INVESTMENT SECURITIES

3 Months Ended

Mar. 31, 2019

Debt and Equity Securities [Abstract]

INVESTMENT SECURITIES [Text Block]

NOTE 5 – INVESTMENT SECURITIES

Investment Securities Available for Sale

The amortized cost, non-credit loss component of OTTI recorded in OCI, gross unrealized gains and losses recorded in OCI, estimated fair value, and weighted-average yield of investment securities available for sale by contractual maturities as of March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019
	Amortized cost		Noncredit Loss Component of OTTI Recorded in OCI		Gross				Fair value
					Unrealized						Weighted-
					gains		losses				average yield %
(Dollars in thousands)
U.S. Treasury securities:
Due within one year	$	7,496	$	-	$	-	$	11	$	7,485	1.29
U.S. government-sponsored
agencies obligations:
Due within one year		191,521		-		-		1,074		190,447	1.28
After 1 to 5 years		174,953		-		327		1,457		173,823	2.00
After 5 to 10 years		195,357		-		719		166		195,910	2.95
After 10 years		32,976		-		-		217		32,759	2.70
Puerto Rico government
obligations:
After 5 to 10 years		4,000		-		125		-		4,125	5.12
After 10 years		4,248		-		-		1,393		2,855	6.97
United States and Puerto
Rico government
obligations		610,551		-		1,171		4,318		607,404	2.16
Mortgage-backed securities ("MBS"):
Freddie Mac ("FHLMC") certificates:
After 5 to 10 years		88,302		-		136		1,259		87,179	2.09
After 10 years		257,466		-		1,324		3,403		255,387	2.52
		345,768		-		1,460		4,662		342,566	2.41
Ginnie Mae ("GNMA") certificates:
Due within one year		4		-		-		-		4	3.93
After 1 to 5 years		156		-		2		-		158	3.67
After 5 to 10 years		57,953		-		311		248		58,016	2.88
After 10 years		114,682		-		3,565		438		117,809	3.93
		172,795		-		3,878		686		175,987	3.58
Fannie Mae ("FNMA") certificates:
Due within one year		14		-		1		-		15	4.03
After 1 to 5 years		19,793		-		253		64		19,982	2.79
After 5 to 10 years		156,855		-		466		2,214		155,107	2.12
After 10 years		528,284		-		4,373		6,745		525,912	2.67
		704,946		-		5,093		9,023		701,016	2.55
Collateralized mortgage obligations issued
or guaranteed by the FHLMC
and GNMA
After 1 to 5 years		5,871		-		1		9		5,863	3.14
After 10 years		58,183		-		371		11		58,543	3.22
		64,054		-		372		20		64,406	3.21
Other mortgage pass-through
trust certificates:
After 10 years		18,768		5,417		-		-		13,351	4.68
Total MBS		1,306,331		5,417		10,803		14,391		1,297,326	2.71
Other
After 1 to 5 years		500		-		-		-		500	2.96
Total investment securities
available for sale	$	1,917,382	$	5,417	$	11,974	$	18,709	$	1,905,230	2.54

		December 31, 2018
		Amortized cost		Noncredit Loss Component of OTTI Recorded in OCI		Gross				Fair value
						Unrealized						Weighted-
						gains		losses				average yield%
(Dollars in thousands)
U.S. Treasury securities:
	Due within one year	$	7,489	$	-	$	-	$	33	$	7,456	1.29
U.S. government-sponsored
agencies obligations:
	Due within one year		191,531		-		-		1,908		189,623	1.28
	After 1 to 5 years		184,851		-		203		2,249		182,805	2.07
	After 5 to 10 years		195,750		-		286		1,674		194,362	2.95
	After 10 years		34,627		-		-		217		34,410	2.68
Puerto Rico government
obligations:
	After 5 to 10 years		4,000		-		128		-		4,128	5.12
	After 10 years		4,185		-		-		1,361		2,824	6.97
United States and Puerto
Rico government
obligations			622,433		-		617		7,442		615,608	2.18
MBS:
FHLMC certificates:
	After 5 to 10 years		92,149		-		31		1,850		90,330	2.09
	After 10 years		265,624		-		523		6,699		259,448	2.52
			357,773		-		554		8,549		349,778	2.41
GNMA certificates:
	After 1 to 5 years		176		-		3		-		179	3.43
	After 5 to 10 years		61,604		-		408		503		61,509	2.88
	After 10 years		118,898		-		2,938		747		121,089	3.92
			180,678		-		3,349		1,250		182,777	3.56
FNMA certificates:
	Due within one year		119		-		2		-		121	2.20
	After 1 to 5 years		19,798		-		50		122		19,726	2.79
	After 5 to 10 years		165,067		-		2		3,822		161,247	2.13
	After 10 years		543,972		-		2,211		13,233		532,950	2.67
			728,956		-		2,265		17,177		714,044	2.55
Collateralized mortgage obligations issued
	or guaranteed by the
	FHLMC and GNMA:
	After 1 to 5 years		6,530		-		1		18		6,513	3.15
	After 10 years		59,020		-		474		60		59,434	3.22
			65,550		-		475		78		65,947	3.22
Other mortgage pass-through
trust certificates:
	After 10 years		19,340		5,426		-		-		13,914	4.89
Total MBS			1,352,297		5,426		6,643		27,054		1,326,460	2.71
Other
	After 1 to 5 years		500		-		-		-		500	2.96
Total investment securities
	available for sale	$	1,975,230	$	5,426	$	7,260	$	34,496	$	1,942,568	2.55

Maturities of MBS are based on the period of final contractual maturity. 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, 2019 and December 31, 2018. 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. For 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, 2019
	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	$	-	$	-	$	2,855	$	1,393	$	2,855	$	1,393
U.S. Treasury and U.S. government
agenciesʼ obligations		15,096		81		389,931		2,844		405,027		2,925
MBS:
FNMA		333		6		458,661		9,017		458,994		9,023
FHLMC		1,251		2		247,769		4,660		249,020		4,662
GNMA		-		-		55,106		686		55,106		686
Collateralized mortgage obligations
issued or guaranteed by
the FHLMC and GNMA		18,629		20		-		-		18,629		20
Other mortgage pass-through
trust certificates		-		-		13,351		5,417		13,351		5,417
	$	35,309	$	109	$	1,167,673	$	24,017	$	1,202,982	$	24,126
	As of December 31, 2018
	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	$	-	$	-	$	2,824	$	1,361	$	2,824	$	1,361
U.S. Treasury and U.S. government
agenciesʼ obligations		16,669		77		468,094		6,004		484,763		6,081
MBS:
FNMA		25,079		129		521,871		17,048		546,950		17,177
FHLMC		3,382		32		263,798		8,517		267,180		8,549
GNMA		3,364		15		57,535		1,235		60,899		1,250
Collateralized mortgage
obligations issued or
guaranteed by the FHLMC and GNMA		16,065		78		-		-		16,065		78
Other mortgage pass-through
trust certificates		-		-		13,914		5,426		13,914		5,426
	$	64,559	$	331	$	1,328,036	$	39,591	$	1,392,595	$	39,922

Assessment for OTTI

Debt securities issued by U.S. government agencies, U.S. government-sponsored entities (“GSEs”), and the U.S. Treasury accounted for approximately 99%of the total available-for-sale portfolio as of March 31, 2019, 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 private label MBS, and on Puerto Rico government debt securities, 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 for 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.

No OTTI losses on available-for-sale debt securities were recorded in the first quarter of 2019 or first quarter of 2018.

The following tables summarize the roll-forward of credit losses on debt securities held by the Corporation for which a portion of an OTTI was also recognized in OCI:
	Cumulative OTTI credit losses recognized in earnings on securities still held
			Credit impairments
	December 31,		recognized in earnings on		March 31,
	2018		securities that have been		2019
	Balance		previously impaired		Balance
(In thousands)
Available-for-sale securities
Private label MBS	$	6,842	$	-	$	6,842

	Cumulative OTTI credit losses recognized in earnings on securities still held
			Credit impairments
	December 31,		recognized in earnings on		March 31,
	2017		securities that have been		2018
	Balance		previously impaired		Balance
(In thousands)
Available for sale securities
Private label MBS	$	6,792	$	-	$	6,792

As of March 31, 2019, the Corporation’s available-for-sale investment securities portfolio included bonds of the Puerto Rico Housing Finance Authority (“PRHFA”) at an amortized cost of $8.2 million (fair value - $7.0 million). Approximately $4.2 million (fair value - $2.9 million) of these bonds consist of a residential pass-through mortgage-backed security issued by the PRHFA that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico government in 2010. This bond was structured as a zero-coupon bond for the first ten years (up to July 2019). Considering the absence of a default on the mortgage backed security and the insurance protection provided by the PRHFA to the underlying collateral, management concluded that these obligations were not other-than-temporarily impaired as of March 31, 2019.

The Corporation performed anOTTI assessment on its private label MBS, which 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 on the underlying collateral.The underlying mortgages are fixed-rate, single-family loans with original FICO scores (over 700) and moderate loan-to-value ratios (under 80%), as well as moderate delinquency levels.

