cost of $43.4 million, and on private label mortgage-backed securities (“MBS”) with an amortized cost of $33.0 million for which credit losses are evaluated 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;
Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the financial condition of the issuer, credit ratings, the failure of the issuer to make scheduled principal or interest payments, recent legislation and government actions affecting the issuer's industry and actions taken by the issuer to deal with the present economic climate;
Changes in the near term prospects of the underlying collateral of a security, if any, such as changes in default rates, loss severity given default, and significant changes in prepayment assumptions; and
The level of cash flows generated from the underlying collateral, if any, supporting the principal and interest payments of the debt securities.

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


	Quarter ended March 31,
	2016		2015
(In thousands)
Total other-than-temporary impairment losses	$	(1,845)	$	-
losses recognized in OCI
Portion of other-than-temporary impairment recognized in OCI		(4,842)		(156)
Net impairment losses recognized in earnings ⁽¹⁾⁽²⁾	$	(6,687)	$	(156)
_________
(1) For the quarter ended March 31, 2016, approximately $6.3 million of the credit impairment recognized in earnings consisted of credit losses on Puerto Rico Government debt securities and $0.4 million was associated with credit losses on private label MBS.

(2) The $0.2 million credit impairment recognized in earnings in the first quarter of 2015 was associated with private label MBS.

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

	Cumulative OTTI credit losses recognized in earnings on securities still held
			Credit impairments
	December 31,		recognized in earnings on		March 31,
	2015		securities that have been		2016
	Balance		previously impaired		Balance
(In thousands)
Available-for-sale securities
Puerto Rico Government obligations	$	15,889	$	6,300	$	22,189
Private label MBS		6,405		387		6,792
Total OTTI credit losses for available-for-sale
debt securities	$	22,294	$	6,687	$	28,981


	Cumulative OTTI credit losses recognized in earnings on securities still held
			Credit impairments
	December 31,		recognized in earnings on		March 31,
	2014		securities that have been		2015
	Balance		previously impaired		Balance
(In thousands)
Available for sale securities
Private label MBS	$	5,777	$	156	$	5,933

During the first quarter of 2016, the Corporation recorded a $6.3 million OTTI charge on three Puerto Rico Government debt securities held by the Corporation as part of its available-for-sale securities portfolio, specifically bonds of the GDB and the Puerto Rico Public Buildings Authority. This is the third OTTI charge on these securities recorded since June 30, 2015, as OTTI charges of $12.9 million and $3.0 million were booked in the second and fourth quarters of 2015, respectively.

During the first quarter of 2016, in consideration of the latest available information about the Puerto Rico Government's financial condition, including the enactment of a debt moratorium law and the declaration of a state of emergency at the GDB as well as issuance of exchange proposals with the Commonwealth's creditors related to its outstanding bond obligations, the Corporation applied a discounted cash flow analysis to its Puerto Rico Government debt securities in order to calculate the cash flows expected to be collected and to determine if any portion of the decline in market value of these securities was considered a credit-related other-than-temporary impairment. The analysis derives an estimate of value based on the present value of risk-adjusted cash flows of the underlying securities and included the following components:

The contractual future cash flows of the bonds are projected based on the key terms as set forth in the official statements for each security. Such key terms include, among others, the interest rate, amortization schedule, if any, and maturity date.
The risk-adjusted cash flows are calculated based on a probability of default analysis and recovery rate assumptions, including the weighting of different scenarios of ultimate recovery, considering the credit rating of each security. Constant monthly default rates are assumed throughout the life of the bonds, which considers the respective security's credit rating as of the date of the analysis.
The adjusted future cash flows are then discounted at the original effective yield of each investment based on the purchase price and expected risk-adjusted future cash flows as of the purchase date of each investment.

The discounted risk-adjusted cash flow analysis for the three Puerto Rico Government bonds mentioned above assumed a default probability of 100%, thus reflecting that it is more likely than not that these three bonds will default during their remaining terms. Based on this analysis, the Corporation determined that it is unlikely to receive all the remaining contractual interest and principal amounts when due on these bonds and recorded, in the first quarter of 2016, other-than-temporary credit-related impairment charges amounting to $6.3 million, assuming recovery rates ranging from 35% to 80% (weighted average of 61%).

The Corporation does not have the intention to sell these securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs; as such, only the credit loss component was reflected in earnings. Given the significant and prolonged uncertainty of a debt restructuring process, the Corporation cannot be certain that future impairment charges will not be required against these securities.

In addition, during the first quarter of 2016, the Corporation recorded a $0.4 million credit-related impairment loss associated with 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 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 were as follows:

	March 31, 2016		December 31, 2015
	Weighted		Weighted
	Average	Range	Average	Range

Discount rate	14.5%	14.5%	14.5%	14.5%
Prepayment rate	30%	21.45% - 100.00%	28%	15.92% - 100.00%
Projected Cumulative Loss Rate	7%	0.50% - 80.00%	7%	0.18% - 80.00%