INVESTMENT SECURITIES

3 Months Ended

Mar. 31, 2022

Investments, Debt and Equity Securities [Abstract]

INVESTMENT SECURITIES [Text Block]

NOTE 2 – INVESTMENT SECURITIES

Investment Securities Available for Sale

The amortized cost, gross unrealized gains and losses recorded in accumulated other comprehensive loss, ACL, estimated fair value, and weighted-average yield of investment securities available for sale by contractual maturities as of March 31, 2022 were as follows:

		March 31, 2022
		Amortized cost		Gross						Fair value
				Unrealized								Weighted-
				Gains		Losses			ACL			average yield %
(Dollars in thousands)
U.S. Treasury securities:
	After 1 to 5 years	$	149,462	$	-	$	6,713	$	-	$	142,749	0.68
U.S. government-sponsored agencies' obligations:
	After 1 to 5 years		2,340,512		28		122,189		-		2,218,351	0.77
	After 5 to 10 years		239,860		62		19,049		-		220,873	0.96
	After 10 years		14,775		202		-		-		14,977	0.88
Puerto Rico government obligations:
	After 10 years (1)		3,498		-		463		308		2,727	-
United States and Puerto Rico government obligations			2,748,107		292		148,414		308		2,599,677	0.78
Mortgage-backed securities ("MBS"):
Freddie Mac ("FHLMC") certificates:
	After 1 to 5 years		6,181		19		11		-		6,189	2.33
After 5 to 10 years			207,503		207		7,905		-		199,805	1.37
After 10 years			1,221,834		194		94,235		-		1,127,793	1.26
			1,435,518		420		102,151		-		1,333,787	1.28
Ginnie Mae ("GNMA") certificates:
	Due within one year		7		-		-		-		7	1.70
	After 1 to 5 years		22,699		201		265		-		22,635	2.05
	After 5 to 10 years		27,524		-		1,097		-		26,427	0.68
	After 10 years		297,566		3,595		11,611		-		289,550	1.69
			347,796		3,796		12,973		-		338,619	1.64
Fannie Mae ("FNMA") certificates:
	Due within one year		4,935		-		6		-		4,929	1.92
	After 1 to 5 years		16,108		194		38		-		16,264	2.85
	After 5 to 10 years		388,664		185		14,483		-		374,366	1.49
	After 10 years		1,382,595		1,339		97,180		-		1,286,754	1.31
			1,792,302		1,718		111,707		-		1,682,313	1.36
Collateralized mortgage obligations issued or guaranteed
by the FHLMC, FNMA and GNMA:
	Due within one year		68		-		-		-		68	1.12
After 1 to 5 years			35,157		50		2,008		-		33,199	1.25
After 10 years			467,368		82		38,373		-		429,077	1.21
			502,593		132		40,381		-		462,344	1.22
Private label:
	After 10 years		9,526		-		2,203		403		6,920	2.96
Total MBS			4,087,735		6,066		269,415		403		3,823,983	1.34
Other:
	Due within one year		1,000		-		-		-		1,000	0.78
Total investment securities available-for-sale		$	6,836,842	$	6,358	$	417,829	$	711	$	6,424,660	1.11
(1)	Consists of a residential pass-through MBS issued by the Puerto Rico Housing Finance Authority (“PRHFA”) that is collateralized by certain second mortgages originated under a program launched by the Puerto Rico government in 2010. During 2021, the Corporation placed this instrument in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral.

The amortized cost, gross unrealized gains and losses recorded in accumulated other comprehensive loss, ACL, estimated fair value, and weighted-average yield of investment securities available-for-sale by contractual maturities as of December 31, 2021 were as follows:

		December 31, 2021
		Amortized cost		Gross						Fair value
				Unrealized								Weighted-
				Gains		Losses		ACL				average yield%
(Dollars in thousands)
U.S. Treasury securities:
	After 1 to 5 years	$	149,660	$	59	$	1,233	$	-	$	148,486	0.68
U.S. government-sponsored agencies' obligations:
	After 1 to 5 years		1,877,181		240		29,555		-		1,847,866	0.60
	After 5 to 10 years		403,785		175		10,856		-		393,104	0.90
	After 10 years		15,788		224		-		-		16,012	0.63
Puerto Rico government obligations:
	After 10 years (1)		3,574		-		416		308		2,850	-
United States and Puerto Rico government obligations			2,449,988		698		42,060		308		2,408,318	0.67
MBS:
FHLMC certificates:
	After 1 to 5 years		2,811		119		-		-		2,930	2.65
	After 5 to 10 years		193,234		2,419		1,122		-		194,531	1.29
	After 10 years		1,240,964		3,748		23,503		-		1,221,209	1.18
			1,437,009		6,286		24,625		-		1,418,670	1.20
GNMA certificates:
	Due within one year		2		-		-		-		2	1.32
	After 1 to 5 years		16,714		572		-		-		17,286	2.90
	After 5 to 10 years		27,271		80		139		-		27,212	0.51
	After 10 years		338,927		7,091		2,174		-		343,844	1.45
			382,914		7,743		2,313		-		388,344	1.45
FNMA certificates:
	Due within one year		4,975		21		-		-		4,996	2.03
	After 1 to 5 years		21,337		424		-		-		21,761	2.87
	After 5 to 10 years		298,771		4,387		1,917		-		301,241	1.41
	After 10 years		1,389,381		8,953		21,747		-		1,376,587	1.21
			1,714,464		13,785		23,664		-		1,704,585	1.27
Collateralized mortgage obligations issued or guaranteed
	by the FHLMC, FNMA and GNMA:
	After 1 to 5 years		24,007		1		778		-		23,230	1.31
	After 5 to 10 years		14,316		97		-		-		14,413	0.76
	After 10 years		500,811		290		13,134		-		487,967	1.23
			539,134		388		13,912		-		525,610	1.22
Private label:
	After 10 years		9,994		-		1,963		797		7,234	2.21
Total MBS			4,083,515		28,202		66,477		797		4,044,443	1.26
Other:
	Due within one year		500		-		-		-		500	0.72
	After 1 to 5 years		500		-		-		-		500	0.84
			1,000		-		-		-		1,000	0.78
Total investment securities
	available-for-sale	$	6,534,503	$	28,900	$	108,537	$	1,105	$	6,453,761	1.03
(1)	Consists 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. During 2021, the Corporation placed this instrument in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral.

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 is presented as part of accumulated other comprehensive income (loss).

The following tables show the fair value and gross unrealized losses of the Corporation’s available-for-sale investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2022 and December 31, 2021. The tables also include debt securities for which an ACL was recorded.

		As of March 31, 2022
		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	$	-	$	-	$	2,727	$	463	(1)	$	2,727	$	463
	U.S. Treasury and U.S. government
	agenciesʼ obligations		1,717,041		80,078		854,995		67,873			2,572,036		147,951
MBS:
	FNMA		1,053,447		60,002		548,419		51,705			1,601,866		111,707
	FHLMC		824,433		53,859		479,664		48,292			1,304,097		102,151
	GNMA		198,644		7,247		63,924		5,726			262,568		12,973
	Collateralized mortgage obligations
	issued or guaranteed by the
	FHLMC, FNMA and GNMA		305,798		28,149		131,285		12,232			437,083		40,381
	Private label MBS		-		-		6,920		2,203	(1)		6,920		2,203
		$	4,099,363	$	229,335	$	2,087,934	$	188,494		$	6,187,297	$	417,829
(1)	Unrealized losses do not include credit loss component recorded as part of the ACL. As of March 31, 2022, PRHFA bond and private label MBS had an ACL of $0.3 million and $0.4 million, respectively.
		As of December 31, 2021
		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	$	-	$	-	$	2,850	$	416	(1)	$	2,850	$	416
	U.S. Treasury and U.S. government
	agenciesʼ obligations		1,717,340		25,401		606,179		16,243			2,323,519		41,644
MBS:
	FNMA		1,237,701		19,843		112,559		3,821			1,350,260		23,664
	FHLMC		986,345		16,144		221,896		8,481			1,208,241		24,625
	GNMA		194,271		1,329		41,233		984			235,504		2,313
	Collateralized mortgage obligations
	issued or guaranteed by the
	FHLMC, FNMA and GNMA		466,004		13,552		16,656		360			482,660		13,912
	Private label MBS		-		-		7,234		1,963	(1)		7,234		1,963
		$	4,601,661	$	76,269	$	1,008,607	$	32,268		$	5,610,268	$	108,537
(1)	Unrealized losses do not include credit loss component recorded as part of the ACL. As of December 31, 2021, PRHFA bond and private label MBS had an ACL of $0.3 million and $0.8 million, respectively.

Assessment for Credit Losses

Debt securities issued by U.S. government agencies, U.S. government-sponsored entities (“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, 2022 and the Corporation expects no credit losses on these securities, 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. government and 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, 2022. The Corporation’s credit loss 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’s available-for-sale MBS portfolio included private label MBS with a fair value of $6.9 million, which had unrealized losses of approximately $2.6 million as of March 31, 2022, of which $0.4 million is due to credit deterioration and is part of the ACL. 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 States with original FICO scores over 700 and moderate loan-to-value ratios (under 80%), as well as moderate delinquency levels. As of March 31, 2022, the Corporation did not have the intent to sell these securities and determined that it is likely that it will not be required to sell the securities before anticipated recovery. The Corporation determined 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 utilized probability of default (“PDs”) and loss given default (“LGDs”) that considered, 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. Under this approach, all future cash flows (interest and principal) from the underlying collateral loans, adjusted by prepayments and the PDs and LGDs, were 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, 2022			December 31, 2021
	Weighted	Range		Weighted	Range
	Average	Minimum	Maximum	Average	Minimum	Maximum
Discount rate	14.3%	14.3%	14.3%	12.9%	12.9%	12.9%
Prepayment rate	14.4%	9.4%	24.1%	15.2%	7.6%	24.9%
Projected Cumulative Loss Rate	6.5%	0.3%	14.9%	7.6%	0.2%	15.7%

The Corporation evaluates if a credit loss exists, primarily by monitoring adverse variances in the present value of expected cash flows. As of March 31, 2022, the ACL for these private label MBS was $0.4 million, compared to $0.8 million as of December 31, 2021.

As of March 31, 2022, the Corporation’s available-for-sale investment securities portfolio also included a residential pass-through MBS issued by the PRHFA, collateralized by certain second mortgages, with a fair value of $2.7 million, which had an unrealized loss of approximately $0.8 million. Approximately $0.3 million of the unrealized losses was due to credit deterioration and is part of the ACL. 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 repayment on 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 properties underlying the second mortgage loans. During 2021, the Corporation placed this instrument in nonaccrual status based on the delinquency status of the underlying second mortgage loans collateral. The Corporation determined the ACL on this instrument based on a risk-adjusted discounted cash flow methodology that considered the structure and terms of the underlying collateral. The Corporation utilized PDs and LGDs that considered, among other things, historical payment performance, loan-to value attributes and relevant current and forward-looking macroeconomic variables, such as regional unemployment rates, the housing price index and expected recovery from the PRHFA guarantee. Under this approach, all future cash flows (interest and principal) from the underlying collateral loans, adjusted by prepayments and the PDs and LGDs, were discounted at the internal rate of return as of the reporting date and compared to the amortized cost. 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 becomes due and payable. Further deterioration of the Puerto Rico economy or fiscal health of the PRHFA could impact the value of these securities, resulting in additional losses to the Corporation. As of March 31, 2022, the Corporation did not have the intent to sell this security and determined that it was likely that it will not be required to sell the security before its anticipated recovery. Accrued interest receivable on available-for-sale debt securities totaled $11.1 million as of March 31, 2022 ($10.1 million as of December 31, 2021) and is excluded from the estimate of credit losses.

The following tables present a rollforward by major security type for the quarters ended March 31, 2022 and 2021 of the ACL on debt securities available for sale:

	Quarter Ended March 31, 2022
	Private label		Puerto Rico Government
	MBS		Obligations		Total
(In thousands)
Beginning Balance	$	797	$	308	$	1,105
Provision for credit losses - benefit		(388)		-		(388)
Net charge-offs		(6)		-		(6)
ACL on debt securities available for sale	$	403	$	308	$	711
	Quarter Ended March 31, 2021
	Private label		Puerto Rico Government
	MBS		Obligations		Total
(In thousands)
Beginning Balance	$	1,002	$	308	$	1,310
Provision for credit losses - benefit		(127)		-		(127)
ACL on debt securities available for sale	$	875	$	308	$	1,183

Investments Held-to-Maturity

The amortized cost, gross unrecognized gains and losses, estimated fair value, ACL, weighted-average yield and contractual maturities of investment securities held to maturity as of March 31, 2022 and December 31, 2021 were as follows:

		March 31, 2022
		Amortized cost						Fair value
				Gross Unrecognized						ACL
												Weighted - average yield %
				Gains		Losses
(Dollars in thousands)
Puerto Rico municipal bonds:
	Due within one year	$	2,598	$	1	$	4	$	2,595	$	93	5.39
	After 1 to 5 years		14,903		541		151		15,293		550	2.40
	After 5 to 10 years		90,790		1,683		3,639		88,834		6,774	4.28
	After 10 years		69,768		-		7,676		62,092		4,907	4.07
Total investment securities
	held to maturity	$	178,059	$	2,225	$	11,470	$	168,814	$	12,324	4.06

		December 31, 2021
		Amortized cost						Fair value
				Gross Unrecognized
												Weighted - average yield %
				Gains		Losses				ACL
(Dollars in thousands)
Puerto Rico municipal bonds:
	Due within one year	$	2,995	$	5	$	-	$	3,000	$	70	5.39
	After 1 to 5 years		14,785		526		156		15,155		347	2.35
	After 5 to 10 years		90,584		1,555		3,139		89,000		3,258	4.25
	After 10 years		69,769		-		9,777		59,992		4,896	4.06
Total investment securities
	held to maturity	$	178,133	$	2,086	$	13,072	$	167,147	$	8,571	4.04

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, 2022 and December 31, 2021, including debt securities for which an ACL was recorded.

	As of March 31, 2022
	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	$	-	$	-	$	138,389	$	11,470	$	138,389	$	11,470
	As of December 31, 2021
	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	$	-	$	-	$	140,732	$	13,072	$	140,732	$	13,072

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 – Nature of Business and Summary of Significant Accounting Policies in the audited consolidated financial statements included in the 2021 Annual Report on Form 10-K.

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, 2022. The Puerto Rico municipal bonds had an ACL of $12.3 million as of March 31, 2022, a $3.7 million increase when compared to $8.6 million as of December 31, 2021, primarily reflecting the Corporation’s change of applying probability weights to the baseline and alternative downside economic scenarios to estimate the ACL and the associated impact on qualitative reserves. According to the Corporation’s policy, accrued interest receivable on held-to-maturity debt securities that totaled $1.7 million as of March 31, 2022 ($3.4 million as of December 31, 2021), was excluded from the estimate of credit losses.

The following table presents the activity in the ACL for debt securities held-to-maturity by major security type for the quarters ended March 31, 2022 and 2021:

	Puerto Rico Municipal Bonds
	Quarter Ended		Quarter Ended
	March 31, 2022		March 31, 2021
(In thousands)
Beginning balance	$	8,571	$	8,845
Provision for credit losses - expense		3,753		24
	$	12,324	$	8,869

During the second quarter of 2019, the oversight board established by the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) announced the designation of Puerto Rico’s 78 municipalities as covered instrumentalities under PROMESA. Municipalities may 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 situation, or measures included in fiscal plans of other government entities, and, more recently, by the effect of the COVID-19 pandemic on the Puerto Rico and global economy. Given the inherent uncertainties about the 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 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, 2022 and December 31, 2021, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents.

Credit Quality Indicators:

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, which are 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. For the definitions of the internal credit-risk ratings, refer to Note 5 – Investment Securities included in the 2021 Annual Report on Form 10-K.

The Corporation periodically reviews its assets 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. The Loan Review Group 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. The objective of these loan reviews is to assess accuracy of the Bank’s determination and maintenance of loan risk rating and its adherence to lending policies, practices and procedures. 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.

As of March 31, 2022 and December 31, 2021, all Puerto Rico municipal bonds were classified as Pass.

No held-to-maturity debt securities were on nonaccrual status, 90 days past due and still accruing, or past due as of March 31, 2022 and December 31, 2021. A security is considered to be past due once it is 30 days contractually past due under the terms of the agreement.