Investment securities

6 Months Ended

Jun. 30, 2016

Note 7 – Investment securities available-for-sale

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities available-for-sale at June 30, 2016 and December 31, 2015.

		At June 30, 2016
				Gross		Gross				Weighted
		Amortized		unrealized		unrealized		Fair		average
(In thousands)		cost		gains		losses		value		yield
U.S. Treasury securities
	Within 1 year	$	45,014	$	90	$	-	$	45,104	0.72	%
	After 1 to 5 years		1,557,118		12,141		-		1,569,259	1.05
	After 5 to 10 years		9,942		471		-		10,413	1.99
Total U.S. Treasury securities			1,612,074		12,702		-		1,624,776	1.05
Obligations of U.S. Government sponsored entities
	Within 1 year		50,045		150		-		50,195	0.90
	After 1 to 5 years		716,459		7,026		90		723,395	1.36
	After 5 to 10 years		250		1		-		251	5.64
Total obligations of U.S. Government sponsored entities			766,754		7,177		90		773,841	1.33
Obligations of Puerto Rico, States and political subdivisions
	After 1 to 5 years		7,150		17		-		7,167	4.27
	After 5 to 10 years		5,915		1		1,562		4,354	4.02
	After 10 years		18,614		1		4,501		14,114	6.99
Total obligations of Puerto Rico, States and political subdivisions			31,679		19		6,063		25,635	5.82
Collateralized mortgage obligations - federal agencies
	Within 1 year		159		-		-		159	0.97
	After 1 to 5 years		19,667		972		-		20,639	2.86
	After 5 to 10 years		36,988		771		-		37,759	2.86
	After 10 years		1,369,388		17,599		6,823		1,380,164	1.98
Total collateralized mortgage obligations - federal agencies			1,426,202		19,342		6,823		1,438,721	2.01
Mortgage-backed securities
	Within 1 year		18		-		-		18	4.72
	After 1 to 5 years		19,790		872		9		20,653	4.50
	After 5 to 10 years		268,493		7,414		184		275,723	2.41
	After 10 years		3,002,023		69,496		670		3,070,849	2.63
Total mortgage-backed securities			3,290,324		77,782		863		3,367,243	2.63
Equity securities (without contractual maturity)			1,351		1,169		-		2,520	7.86
Other
	After 1 to 5 years		8,725		35		-		8,760	1.73
	After 5 to 10 years		1,136		44		-		1,180	3.62
Total other			9,861		79		-		9,940	1.95
Total investment securities available-for-sale^[1]		$	7,138,245	$	118,270	$	13,839	$	7,242,676	2.02	%
[1]Includes $3.6 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $2.9 billion serve as collateral for public funds.

		At December 31, 2015
				Gross		Gross				Weighted
		Amortized		unrealized		unrealized		Fair		average
(In thousands)		cost		gains		losses		value		yield
U.S. Treasury securities
	Within 1 year	$	24,861	$	335	$	-	$	25,196	4.31	%
	After 1 to 5 years		1,149,807		365		1,999		1,148,173	1.03
	After 5 to 10 years		9,937		22		-		9,959	1.99
Total U.S. Treasury securities			1,184,605		722		1,999		1,183,328	1.11
Obligations of U.S. Government sponsored entities
	After 1 to 5 years		919,819		1,337		4,808		916,348	1.33
	After 5 to 10 years		250		1		-		251	5.64
	After 10 years		23,000		42		-		23,042	3.22
Total obligations of U.S. Government sponsored entities			943,069		1,380		4,808		939,641	1.38
Obligations of Puerto Rico, States and political subdivisions
	After 1 to 5 years		7,227		-		199		7,028	3.94
	After 5 to 10 years		5,925		-		2,200		3,725	4.02
	After 10 years		18,585		-		6,979		11,606	6.99
Total obligations of Puerto Rico, States and political subdivisions			31,737		-		9,378		22,359	5.74
Collateralized mortgage obligations - federal agencies
	After 1 to 5 years		21,446		594		37		22,003	2.81
	After 5 to 10 years		44,585		733		-		45,318	2.85
	After 10 years		1,518,662		8,137		33,283		1,493,516	1.99
Total collateralized mortgage obligations - federal agencies			1,584,693		9,464		33,320		1,560,837	2.02
Mortgage-backed securities
	After 1 to 5 years		22,015		987		8		22,994	4.65
	After 5 to 10 years		256,097		4,866		1,197		259,766	2.51
	After 10 years		2,039,217		34,839		12,620		2,061,436	2.83
Total mortgage-backed securities			2,317,329		40,692		13,825		2,344,196	2.81
Equity securities (without contractual maturity)			1,350		1,053		5		2,398	7.92
Other
	After 1 to 5 years		8,911		-		28		8,883	1.71
	After 5 to 10 years		1,311		39		-		1,350	3.62
Total other			10,222		39		28		10,233	1.95
Total investment securities available-for-sale^[1]		$	6,073,005	$	53,350	$	63,363	$	6,062,992	2.07	%
[1]Includes $2.4 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $1.5 billion serve as collateral for public funds.

The weighted average yield on investment securities available-for-sale is based on amortized cost; therefore, it does not give effect to changes in fair value.

Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

There were no securities sold during the quarter and six months ended June 30, 2016. During the six months ended June 30, 2015, the Corporation sold U.S. agency securities with a carrying amount of $70 million at the BPPR segment, resulting in a realized gain of $5 thousand.

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2016 and December 31, 2015.

		At June 30, 2016
		Less than 12 months				12 months or more				Total
				Gross				Gross				Gross
		Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)		value		losses		value		losses		value		losses
Obligations of U.S. Government sponsored entities		$	24,110	$	63	$	1,301	$	27	$	25,411	$	90
Obligations of Puerto Rico, States and political
	subdivisions		-		-		16,501		6,063		16,501		6,063
Collateralized mortgage obligations - federal agencies			-		-		405,082		6,823		405,082		6,823
Mortgage-backed securities			114,735		829		9,662		34		124,397		863
Total investment securities available-for-sale in an
	unrealized loss position	$	138,845	$	892	$	432,546	$	12,947	$	571,391	$	13,839

		At December 31, 2015
		Less than 12 months				12 months or more				Total
				Gross				Gross				Gross
		Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)		value		losses		value		losses		value		losses
U.S. Treasury securities		$	589,689	$	1,999	$	-	$	-	$	589,689	$	1,999
Obligations of U.S. Government sponsored entities			390,319		2,128		181,744		2,680		572,063		4,808
Obligations of Puerto Rico, States and political
	subdivisions		884		164		19,490		9,214		20,374		9,378
Collateralized mortgage obligations - federal agencies			331,501		4,446		814,195		28,874		1,145,696		33,320
Mortgage-backed securities			1,641,663		12,992		22,362		833		1,664,025		13,825
Equity securities			45		5		-		-		45		5
Other			8,883		28		-		-		8,883		28
Total investment securities available-for-sale in an
	unrealized loss position	$	2,962,984	$	21,762	$	1,037,791	$	41,601	$	4,000,775	$	63,363

As of June 30, 2016, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $14 million, driven by U.S. Agency collateralized mortgage obligations and Obligations of the Puerto Rico Government and its political subdivisions. As part of its analysis for all U.S. Agencies’ securities, management considers the U.S. Agency guarantee. The portfolio of obligations of the Puerto Rico Government is mostly comprised of securities with specific sources of income or revenues identified for repayments. The Corporation performs periodic credit quality reviews on these issuers.

Management evaluates investment securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis. Once a decline in value is determined to be other-than-temporary, the value of a debt security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses. Also, for equity securities that are considered other-than-temporarily impaired, the excess of the security’s carrying value over its fair value at the evaluation date is accounted for as a loss in the results of operations. The OTTI analysis requires management to consider various factors, which include, but are not limited to: (1) the length of time and the extent to which fair value has been less than the amortized cost basis, (2) the financial condition of the issuer or issuers, (3) actual collateral attributes, (4) the payment structure of the debt security and the likelihood of the issuer being able to make payments, (5) any rating changes by a rating agency, (6) adverse conditions specifically related to the security, industry, or a geographic area, and (7) management’s intent to sell the debt security or whether it is more likely than not that the Corporation would be required to sell the debt security before a forecasted recovery occurs.

During the second quarter of 2016, the Corporation recognized an other-than-temporary impairment charge of $209 thousand on an investment security available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. At June 30, 2016 this security was rated Caa2 and CC by Moody’s and S&P, respectively. Puerto Rico’s fiscal and economic situation, together with, among other factors, the recent moratorium declared on the payment of principal and interest on obligations for certain Puerto Rico government securities, including those issued or guaranteed by the Commonwealth, led management to conclude that the unrealized losses on this security was other-than-temporary. The Corporation determined that the entire balance of the unrealized loss carried by this security was attributed to estimated credit losses. Accordingly, the other-than-temporary impairment was recognized in its entirety in the accompanying consolidated statement of operations and no amount remained recognized in the accompanying statement of other comprehensive income related to this specific security.

In the second quarter of 2015, the Corporation recognized an other-than-temporary impairment charge of $14.4 million on its portfolio of investment securities available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. At June 30, 2015 these securities were rated Caa2 and CCC- by Moody’s and S&P, respectively.

The following table states the name of issuers, and the aggregate amortized cost and fair value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), in which the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities backed by the full faith and credit of the U.S. Government. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies, which are payable and secured by the same source of revenue or taxing authority, other than the U.S. Government, are considered securities of a single issuer.

		June 30, 2016				December 31, 2015

(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value
FNMA	$	2,820,595	$	2,863,151	$	2,649,860	$	2,633,899
FHLB		286,449		289,572		340,119		338,700
Freddie Mac		1,377,651		1,390,990		1,088,691		1,079,956

Held To Maturity Securities Member

Investment

Note 8 – Investment securities held-to-maturity

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities held-to-maturity at June 30, 2016 and December 31, 2015.

		At June 30, 2016
				Gross		Gross				Weighted
		Amortized		unrealized		unrealized		Fair		average
(In thousands)		cost		gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
	Within 1 year	$	3,050	$	-	$	227	$	2,823	5.91	%
	After 1 to 5 years		14,270		-		5,757		8,513	6.00
	After 5 to 10 years		18,930		-		7,561		11,369	6.17
	After 10 years		61,194		3,325		7,805		56,714	1.97
Total obligations of Puerto Rico, States and political subdivisions			97,444		3,325		21,350		79,419	3.50
Collateralized mortgage obligations - federal agencies
	After 5 to 10 years		81		4		-		85	5.45
Total collateralized mortgage obligations - federal agencies			81		4		-		85	5.45
Other
	After 1 to 5 years		2,000		-		35		1,965	1.81
Total other			2,000		-		35		1,965	1.81
Total investment securities held-to-maturity^[1]		$	99,525	$	3,329	$	21,385	$	81,469	3.47	%
[1]Includes $97.8 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

		At December 31, 2015
				Gross		Gross				Weighted
		Amortized		unrealized		unrealized		Fair		average
(In thousands)		cost		gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
	Within 1 year	$	2,920	$	-	$	291	$	2,629	5.90	%
	After 1 to 5 years		13,655		-		5,015		8,640	5.98
	After 5 to 10 years		20,020		-		8,020		12,000	6.14
	After 10 years		62,222		3,604		8,280		57,546	2.08
Total obligations of Puerto Rico, States and political subdivisions			98,817		3,604		21,606		80,815	3.55
Collateralized mortgage obligations - federal agencies
	After 5 to 10 years		86		5		-		91	5.45
Total collateralized mortgage obligations - federal agencies			86		5		-		91	5.45
Other
	After 1 to 5 years		2,000		-		17		1,983	1.81
Total other			2,000		-		17		1,983	1.81
Total investment securities held-to-maturity^[1]		$	100,903	$	3,609	$	21,623	$	82,889	3.52	%
[1]Includes $57.2 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2016 and December 31, 2015.

		At June 30, 2016
		Less than 12 months				12 months or more				Total
				Gross				Gross				Gross
		Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)		value		losses		value		losses		value		losses
Obligations of Puerto Rico, States and political subdivisions		$	-	$	-	$	32,650	$	21,350	$	32,650	$	21,350
Other			720		30		995		5		1,715		35
Total investment securities held-to-maturity in an unrealized
	loss position	$	720	$	30	$	33,645	$	21,355	$	34,365	$	21,385

		At December 31, 2015
		Less than 12 months				12 months or more				Total
				Gross				Gross				Gross
		Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)		value		losses		value		losses		value		losses

Obligations of Puerto Rico, States and political subdivisions		$	-	$	-	$	33,334	$	21,606	$	33,334	$	21,606
Other			1,483		17		-		-		1,483		17
Total investment securities held-to-maturity in an unrealized
	loss position	$	1,483	$	17	$	33,334	$	21,606	$	34,817	$	21,623

As indicated in Note 7 to these consolidated financial statements, management evaluates investment securities for OTTI declines in fair value on a quarterly basis.

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at June 30, 2016 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $55 million of securities issued by three municipalities of Puerto Rico that are payable from the real and personal property taxes collected within such municipalities. These bonds have seniority to the payment of operating cost and expenses of the municipality. The portfolio also includes approximately $43 million in securities for which the underlying source of payment is not the central government, but in which it provides a guarantee in the event of default.

The Corporation performs periodic credit quality reviews on these issuers. Based on the quarterly analysis performed, management concluded that no individual debt security was other-than-temporarily impaired at June 30, 2016. Further deterioration of the fiscal crisis of the Government of Puerto Rico could further affect the value of these securities, resulting in losses to the Corporation. The Corporation does not have the intent to sell securities held-to-maturity and it is more likely than not that the Corporation will not have to sell these investment securities prior to recovery of their amortized cost basis.