INVESTMENT SECURITIES

3 Months Ended

Mar. 31, 2020

Debt and Equity Securities [Abstract]

INVESTMENT SECURITIES [Text Block]

NOTE 5 – INVESTMENT SECURITIES

Investment Securities Available for Sale

The amortized cost, gross unrealized gains and losses recorded in OCI, allowance for credit losses, estimated fair value, and weighted-average yield of investment securities available for sale by contractual maturities as of March 31, 2020 were as follows:

		March 31, 2020
		Amortized cost		Gross					Allowance	Fair value
				Unrealized					for Credit			Weighted-
				gains		losses			Losses			average yield %
(Dollars in thousands)
U.S. Treasury securities:
Due within one year		$	7,483	$	99	$	-	$	-	$	7,582	1.65
U.S. government-sponsored
agencies' obligations:
Due within one year			90,002		510		-		-		90,512	1.56
After 1 to 5 years			118,454		1,488		-		-		119,942	2.04
After 5 to 10 years			112,477		978		12		-		113,443	2.06
After 10 years			23,306		2		64		-		23,244	0.65
Puerto Rico government
obligations:
After 5 to 10 years			4,000		361		-		-		4,361	5.12
After 10 years (1)			4,113		-		1,144		-		2,969	6.97
United States and Puerto
Rico government
obligations			359,835		3,438		1,220		-		362,053	1.92
MBS:
Freddie Mac ("FHLMC") certificates:
	Due within one year		100		8		-		-		108	4.87
After 5 to 10 years			76,460		2,426		-		-		78,886	2.15
After 10 years			295,944		10,832		2		-		306,774	2.49
			372,504		13,266		2		-		385,768	2.42
Ginnie Mae ("GNMA") certificates:
After 1 to 5 years			5,808		141		-		-		5,949	3.23
After 5 to 10 years			37,206		970		-		-		38,176	2.74
After 10 years			303,796		15,120		2		-		318,914	3.12
			346,810		16,231		2		-		363,039	3.08
Fannie Mae ("FNMA") certificates:
After 1 to 5 years			19,773		750		-		-		20,523	2.79
After 5 to 10 years			133,479		5,218		-		-		138,697	2.14
After 10 years			540,107		23,238		-		-		563,345	2.61
			693,359		29,206		-		-		722,565	2.52
Collateralized mortgage obligations issued
or guaranteed by the FHLMC, FNMA
and GNMA
After 1 to 5 years			606		-		3		-		603	1.66
After 10 years			86,706		1,290		646		-		87,350	2.50
			87,312		1,290		649		-		87,953	2.49
Private label
After 10 years			15,357		-		4,689		368		10,300	3.45
Total MBS			1,515,342		59,993		5,342		368		1,569,625	2.63
Other
After 1 to 5 years			500		-		-		-		500	2.95
Total investment securities
available for sale		$	1,875,677	$	63,431	$	6,562	$	368	$	1,932,178	2.50
__________

Consist of a residential pass-through MBS issued by the PRHFA that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico government in 2010.The amortized cost, 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 December 31, 2019 were as follows:

		December 31, 2019
		Amortized cost		Gross				Fair value
				Unrealized						Weighted-
				gains		losses				average yield%
(Dollars in thousands)
U.S. Treasury securities:
	After 1 to 5 years	$	7,478	$	1	$	-	$	7,479	1.65
U.S. government-sponsored
agencies' obligations:
	Due within one year		93,299		103		106		93,296	1.67
	After 1 to 5 years		142,513		676		52		143,137	2.12
	After 5 to 10 years		63,764		165		150		63,779	2.33
	After 10 years		24,624		-		116		24,508	2.00
Puerto Rico government
obligations:
	After 5 to 10 years		4,000		348		-		4,348	5.12
	After 10 years (1)		4,166		-		1,192		2,974	6.97
United States and Puerto
Rico government
obligations			339,844		1,293		1,616		339,521	2.11
MBS:
FHLMC certificates:
	After 5 to 10 years		81,418		589		228		81,779	2.16
	After 10 years		424,316		3,873		758		427,431	2.50
			505,734		4,462		986		509,210	2.44
GNMA certificates:
	After 1 to 5 years		4,357		45		-		4,402	3.26
	After 5 to 10 years		42,303		607		-		42,910	2.77
	After 10 years		258,944		7,126		500		265,570	3.03
			305,604		7,778		500		312,882	3.00
FNMA certificates:
	After 1 to 5 years		19,779		415		3		20,191	2.79
	After 5 to 10 years		140,599		1,257		641		141,215	2.14
	After 10 years		700,213		9,006		1,208		708,011	2.58
			860,591		10,678		1,852		869,417	2.51
Collateralized mortgage obligations issued
	or guaranteed by the FHLMC,
	FNMA and GNMA:
	After 1 to 5 years		608		-		1		607	2.43
	After 10 years		80,130		362		220		80,272	2.76
			80,738		362		221		80,879	2.75
Private label
	After 10 years		15,997		-		4,881		11,116	3.90
Total MBS			1,768,664		23,280		8,440		1,783,504	2.60
Other
	After 1 to 5 years		500		-		-		500	2.95
Total investment securities
	available for sale	$	2,109,008	$	24,573	$	10,056	$	2,123,525	2.52

