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INVESTMENT SECURITIES

6 Months Ended

Jun. 30, 2019

Debt and Equity Securities [Abstract]

Investments In Debt And Marketable Equity Securities And Certain Trading Assets Disclosure

NOTE 5 – INVESTMENT SECURITIES

Investment Securities Available for Sale

The amortized cost, non-credit loss component of OTTI recorded in other comprehensive income (“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 June 30, 2019 and December 31, 2018 were as follows:

		June 30, 2019
		Amortized cost			Noncredit Loss Component of OTTI Recorded in OCI									Fair value
								Gross Unrealized									Weighted-
								gains			losses						average yield%
(Dollars in thousands)

U.S. Treasury securities:
	Due within one year	$	7,452		$	-		$	12		$	-		$	7,464		2.42

U.S. government-sponsored
agencies obligations:
Due within one year			182,408			-			1			482			181,927		1.31
After 1 to 5 years			166,618			-			580			473			166,725		2.02
After 5 to 10 years			154,368			-			1,064			8			155,424		2.89
After 10 years			29,233			-			6			60			29,179		2.70

Puerto Rico government
obligations:
After 5 to 10 years			4,000			-			92			-			4,092		5.12
After 10 years			4,298			-			-			1,399			2,899		6.97

United States and Puerto Rico
government obligations			548,377			-			1,755			2,422			547,710		2.13

Mortgage-backed securities (“MBS”):
Freddie Mac (“FHLMC”) certificates:
After 5 to 10 years			83,358			-			312			331			83,339		2.08
After 10 years			246,050			-			2,657			1,501			247,206		2.52
			329,408			-			2,969			1,832			330,545		2.41

Ginnie Mae (“GNMA”) certificates:
Due within one year			2			-			-			-			2		3.77
After 1 to 5 years			137			-			2			-			139		3.84
After 5 to 10 years			54,179			-			480			35			54,624		2.87
After 10 years			111,034			-			5,455			187			116,302		3.94
			165,352			-			5,937			222			171,067		3.59
Fannie Mae (“FNMA”) certificates:
After 1 to 5 years			19,789			-			402			6			20,185		2.79
After 5 to 10 years			149,405			-			1,254			836			149,823		2.12
After 10 years			509,874			-			6,813			3,551			513,136		2.67
			679,068			-			8,469			4,393			683,144		2.55
Collateralized mortgage obligations
issued or guaranteed by the FHLMC									`
and GNMA:
After 1 to 5 years			930			-			1			-			931		3.07
After 10 years			56,874			-			411			1			57,284		3.16
			57,804			-			412			1			58,215		3.16
Other mortgage pass-through
trust certificates:
After 10 years			17,864			5,357			-			-			12,507		4.39
Total MBS			1,249,496			5,357			17,787			6,448			1,255,478		2.71

Other
After 1 to 5 years			500			-			-			-			500		2.96

Total investment securities
available for sale		$	1,798,373		$	5,357		$	19,542		$	8,870		$	1,803,688		2.53

		December 31, 2018
		Amortized cost			Noncredit Loss Component of OTTI Recorded in OCI			Gross Unrealized						Fair value
								Gross 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 June 30, 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 June 30, 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	$	-		$	-		$	2,899		$	1,399		$	2,899		$	1,399
	U.S. Treasury and U.S. government
	agenciesʼ obligations		-			-			293,853			1,023			293,853			1,023
	MBS:
	FNMA		-			-			321,593			4,393			321,593			4,393
	FHLMC		-			-			116,615			1,832			116,615			1,832
	GNMA		-			-			29,638			222			29,638			222
	Collateralized mortgage obligations
	issued or guaranteed by the
	FHLMC and GNMA		3,095			1			-			-			3,095			1
	Other mortgage pass-through
	trust certificates		-			-			12,507			5,357			12,507			5,357
		$	3,095		$	1		$	777,105		$	14,226		$	780,200		$	14,227


		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 June 30, 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, any 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 six months of 2019 and 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 as of the indicated dates:

		Cumulative OTTI credit losses recognized in earnings on securities still held
						Credit impairments
		March 31,				recognized in earnings on			June 30,
		2019				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			June 30,
		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
		March 31,			recognized in earnings			June 30,
		2018			on securities that have been			2018
		Balance			previously impaired			Balance
(In thousands)
Available-for-sale securities
Private label MBS		$	6,792		$	-		$	6,792


		Cumulative OTTI credit losses recognized in earnings on securities still held
					Credit impairments
		December 31,			recognized in earnings			June 30,
		2017			on securities that have been			2018
		Balance			previously impaired			Balance
(In thousands)
Available-for-sale securities
Private label MBS		$	6,792		$	-		$	6,792

As of June 30, 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 $8.3 million (fair value - $7.0 million). Approximately $4.3 million (fair value - $2.9 million) of these bonds 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. This bond was structured as a zero-coupon bond for the first ten years (up to July 2019). The underlying source of payment is second mortgage loans in Puerto Rico, not the central government, but PRHFA provides a guarantee in the event of default and subsequent foreclosure of the underlying property. Based on the quarterly analyses performed, management concluded that these obligations were not other-than-temporarily impaired as of June 30, 2019. 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 these debt securities prior to recovery of the amortized cost basis.

The Corporation performed an OTTI 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
	June 30, 2019					December 31, 2018
	Weighted		Range			Weighted		Range
	Average		Minimum	Maximum		Average		Minimum	Maximum

Discount rate	13.8%		13.8%	13.8%		14.5%		14.5%	14.5%
Prepayment rate	9.1%		3.3%	17.0%		11.4%		3.3%	20.9%
Projected Cumulative Loss Rate	3.1%		0.0%	6.6%		3%		0.0%	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 June 30, 2019 and December 31, 2018 were as follows:

		June 30, 2019
		Amortized cost										Fair value
						Gross Unrecognized
(Dollars in thousands)						gains			losses						Weighted- average yield%

Puerto Rico Municipal Bonds:
	After 1 to 5 years	$	5,957			$	-		$	402		$	5,555		4.96
	After 5 to 10 years		53,016				-			5,684			47,332		6.11
	After 10 years		85,699				-			15,472			70,227		6.03
Total investment securities
	held to maturity	$	144,672			$	-		$	21,558		$	123,114		6.02

		December 31, 2018
		Amortized cost									Fair value
					Gross Unrecognized
(Dollars in thousands)					gains			losses						Weighted- 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 June 30, 2019 and December 31, 2018:

	As of June 30, 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	$	-		$	-		$	123,114		$	21,558		$	123,114		$	21,558


	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-adjusted discount rates. A security with similar characteristics traded in the open market is used as a proxy for each municipal bond. Then, the cash 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 June 30, 2019. Approximately 70% of the held-to-maturity municipal bonds were issued by three of the largest municipalities in Puerto Rico. The vast majority of revenues of these three municipalities is independent of the Puerto Rico central government. These obligations typically are not issued in bearer form, nor are they registered with the SEC, and are not rated by external credit agencies. In most cases, these bonds have priority over the payment of operating costs and expenses of the municipality, which are required by law to levy special property taxes in such amounts 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 June 30, 2019.

During the second quarter of 2019, the PROMESA oversight board announced the designation of the 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 and liquidity shortfalls, 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”). Given the uncertain effect that the negative fiscal situation of the Puerto Rico central government and the measures taken, or to be taken, by other government entities may have on municipalities, the Corporation cannot be certain whether future impairment charges relating to 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 June 30, 2019 and December 31, 2018, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents.