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DEBT SECURITIES | 12 Months Ended
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Dec. 31, 2022
DEBT SECURITIES [Abstract] |
DEBT SECURITIES [Text Block] | NOTE 3 – DEBT SECURITIES Available-for-Sale Debt Securities The amortized cost, gross unrealized gains and losses recorded in OCL, ACL, estimated fair value, and weighted-average yield of available-for-sale debt securities by contractual maturities as of December 31, 2022 were as follows: December 31, 2022 Amortized cost (1) Gross ACL Fair value Unrealized Weighted- Gains Losses average yield% (Dollars in thousands) U.S. Treasury securities: Due within one year $ 7,493 $ - $ 309 $ - $ 7,184 0.22 After 1 to 5 years 141,366 - 9,675 - 131,691 0.70 U.S. GSEs' obligations: Due within one year 129,018 - 4,036 - 124,982 0.32 After 1 to 5 years 2,395,273 22 227,724 - 2,167,571 0.83 After 5 to 10 years 56,251 13 7,670 - 48,594 1.54 After 10 years 12,170 36 - - 12,206 4.62 Puerto Rico government obligations: After 10 years (2) 3,331 - 755 375 2,201 - United States and Puerto Rico government obligations 2,744,902 71 250,169 375 2,494,429 0.83 MBS: FHLMC certificates: After 1 to 5 years 4,235 - 169 - 4,066 2.33 After 5 to 10 years 204,085 - 19,061 - 185,024 1.55 After 10 years 1,092,289 - 186,558 - 905,731 1.38 1,300,609 - 205,788 - 1,094,821 1.41 GNMA certificates: Due within one year 5 - - - 5 1.73 After 1 to 5 years 15,508 - 622 - 14,886 2.00 After 5 to 10 years 45,322 1 3,809 - 41,514 1.31 After 10 years 232,632 51 27,169 - 205,514 2.47 293,467 52 31,600 - 261,919 2.27 FNMA certificates: After 1 to 5 years 9,685 - 521 - 9,164 1.76 After 5 to 10 years 400,223 - 36,871 - 363,352 1.70 After 10 years 1,186,635 124 186,757 - 1,000,002 1.38 1,596,543 124 224,149 - 1,372,518 1.46 Collateralized mortgage obligations issued or guaranteed by the FHLMC, FNMA and GNMA ("CMOs"): After 1 to 5 years 30,578 - 4,463 - 26,115 2.43 After 10 years 423,695 - 80,271 - 343,424 1.38 454,273 - 84,734 - 369,539 1.45 Private label: After 10 years 7,903 - 2,026 83 5,794 6.83 Total MBS 3,652,795 176 548,297 83 3,104,591 1.52 Other Due within one year 500 - - - 500 0.84 Total available-for-sale debt securities $ 6,398,197 $ 247 $ 798,466 $ 458 $ 5,599,520 1.22 (1) Excludes accrued interest receivable on available-for-sale debt securities that totaled $ 11.1 million as of December 31, 2022 reported as part of accrued interest receivable on loans and investment securities in the consolidated statements of financial condition, and excluded from the estimate of credit losses. (2) 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. The amortized cost, gross unrealized gains and losses recorded in OCL, ACL, estimated fair value, and weighted-average yield of available-for-sale debt securities by contractual maturities as of December 31, 2021 were as follows: December 31, 2021 Amortized cost (1) Gross ACL Fair value Unrealized Weighted- Gains Losses 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. GSEs' 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 (2) 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 CMOs: 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 available-for-sale debt securities $ 6,534,503 $ 28,900 $ 108,537 1,105 $ 6,453,761 1.03 (1) Excludes accrued interest receivable on available-for-sale debt securities that totaled $ 10.1 million as of December 31, 2021 reported as part of accrued interest receivable on loans and investment securities in the consolidated statements of financial condition, and excluded from the estimate of credit losses. (2) 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 available-for-sale debt securities are based on the period of final contractual maturity. Expected maturities might differ from contractual maturities because they may be subject to prepayments and/or call options. The weighted-average yield on available-for-sale debt securities is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gain or loss on available-for-sale debt securities is presented as part of other comprehensive (loss) income. The following tables show the fair value and gross unrealized losses of the Corporation’s available-for-sale debt securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2022 and 2021. The tables also include debt securities for which an ACL was recorded. As of December 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: U.S. Treasury and U.S. GSEs' obligations $ 298,313 $ 18,057 $ 2,174,724 $ 231,357 $ 2,473,037 $ 249,414 Puerto Rico government obligations - - 2,201 755 (1) 2,201 755 MBS: FHLMC 263,184 45,776 831,637 160,012 1,094,821 205,788 GNMA 74,829 3,433 179,854 28,167 254,683 31,600 FNMA 424,178 51,289 938,625 172,860 1,362,803 224,149 CMOs 54,688 6,788 314,851 77,946 369,539 84,734 Private label - - 5,794 2,026 (1) 5,794 2,026 $ 1,115,192 $ 125,343 $ 4,447,686 $ 673,123 $ 5,562,878 $ 798,466 (1) Unrealized losses do not include the credit loss component recorded as part of the ACL. As of December 31, 2022, PRHFA bond and private label MBS had an ACL of $ 0.4 million and $ 0.1 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: U.S. Treasury and U.S. GSEs' obligations $ 1,717,340 $ 25,401 $ 606,179 $ 16,243 $ 2,323,519 $ 41,644 Puerto Rico government obligations - - 2,850 416 (1) 2,850 416 MBS: 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 FNMA 1,237,701 19,843 112,559 3,821 1,350,260 23,664 CMOs 466,004 13,552 16,656 360 482,660 13,912 Private label - - 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 the 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. There were no sales of available-for-sale debt securities during the years ended December 31, 2022 and 2021. During the year ended December 31, 2020, proceeds from sales of available-for-sale debt securities amounted to $ 1.2 billion, including gross realized gains of $ 13.3 million and gross realized losses of $ 0.1 million. The $ 13.2 million net gain was realized on tax-exempt securities or was realized at the tax-exempt international banking entity subsidiary, which had no effect in the income tax expense recorded during the year ended December 31, 2020. 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 substantially all of the total available-for -sale portfolio as of December 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 December 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 $ 5.8 million, which had unrealized losses of approximately $ 2.1 million as of December 31, 2022, of which $ 0.1 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 is 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 December 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 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 and the housing price index. Under this approach, expected cash flows (interest and principal) were discounted at the Treasury yield curve as of the reporting date. Significant assumptions in the valuation of the private label MBS were as follows: As of As of December 31, 2022 December 31, 2021 Weighted Range Weighted Range Average Minimum Maximum Average Minimum Maximum Discount rate 16.2% 16.2% 16.2% 12.9% 12.9% 12.9% Prepayment rate 11.8% 1.5% 15.2% 15.2% 7.6% 24.9% Projected Cumulative Loss Rate 5.6% 0.3% 15.6% 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 December 31, 2022, the ACL for these private label MBS was $ 0.1 million, compared to $ 0.8 million as of December 31, 2021. As of December 31, 2022, the Corporation’s available-for-sale debt securities portfolio also included a residential pass-through MBS issued by the PRHFA, collateralized by certain second mortgages, with a fair value of $ 2.2 million, which had an unrealized loss of approximately $ 1.1 million. Approximately $ 0.4 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 are 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 discounted cash flow methodology that considered the structure and terms of the debt security. 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, expected cash flows (interest and principal) were discounted at the Treasury yield curve plus a spread 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 December 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. The following tables present a roll-forward by major security type for the years ended December 31, 2022, 2021, and 2020 of the ACL on available-for-sale debt securities: Year Ended December 31, 2022 Private label MBS Puerto Rico Government Obligations Total (In thousands) Beginning balance $ 797 $ 308 $ 1,105 Provision for credit losses - (benefit) expense (501) 67 (434) Net charge-offs (213) - (213) ACL on available-for-sale debt securities $ 83 $ 375 $ 458 Year Ended December 31, 2021 Private label MBS Puerto Rico Government Obligations Total (In thousands) Beginning balance $ 1,002 $ 308 $ 1,310 Provision for credit losses - (benefit) (136) - (136) Net charge-offs (69) - (69) ACL on available-for-sale debt securities $ 797 $ 308 $ 1,105 Year Ended December 31, 2020 Private label MBS Puerto Rico Government Obligations Total (In thousands) Beginning balance $ - $ - $ - Provision for credit losses - expense 1,333 308 1,641 Net charge-offs (331) - (331) ACL on available-for-sale debt securities $ 1,002 $ 308 $ 1,310 During 2022, the Corporation recognized $ 86.1 million of interest income on available-for-sale debt securities (2021 - $ 62.7 million; 2020 - $ 49.0 million), of which $ 40.7 million was exempt (2021 - $ 25.7 million; 2020 - $ 38.5 million). The exempt securities primarily relate to MBS and government obligations held by IBEs (as defined in the International Banking Entity Act of Puerto Rico), whose interest income and sales are exempt from Puerto Rico income taxation under that act. Held-to-Maturity Debt Securities The amortized cost, gross unrecognized gains and losses, estimated fair value, ACL, weighted-average yield and contractual maturities of held-to-maturity debt securities as of December 31, 2022 and 2021 were as follows : December 31, 2022 Amortized cost (1) Gross Unrecognized Fair value Weighted- Gains Losses ACL average yield% (Dollars in thousands) Puerto Rico municipal bonds: Due within one year $ 1,202 $ - $ 15 $ 1,187 $ 2 5.20 After 1 to 5 years 42,530 886 1,076 42,340 656 6.34 After 5 to 10 years 55,956 3,182 360 58,778 3,243 6.29 After 10 years 66,022 - 1,318 64,704 4,385 7.10 Total Puerto Rico municipal bonds 165,710 4,068 2,769 167,009 8,286 6.62 MBS: FHLMC certificates: After 5 to 10 years $ 21,443 $ - $ 746 $ 20,697 $ - 3.03 After 10 years 19,362 - 888 18,474 - 4.21 40,805 - 1,634 39,171 - 3.59 GNMA certificates: ` After 10 years 19,131 - 943 18,188 - 3.35 FNMA certificates: After 1 to 5 years 9,621 - 396 9,225 - 3.48 After 10 years 72,347 - 3,155 69,192 - 4.14 81,968 - - 3,551 78,417 - 4.06 CMOs After 10 years 129,923 - 5,593 124,330 - 3.24 Total MBS 271,827 - 11,721 260,106 - 3.55 Total held-to-maturity debt securities $ 437,537 $ 4,068 $ 14,490 $ 427,115 $ 8,286 4.71 (1) Excludes accrued interest receivable on held-to-maturity debt securities that totaled $ 5.5 million as of December 31, 2022, was reported as part of accrued interest receivable on loans and investment securities in the consolidated statements of financial condition, and is excluded from the estimate of credit losses. December 31, 2021 Amortized cost (1) Gross Unrecognized Fair value Weighted- Gains Losses ACL average yield% (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 held-to-maturity debt securities $ 178,133 $ 2,086 $ 13,072 $ 167,147 $ 8,571 4.04 (1) Excludes accrued interest receivable on held-to-maturity debt securities that totaled $ 3.4 million as of December 31, 2021, was reported as part of accrued interest receivable on loans and investment securities in the consolidated statements of financial condition, and is excluded from the estimate of credit losses. During 2022, the Corporation purchased approximately $ 289.9 million of GSEs’ MBS, which were classified as held-to-maturity debt securities. The following tables show the Corporation’s held-to-maturity debt securities ’ fair value and gross unrecognized losses, aggregated by category and length of time that individual securities had been in a continuous unrecognized loss position, as of December 31, 2022 and 2021, including debt securities for which an ACL was recorded: As of December 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 $ - $ - $ 98,797 $ 2,769 $ 98,797 $ 2,769 MBS: FHLMC certificates 39,171 1,634 - - 39,171 1,634 GNMA certificates 18,188 943 - - 18,188 943 FNMA certificates 78,417 3,551 - - 78,417 3,551 CMOs 124,330 5,593 - - 124,330 5,593 Total held-to-maturity debt securities $ 260,106 $ 11,721 $ 98,797 $ 2,769 $ 358,903 $ 14,490 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 classifies the held-to-maturity debt securities portfolio into the following major security types: MBS issued by GSEs and Puerto Rico municipal bonds. As of December 31, 2022, all of the MBS included in the held-to-maturity debt securities portfolio were issued by GSEs. The Corporation does not recognize an ACL for these securities since they are highly rated by major rating agencies and have a long history of no credit losses. In the case of Puerto Rico municipal bonds, the Corporation determines the ACL 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. 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 December 31, 2022. The Puerto Rico municipal bonds had an ACL of $ 8.3 million as of December 31, 2022, down $ 0.3 million from $ 8.6 million as of December 31, 2021, mostly related to a reduction in qualitative reserves driven by improvements in the underlying financial information of certain issuers during 2022. The following table presents the activity in the ACL for held-to-maturity debt securities by major security type for the years ended December 31, 2022, 2021 and 2020: Puerto Rico Municipal Bonds Year Ended December 31, 2022 December 31, 2021 December 31, 2020 (In thousands) Beginning Balance $ 8,571 $ 8,845 $ - Impact of adopting ASC 326 - - 8,134 Initial allowance on PCD debt securities - - 1,269 Provision for credit losses - (benefit) (285) (274) (558) ACL on held-to-maturity debt securities $ 8,286 $ 8,571 $ 8,845 During the second quarter of 2019, the oversight board established by 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 economic and fiscal challenges 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 December 31, 2022 and 2021, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents. During 2022, the Corporation recognized $ 15.5 million of interest income on held-to-maturity debt securities (2021 - $ 8.8 million; 2020 - $ 7.6 million), of which $ 15.4 million was exempt (2021 - $ 8.8 million; 2020 - $ 7.6 million). The exempt securities primarily relate to MBS held by IBEs (as defined in the International Banking Entity Act of Puerto Rico), whose interest income and sales are exempt from Puerto Rico income taxation under that act; and tax-exempt Puerto Rico municipal bonds. Credit Quality Indicators: The held-to-maturity debt securities portfolio consisted of GSEs ’ MBS and financing arrangements with Puerto Rico municipalities issued in bond form. As previously mentioned, the Corporation expects no credit losses on GSEs MBS. The Puerto Rico municipal bonds 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 these municipal bonds through the use of internal credit-risk ratings, which are generally updated on a quarterly basis. The Corporation considers a municipal bond 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 asset 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 and include assets categorized as watch. Assets classified as watch have acceptable business credit, but borrowers ’ operations, cash flow or financial condition evidence more than average risk and requires additional level of supervision and attention from loan officers. Special Mention – Special Mention assets have 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 – Substandard assets are 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 the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on 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 as 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 Puerto Rico municipal bonds to evaluate if they are properly classified, and to measure credit losses on these securities. 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 debt 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 December 31, 2022 and 2021, all Puerto Rico municipal bonds classified as held-to-maturity 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 December 31, 2022 and 2021. A security is considered to be past due once it is 30 days contractually past due under the terms of the agreement.

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