Consist of a residential pass-through MBS issued by the PRHFA that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico government in 2010.

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 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, 2020 and December 31, 2019. The tables also include debt securities for which an ACL was recorded as of March 31, 2020 or a credit loss was charged against the amortized cost basis of the debt security prior to the adoption of ASC 326 on January 1, 2020.

	As of March 31, 2020
	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	$	-	$	-	$	2,969	$	1,144	$	2,969	$	1,144
U.S. Treasury and U.S. government
agenciesʼ obligations		3,213		1		22,280		75		25,493		76
MBS:
FHLMC		-		-		728		2		728		2
GNMA		-		-		609		2		609		2
Collateralized mortgage obligations
issued or guaranteed by
the FHLMC, FNMA and GNMA		40,571		649		-		-		40,571		649
Private label MBS		-		-		10,300		4,689		10,300		4,689
	$	43,784	$	650	$	36,886	$	5,912	$	80,670	$	6,562
	As of December 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	$	-	$	-	$	2,974	$	1,192	$	2,974	$	1,192
U.S. Treasury and U.S. government
agenciesʼ obligations		45,073		172		99,764		252		144,837		424
MBS:
FNMA		58,668		499		173,708		1,353		232,376		1,852
FHLMC		74,134		270		63,864		716		137,998		986
GNMA		79,145		472		7,203		28		86,348		500
Collateralized mortgage
obligations issued or guaranteed
by the FHLMC, FNMA and GNMA		21,873		221		-		-		21,873		221
Private label MBS		-		-		11,116		4,881		11,116		4,881
	$	278,893	$	1,634	$	358,629	$	8,422	$	637,522	$	10,056

During the first quarter of 2020, the Corporation sold approximately $275.6 million of U.S. agencies MBS and recognized a gain of approximately $8.2 million. These sales have settlement dates in April, thus, as of March 31, 2020, the decrease in the investment securities portfolio was offset by a corresponding increase in accounts receivable on unsettled investment sales included as part of other assets in the consolidated statements of financial condition.

Assessment for Credit Losses

Debt securities issued by U.S. government agencies, U.S. GSEs, and the U.S. Treasury, including notes and MBS, accounted for approximately 99% of the total available-for-sale portfolio as of March 31, 2020, and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Corporation does not have the intent to sell these U.S. agencies debt securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Corporation does not consider impairments on these securities to be credit related as of March 31, 2020. The Corporation’s credit losses 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:

 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.

The Corporation’s available-for-sale MBS portfolio includes private label MBS with a fair value of $10.3 million, which had unrealized losses of approximately $4.7 million at March 31, 2020. 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 collateral are fixed-rate, single-family residential mortgage loans in the United State with original FICO scores over 700 and moderate loan-to-value ratios (under 80%), as well as moderate delinquency levels. The Corporation does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before anticipated recovery. The Corporation determine the ACL for private label MBS based on a risk-adjusted discounted cash flow methodology that considers the structure and terms of the instruments. The Corporation utilizes PDs and LGDs that consider, among other things, historical payment performance, loan-to value attributes and relevant current and forward-looking macroeconomic variables, such as regional unemployment rates and the housing price index. On this approach, all future cash flows (interest and principal) from the underlying collateral loans, adjusted by prepayments and the PDs and LGDs derived from the above-described methodology are discounted at the effective interest rate as of the reporting date. Significant assumptions in the valuation of the private label MBS were as follows:

	As of			As of
	March 31, 2020			December 31, 2019
	Weighted	Range		Weighted	Range
	Average	Minimum	Maximum	Average	Minimum	Maximum
Discount rate	12.7%	12.7%	12.7%	13.7%	13.7%	13.7%
Prepayment rate	7.9%	6.8%	10.3%	7.9%	6.8%	10.3%
Projected Cumulative Loss Rate	8.9%	2.6%	20.7%	2.8%	0.0%	7.4%

The Corporation evaluates if a credit loss exists, primarily by monitoring adverse variances in the present value of expected cash flows. During the first quarter of 2020, the Corporation established a $0.4 million ACL for these private label MBS, based on a decline in the present value of expected cash flows taking into consideration the effect of the deteriorating forecasted economic conditions due to the COVID-19 pandemic.

As of March 31, 2020, the Corporation’s available-for-sale investment securities portfolio also included bonds of the PRHFA with a fair value of $7.3 million, which had unrealized net losses of approximately $0.8 million. These bonds include a residential pass-through MBS issued by the PRHFA that is collateralized by certain second mortgages with a fair value of $3.0 million which had an unrealized loss of $1.1 million as of March 31, 2020. The underlying second mortgage loans were originated under a program launched by the Puerto Rico government in 2010. This residential pass-through MBS was structured as a zero-coupon bond for the first ten years (up to July 2019). The underlying source of payment of this residential pass-through MBS is second mortgage loans in Puerto Rico. PRHFA not the Puerto Rico government, provides a guarantee in the event of default and subsequent foreclosure of the second mortgage loans underlying properties. Based on the quarterly analysis performed, management concluded that the impairment on this residential pass-through MBS as of March 31, 2020 was not credit related based primarily on payment performance history and the insurance protection provided by the PRHFA to the underlying collateral. In the event that the second mortgage loans default and the collateral is insufficient to satisfy the outstanding balance of this residential pass-through MBS, PRHFA’s ability to honor its insurance will depend on, among other factors, the financial condition of PRHFA at the time such obligation become due and payable. A deterioration of the Puerto Rico economy or fiscal health of the PRHFA could further impact the value of these securities, resulting in losses to the Corporation. The Corporation does not have the intent to sell this security and it is likely that it will not be required to sell the security before its anticipated recovery.

The following table presents a rollforward by major security type for the quarter ended March 31, 2020 of the ACL on debt securities available-for-sale at period end:

	Private label
	MBS
(In thousands)
Beginning Balance	$	-
Impact of adopting ASC 326		-
Addition for securities for which previous expected credit losses were recognized (provision for credit losses)		368
	$	368

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

Investments Held to Maturity

The amortized cost, gross unrecognized gains and losses, estimated fair value, allowance for credit losses, weighted-average yield and contractual maturities of investment securities held to maturity as of March 31, 2020 and December 31, 2019 were as follows:

		March 31, 2020
		Amortized cost						Fair value
				Gross Unrecognized						Allowance for Credit Losses
												Weighted - average yield %
(Dollars in thousands)				gains		losses
Puerto Rico Municipal Bonds:
	Due within one year	$	321	$	-	$	3	$	318	$	99	5.65
	After 1 to 5 years		8,122		-		675		7,447		78	4.99
	After 5 to 10 years		56,511		-		8,118		48,393		2,999	5.42
	After 10 years		73,580		-		18,576		55,004		6,092	5.25
Total investment securities
	held to maturity	$	138,534	$	-	$	27,372	$	111,162	$	9,268	5.31

		December 31, 2019
		Amortized cost						Fair value
				Gross Unrecognized
										Weighted - average yield %
(Dollars in thousands)				gains		losses
Puerto Rico Municipal Bonds:
	Due within one year	$	321	$	-	$	6	$	315	5.84
	After 1 to 5 years		8,264		-		736		7,528	5.18
	After 5 to 10 years		56,511		-		8,646		47,865	5.77
	After 10 years		73,579		-		18,913		54,666	5.44
Total investment securities
	held to maturity	$	138,675	$	-	$	28,301	$	110,374	5.56

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, 2020 and December 31, 2019, including debt securities for which an ACL was recorded as of March 31, 2020.

	As of March 31, 2020
	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	$	-	$	-	$	111,162	$	27,372	$	111,162	$	27,372
	As of December 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	$	-	$	-	$	110,374	$	28,301	$	110,374	$	28,301

The Corporation determines the ACL of Puerto Rico Municipal Bonds based on the product of a cumulative PD and LGD, and the amortized cost basis of the bonds over their remaining expected life as described in Note 1 – Basis of Presentation and Significant Accounting Policies above.

The Corporation performs periodic credit quality reviews on these issuers. All of the Puerto Rico Municipal Bonds were current as to scheduled contractual payments as of March 31, 2020. The Puerto Rico municipal bonds had an allowance for credit losses of $9.3 million as of March 31, 2020, of which $1.1 million was recorded as a provision for credit losses in the first quarter of 2020. The increase in the ACL during the first quarter of 2020 primarily reflects the effect of the deteriorating economic outlook due to the COVID-19 pandemic on the macroeconomic variables used for the determination of the PD and LGD used in the model.

The following table presents the activity in the ACL for debt securities held-to-maturity by major security type for the quarter ended March 31, 2020:

	Puerto Rico
	Municipal Bonds
(In thousands)
Beginning Balance	$	-
Impact of adopting ASC 326		8,134
Addition for securities for which no previous expected
credit losses were recognized (provision for credit losses)		1,134
	$	9,268

During the second quarter of 2019, the oversight board established by PROMESA announced the designation of Puerto Rico’s 78 municipalities as covered instrumentalities under PROMESA. Meanwhile, the latest fiscal plan certified by the PROMESA oversight board did not contemplate a restructuring of the debt of Puerto Rico’s municipalities, but the plan did call for the gradual elimination of budgetary subsidies provided to municipalities by the central government. Furthermore, municipalities are also likely to be affected by the negative economic and other effects resulting from expense, revenue or cash management measures taken by the Puerto Rico government to address its fiscal problems, or measures included in fiscal plans of other government entities, such as the fiscal plans of the Government Development Bank for Puerto Rico (“GDB”) and the Puerto Rico Electric Power Authority (“PREPA”), and, more recently, by the effect of the COVID-19 pandemic on the Puerto Rico and global economy. Given the uncertain effect that the negative fiscal situation of the Puerto Rico central government, the COVID-19 pandemic, and the measures taken, or to be taken, by other government entities in response to the COVID-19 pandemic may have on municipalities, the Corporation cannot be certain whether future charges to the ACL on these securities will 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, 2020 and December 31, 2019, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents.

Credit Quality Indicators:

As mentioned in Note 1 – Basis of Presentation and Significant Accounting Policies above, the held-to-maturity investment securities portfolio consisted of financing arrangements with Puerto Rico municipalities issued in bond form, which are accounted for as securities, but are underwritten as loans with features that are typically found in commercial loans. Accordingly, the Corporation monitors the credit quality of Puerto Rico municipal bonds held-to-maturity through the use of internal credit-risk ratings, generally updated on a quarterly basis. The Corporation considers a debt security held-to-maturity as a criticized asset if its risk rating is Special Mention, Substandard, Doubtful or Loss. Puerto Rico municipal bonds that do not meet the criteria for classification as criticized assets are considered to be pass-rated securities. The assets categories are defined below:

Pass – Assets classified as pass have a well-defined primary source of repayment, with no apparent risk, strong financial position, minimal operating risk, profitability, liquidity and strong capitalization.

Special Mention – A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Corporation’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Corporation to sufficient risk to warrant adverse classification.

Substandard – A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Doubtful classifications have all of the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently known facts, conditions and values. A Doubtful classification may be appropriate in cases where significant risk exposures are perceived, but loss cannot be determined because of specific reasonable pending factors, which may strengthen the credit in the near term.

Loss – Assets classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset even though partial recovery may occur in the future. There is little or no prospect for near term improvement and no realistic strengthening action of significance pending.

The Corporation periodically reviews its asset classifications to evaluate if they are properly classified, and to determine impairment, if any. The frequency of these reviews will depend on the amount of the aggregate outstanding debt, and the risk rating classification of the obligor.

The Corporation has a Loan Review Group that reports directly to the Corporation’s Risk Management Committee and administratively to the Chief Risk Officer, which performs annual comprehensive credit process reviews of the Bank’s commercial loan portfolios, including the above-mentioned Puerto Rico municipal bonds accounted for as held-to-maturity securities. This group evaluates the credit risk profile of portfolios, including the assessment of the risk rating representative of the current credit quality of the assets, and the evaluation of collateral documentation, if applicable. The monitoring performed by this group contributes to the assessment of compliance with credit policies and underwriting standards, the determination of the current level of credit risk, the evaluation of the effectiveness of the credit management process and the identification of any deficiency that may arise in the credit-granting process. Based on its findings, the Loan Review Group recommends corrective actions, if necessary, that help in maintaining a sound credit process. The Loan Review Group reports the results of the credit process reviews to the Risk Management Committee of the Corporation’s Board of Directors.

The following table summarizes the amortized cost of debt securities held-to-maturity as of March 31, 2020 and December 31, 2019 aggregated by credit quality indicator:

	Held to Maturity
	Puerto Rico Municipal Bonds
	March 31,		December 31
(In thousands)	2020		2019
Risk Ratings:
Pass	$	138,534	$	138,675
Criticized:
Special Mention		-		-
Substandard		-		-
Doubtful		-		-
Loss		-		-
Total	$	138,534	$	138,675

No held-to-maturity debt securities were on nonaccrual status, 90 days past due and still accruing, or past due as of March 31, 2020 and December 31, 2019. A security is considered to be past due once it is 30 days contractually past due under the terms of the agreement.