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Debt securities held-to-maturity

9 Months Ended

Sep. 30, 2022

Held To Maturity Debt Securities

Debt Securities, Held-to-maturity

Investments in debt and marketable equity securities

Note 7 –Debt securities held-to-maturityThe following tables present the amortized cost, allowance for credit losses, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of debt securities held-to-maturity at September 30, 2022 and December 31, 2021.

		At September 30, 2022
					Allowance			Gross		Gross				Weighted
		Amortized			for Credit		Net of	unrealized		unrealized		Fair		average
(In thousands)		cost			Losses		Allowance	gains		losses		value		yield
U.S. Treasury securities
	Within 1 year	$	348,053	$	-	$	348,053	$	-	$	3,262	$	344,791	3.00	%
	After 1 to 5 years		1,533,494		-		1,533,494		-		48,605		1,484,889	2.75
Total U.S. Treasury securities			1,881,547		-		1,881,547		-		51,867		1,829,680	2.80
Obligations of Puerto Rico, States and political subdivisions
	Within 1 year		4,530		11		4,519		7		-		4,526	6.10
	After 1 to 5 years		19,105		215		18,890		149		81		18,958	4.24
	After 5 to 10 years		1,025		33		992		33		-		1,025	5.80
	After 10 years		41,519		6,951		34,568		4,947		2,130		37,385	1.41
Total obligations of Puerto Rico, States and political subdivisions			66,179		7,210		58,969		5,136		2,211		61,894	2.62
Collateralized mortgage obligations - federal agencies
	After 1 to 5 years		24		-		24		-		-		24	6.44
Total collateralized mortgage obligations - federal agencies			24		-		24		-		-		24	6.44
Securities in wholly owned statutory business trusts
	After 10 years		5,960		-		5,960		-		-		5,960	6.33
Total securities in wholly owned statutory business trusts			5,960		-		5,960		-		-		5,960	6.33
Total debt securities held-to-maturity		$	1,953,710	$	7,210	$	1,946,500	$	5,136	$	54,078	$	1,897,558	2.80	%

		At December 31, 2021
					Allowance			Gross		Gross				Weighted
		Amortized			for Credit		Net of	unrealized		unrealized		Fair		average
(In thousands)		cost			Losses		Allowance	gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
	Within 1 year	$	4,240	$	7	$	4,233	$	4	$	-	$	4,237	6.07	%
	After 1 to 5 years		14,395		148		14,247		149		-		14,396	6.23
	After 5 to 10 years		11,280		122		11,158		104		-		11,262	2.18
	After 10 years		43,561		7,819		35,742		11,746		-		47,488	1.50
Total obligations of Puerto Rico, States and political subdivisions			73,476		8,096		65,380		12,003		-		77,383	2.79
Collateralized mortgage obligations - federal agencies
	After 1 to 5 years		25		-		25		-		-		25	6.44
Total collateralized mortgage obligations - federal agencies			25		-		25		-		-		25	6.44
Securities in wholly owned statutory business trusts
	After 10 years		5,960		-		5,960		-		-		5,960	6.33
Total securities in wholly owned statutory business trusts			5,960		-		5,960		-		-		5,960	6.33
Total debt securities held-to-maturity		$	79,461	$	8,096	$	71,365	$	12,003	$	-	$	83,368	3.06	%

Debt 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.

Credit Quality Indicators

The following describes the credit quality indicators by major security type that the Corporation considers in its’ estimate to develop the allowance for credit losses for investment securities held-to-maturity.

As discussed in Note 2 to the Consolidated Financial Statements included in Form 10-K for the year ended December 31, 2021, U.S. Treasury securities carry an explicit guarantee from the U.S. Government are highly rated by major rating agencies, and have a long history of no credit losses. Accordingly, the Corporation applies a zero-credit loss assumption and no ACL for these securities has been established.

At September 30, 2022 and December 31, 2021, the “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity, includes securities issued by municipalities of Puerto Rico that are generally not rated by a credit rating agency. This includes $25 million of general and special obligation bonds issued by three municipalities of Puerto Rico, that are payable primarily from certain property taxes imposed by the issuing municipality (December 31, 2021 - $30 million). In the case of general obligations, they also benefit from a pledge of the full faith, credit and unlimited taxing power of the issuing municipality, which is required by law to levy property taxes in an amount sufficient for the payment of debt service on such general obligation bonds. The Corporation performs periodic credit quality reviews of these securities and internally assigns standardized credit risk ratings based on its evaluation. The Corporation considers these ratings in its estimate to develop the allowance for credit losses associated with these securities. For the definitions of the obligor risk ratings, refer to the Credit Quality section of Note 9 to the Consolidated Financial Statements.

The following presents the amortized cost basis of securities held by the Corporation issued by municipalities of Puerto Rico aggregated by the internally assigned standardized credit risk rating:


		At September 30, 2022		At December 31, 2021
(In thousands)		Securities issued by Puerto Rico municipalities
Watch		$	13,735	$	16,345
Pass			10,925		13,800
Total		$	24,660	$	30,145

At September 30, 2022, the portfolio of “Obligations of Puerto Rico, States and political subdivisions” also includes $42 million in securities issued by the Puerto Rico Housing Finance Authority (“HFA”), a government instrumentality, for which the underlying source of payment is second mortgage loans in Puerto Rico residential properties (not the government), but for which HFA, provides a guarantee in the event of default and upon the satisfaction of certain other conditions (December 31, 2021 - $43 million). These securities are not rated by a credit rating agency. The Corporation assesses the credit risk associated with these securities by evaluating the refreshed FICO scores of a representative sample of the underlying borrowers. At September 30, 2022, the average refreshed FICO score for the representative sample, comprised of 65% of the nominal value of the securities, used for the loss estimate was of 707 (compared to 64% and 704, respectively, at December 31, 2021). The loss estimates for this portfolio was based on the methodology established under CECL for similar loan obligations. The Corporation does not consider the government guarantee when estimating the credit losses associated with this portfolio.

A further deterioration of the Puerto Rico economy or of the fiscal health of the Government of Puerto Rico and/or its instrumentalities (including if any of the issuing municipalities become subject to a debt restructuring proceeding under PROMESA) could further affect the value of these securities, resulting in losses to the Corporation.

Refer to Note 21 to the Consolidated Financial Statements for additional information on the Corporation’s exposure to the Puerto Rico Government.

Delinquency status

At September 30, 2022 and December 31, 2021, there were no securities held-to-maturity in past due or non-performing status.

Allowance for credit losses on debt securities held-to-maturity

The following table provides the activity in the allowance for credit losses related to debt securities held-to-maturity by security type at September 30, 2022 and September 30, 2021:


		For the quarters ended September 30,
			2022		2021
(In thousands)		Obligations of Puerto Rico, States and political subdivisions
Allowance for credit losses:
Beginning balance		$	7,495	$	10,214
Provision for credit losses (benefit)			(285)		(992)
Securities charged-off			-		-
Recoveries			-		-
Ending balance		$	7,210	$	9,222

		For the nine months ended September 30,
			2022		2021
(In thousands)			Obligations of Puerto Rico, States and political subdivisions
Allowance for credit losses:
Beginning balance		$	8,096	$	10,261
Provision for credit losses (benefit)			(886)		(1,039)
Securities charged-off			-		-
Recoveries			-		-
Ending balance		$	7,210	$	9,222

The allowance for credit losses for the Obligations of Puerto Rico, States and political subdivisions includes $0.3 million for securities issued by municipalities of Puerto Rico, and $6.9 million for bonds issued by the Puerto Rico HFA, which are secured by second mortgage loans on Puerto Rico residential properties (compared to $0.3 million and $7.8 million, respectively, at December 31, 2021).