Based on the expected cash flows, 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, if any, is reflected in earnings. Significant assumptions in the valuation of the private label MBS were as follows:

	As of		As of
	March 31, 2019		December 31, 2018
	Weighted		Weighted
	Average	Range	Average	Range
Discount rate	14.1%	14.1%	14.5%	14.5%
Prepayment rate	9.2%	3.3% - 17.0%	11.4%	3.3% - 20.9%
Projected Cumulative Loss Rate	3%	0% - 6.6%	3%	0% - 6.8%

Investments Held to Maturity

The amortized cost, gross unrecognized gains and losses, estimated fair value, weighted-average yield and contractual maturities of investment securities held to maturity as of March 31, 2019 and December 31, 2018 were as follows:

		March 31, 2019
		Amortized cost						Fair value
				Gross Unrecognized
										Weighted-
				gains		losses				average yield%
Puerto Rico Municipal Bonds:
	After 1 to 5 years	$	5,958	$	-	$	434	$	5,524	5.17
	After 5 to 10 years		53,016		-		5,693		47,323	6.24
	After 10 years		85,699		-		14,640		71,059	6.21
Total investment securities
	held to maturity	$	144,673	$	-	$	20,767	$	123,906	6.18

		December 31, 2018
		Amortized cost						Fair value
				Gross Unrecognized
										Weighted
				gains		losses				average-yield%
Puerto Rico Municipal Bonds:
	After 1 to 5 years	$	6,100	$	-	$	435	$	5,665	4.79
	After 5 to 10 years		53,016		-		5,360		47,656	6.00
	After 10 years		85,699		-		13,362		72,337	5.86
Total investment securities
	held to maturity	$	144,815	$	-	$	19,157	$	125,658	5.86

The following tables show the Corporation’s held-to-maturity investments’ fair value and gross unrecognized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrecognized loss position, as of March 31, 2019 and December 31, 2018:

	As of March 31, 2019
	Less than 12 months				12 months or more				Total
			Unrecognized				Unrecognized				Unrecognized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
		(In thousands)
Debt securities:
Puerto Rico Municipal Bonds	$	-	$	-	$	123,906	$	20,767	$	123,906	$	20,767
	As of December 31, 2018
	Less than 12 months				12 months or more				Total
			Unrecognized				Unrecognized				Unrecognized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
		(In thousands)
Debt securities:
Puerto Rico Municipal Bonds	$	-	$	-	$	125,658	$	19,157	$	125,658	$	19,157

The Corporation determines the fair market value of Puerto Rico Municipal Bonds based on a discounted cash flow analysis using risk-adjusteddiscount rates. A security with similar characteristics traded in the open market is used as a proxy for each municipal bond. Then, thecash flow is discounted at the average spread over the discount curve exhibited by the proxy security at the end of each quarter, plus any corresponding discount rate adjustments to reflect recent transactions or market yield expectations for these type of transactions.

All of the Puerto Rico Municipal Bonds were performing and current as to scheduled contractual payments as of March 31, 2019. Approximately 70% of the held-to-maturity municipal bonds were issued by three of the largest municipalities in Puerto Rico. The vastmajority of revenues of these three municipalities is independent of the Puerto Rico central government. These obligations typically are notissued in bearer form, nor are they registered with the SEC, and are not rated by external credit agencies. In most cases, these bonds havepriority over the payment of operating costs and expenses of the municipality, which are required by law to levy special property taxes in suchamounts as are required for the payment of all of their respective general obligation bonds and loans. The Corporation performs periodic credit quality reviews on these issuers. Based on the quarterly analysis performed, management concluded that no individual debt security held to maturity was other-than-temporarily impaired as of March 31, 2019.  

The PROMESA oversight board has not designated any ofPuerto Rico’s 78 municipalities as covered entities under PROMESA. However, while the latest fiscal plan certified by the PROMESA oversight board did not contemplate a restructuring of the debt of Puerto Rico’s municipalities, the plan did call forthe gradual elimination of budgetary subsidies provided to municipalities by the central government. Furthermore, municipalities are also likely to be affected by thenegative economic and other effects resulting from expense, revenue or cash management measures taken by thePuerto Rico government to address its fiscal and liquidity shortfalls, or measures included in fiscal plans of other government entities, such asthe fiscal plans of the Government Development Bank for Puerto Rico (“GDB”) and the Puerto Rico Electric Power Authority (“PREPA”). Given the uncertain effect that the negative fiscal situation of the Puerto Rico central government and the measures taken, or to be taken, by othergovernment entities may have on municipalities, the Corporation cannot be certain whether future impairment charges relating tothese securitieswill be required.

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 are classified as money market investments in the consolidated statements of financial condition.  As of March 31, 2019 and December 31, 2018, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents.