Investment Securities

12 Months Ended

Dec. 31, 2015

Securities Purchased Under Agreements To Resell And Investments Securities

NOTE 3 – INVESTMENT SECURITIES

Money Market Investments

The Company considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less at the date of acquisition. At December 31, 2015 and 2014, money market instruments included as part of cash and cash equivalents amounted to $4.7 million in both periods.

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by the Company at December 31, 2015 and 2014 were as follows:

	December 31, 2015
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(In thousands)
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	735,363	$	25,791	$	1,509	$	759,645	2.97%
GNMA certificates		57,129		1,366		-		58,495	3.19%
CMOs issued by US government-sponsored agencies		137,787		27		2,741		135,073	1.85%
Total mortgage-backed securities		930,279		27,184		4,250		953,213	2.82%
Investment securities
Obligations of US government-sponsored agencies		5,122		-		29		5,093	1.36%
Obligations of Puerto Rico government and political subdivisions		17,801		-		4,070		13,731	6.24%
Other debt securities		2,444		128		-		2,572	2.98%
Total investment securities		25,367		128		4,099		21,396	4.94%
Total securities available for sale	$	955,646	$	27,312	$	8,349	$	974,609	2.87%
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	595,157		426		5,865		589,718	2.24%
Investment securities
US Treasury securities		25,032		-		71		24,961	0.49%
Total securities held to maturity		620,189		426		5,936		614,679	2.17%
Total	$	1,575,835	$	27,738	$	14,285	$	1,589,288	2.60%

	December 31, 2014
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(In thousands)
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	972,836	$	37,876	$	1,203	$	1,009,509	3.12%
GNMA certificates		4,473		288		8		4,753	4.94%
CMOs issued by US government-sponsored agencies		179,146		136		3,153		176,129	1.81%
Total mortgage-backed securities		1,156,455		38,300		4,364		1,190,391	2.92%
Investment securities
Obligations of US government-sponsored agencies		7,148		33		-		7,181	1.34%
Obligations of Puerto Rico government and public instrumentalities		20,939		-		5,267		15,672	5.41%
Other debt securities		3,137		157		-		3,294	2.95%
Total investment securities		31,224		190		5,267		26,147	4.23%
Total securities available-for-sale	$	1,187,679	$	38,490	$	9,631	$	1,216,538	2.96%
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates		162,752		1,402		-		164,154	2.48%
Total	$	1,350,431	$	39,892	$	9,631	$	1,380,692	2.90%

The amortized cost and fair value of the Company’s investment securities at December 31, 2015, by contractual maturity, are shown in the next table. Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	December 31, 2015
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)				(In thousands)
Mortgage-backed securities
Due after 5 to 10 years
FNMA and FHLMC certificates	$	15,098	$	15,228	$	-	$	-
Total due after 5 to 10 years		15,098		15,228		-		-
Due after 10 years
FNMA and FHLMC certificates		720,265		744,417		595,157		589,718
GNMA certificates		57,129		58,495		-		-
CMOs issued by US government-sponsored agencies		137,787		135,073		-		-
Total due after 10 years		915,181		937,985		595,157		589,718
Total mortgage-backed securities		930,279		953,213		595,157		589,718
Investment securities
Due from 1 to 5 years
US Treasury securities		-		-		25,032		24,961
Obligations of Puerto Rico government and political subdivisions		8,733		7,438		-		-
Total due from 1 to 5 years		8,733		7,438		25,032		24,961
Due after 5 to 10 years
Obligations of US government and sponsored agencies		5,122		5,093		-		-
Total due after 5 to 10 years		5,122		5,093		-		-
Due after 10 years
Obligations of Puerto Rico government and political subdivisions		9,068		6,293		-		-
Other debt securities		2,444		2,572		-		-
Total due after 10 years		11,512		8,865		-		-
Total investment securities		25,367		21,396		25,032		24,961
Total securities available-for-sale	$	955,646	$	974,609	$	620,189	$	614,679

The Company, as part of its asset/liability management, may purchase U.S. Treasury securities and U.S. government-sponsored agency discount notes close to their maturities as alternatives to cash deposits at correspondent banks or as a short term vehicle to reinvest the proceeds of sale transactions until investment securities with attractive yields can be purchased. During the years ended 2015, 2014 and 2013, the Company sold $63.5 million, $99.4 million and $141.2 million, respectively, of available-for-sale Government National Mortgage Association (“GNMA”) certificates as part of its recurring mortgage loan origination and securitization activities. These sales did not realize any gains or losses during such periods. During the year ended December 31, 2015, the Company retained securitized GNMA pools totaling $54.5 million amortized cost, at a yield of 3.09% from its own originations. Previously, the Company was selling all securitized GNMA pools.

For the years ended December 31, 2015 and 2014, the Company recorded a net gain on sale of securities of $2.6 million and $4.4 million, respectively and a net loss of $35 thousand for the year ended December 31, 2013. The table below presents the gross realized gains and losses by category for such periods

	Year Ended December 31, 2015
			Book Value
Description	Sale Price		at Sale		Gross Gains		Gross Losses
	(In thousands)
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	40,307	$	37,736	$	2,571	$	-
GNMA certificates		63,524		63,523		1		-
Total	$	103,831	$	101,259	$	2,572	$	-

	Year Ended December 31, 2014
			Book Value
Description	Sale Price		at Sale		Gross Gains		Gross Losses
	(In thousands)
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	115,158	$	110,792	$	4,366	$	-
GNMA certificates		99,360		99,360		-		-
Total mortgage-backed securities	$	214,518	$	210,152	$	4,366	$	-


	Year Ended December 31, 2013
			Book Value
Description	Sale Price		at Sale		Gross Gains		Gross Losses
	(In thousands)
Sale of securities available-for-sale
Mortgage-backed securities
GNMA certificates	$	141,202	$	141,237		-	$	35
Total mortgage-backed securities	$	141,202	$	141,237	$	-	$	35

The following tables show the Company’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-maturity, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position at December 31, 2015 and 2014:

	December 31, 2015
	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	103,340	$	2,410	$	100,930
Obligations of Puerto Rico government and political subdivisions		17,801		4,070		13,731
	$	121,141	$	6,480	$	114,661

	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies		25,736	$	331	$	25,405
FNMA and FHLMC certificates	$	149,480	$	1,509	$	147,971
Obligations of US government and sponsored agencies		5,122	$	29	$	5,093

Securities held-to-maturity
FNMA and FHLMC Certificates		468,487		5,865		462,622
US Treausury Securities		25,032		71		24,961
	$	673,857	$	7,805	$	666,052


	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	129,076		2,741	$	126,335
FNMA and FHLMC certificates		149,480		1,509		147,971
Obligations of Puerto Rico Government and political subdivisions		17,801		4,070		13,731
Obligations of US government and sponsored agencies		5,122		29		5,093
		301,479		8,349		293,130
Securities held-to-maturity
FNMA and FHLMC certificates		468,487		5,865		462,622
US Treasury Securities		25,032		71		24,961
	$	794,998	$	14,285	$	780,713

	December 31, 2014
	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
Obligations of Puerto Rico government and political subdivisions	$	20,939	$	5,267	$	15,672
CMOs issued by US government-sponsored agencies		143,928		3,086		140,842
FNMA and FHLMC certificates		113,376		1,172		112,204
GNMA certificates		77		8		69
	$	278,320	$	9,533	$	268,787


	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies		15,172		67		15,105
FNMA and FHLMC certificates		63,736		31		63,705
	$	78,908	$	98	$	78,810


	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies		159,100		3,153		155,947
FNMA and FHLMC certificates		177,112		1,203		175,909
Obligations of Puerto Rico government and political subdivisions		20,939		5,267		15,672
GNMA certificates		77		8		69
	$	357,228	$	9,631	$	347,597

The Company performs valuations of the investment securities on a monthly basis. Moreover, the Company conducts quarterly reviews to identify and evaluate each investment in an unrealized loss position for other-than-temporary impairment. Any portion of a decline in value associated with credit loss is recognized in the statements of operations with the remaining noncredit-related component recognized in other comprehensive income (loss). A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered by comparing the present value of cash flows expected to be collected from the security, discounted at the rate equal to the yield used to accrete current and prospective beneficial interest for the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the “credit loss.” Other-than-temporary impairment analysis is based on estimates that depend on market conditions and are subject to further change over time. In addition, while the Company believes that the methodology used to value these exposures is reasonable, the methodology is subject to continuing refinement, including those made as a result of market developments. Consequently, it is reasonably possible that changes in estimates or conditions could result in the need to recognize additional other-than-temporary impairment charges in the future.

Most of the investments ($777.2 million, amortized cost, or 98%) with an unrealized loss position at December 31, 2015 consist of securities issued or guaranteed by the U.S. Treasury or U.S. government-sponsored agencies, all of which are highly liquid securities that have a large and efficient secondary market. Their aggregate losses and their variability from period to period are the result of changes in market conditions, and not due to the repayment capacity or creditworthiness of the issuers or guarantors of such securities.

The remaining investments ($17.8 million, amortized cost, or 2%) with an unrealized loss position at December 31, 2015 consist of obligations issued or guaranteed by the government of Puerto Rico and its political subdivisions or instrumentalities. The decline in the market value of these securities is mainly attributed to an increase in volatility as a result of changes in market conditions that reflect the significant economic and fiscal challenges that Puerto Rico is facing, including a protracted economic recession, sizable government debt-service obligations and structural budget deficits, high unemployment and a shrinking population. Moreover, the negative rating decisions taken by the credit rating agencies have affected the market value and liquidity of these securities.

As of December 31, 2015, the Company performed a cash flow analysis of its Puerto Rico government bonds to calculate the cash flows expected to be collected and determine if any portion of the decline in market value of these investments was considered an other-than-temporary impairment. The analysis derives an estimate of value based on the present value of risk-adjusted future cash flows of the underlying investments, and included the following components:

The contractual future cash flows of the bonds are projected based on the key terms as set forth in the official statements for each investment. Such key terms include among others the interest rate, amortization schedule, if any, and maturity date.
The risk-adjusted cash flows are calculated based on a monthly default probability and recovery rate assumptions based on the credit rating of each investment. Constant monthly default rates are assumed throughout the life of the bonds which are based on the respective security’s credit rating as of the date of the analysis.
The adjusted future cash flows are then discounted at the original effective yield of each investment based on the purchase price and expected risk-adjusted future cash flows as of the purchase date of each investment.

For PRHTA obligation totaling $6.7 million, amortized cost, or 36% of the obligations issued or guaranteed by the government of Puerto Rico and its political subdivisions or instrumentalities, the discounted cash flow analysis for the investments showed a cumulative default probability at maturity of 9.78%, thus reflecting that it is more likely than not that the bonds will not default at all during their remaining terms. Based on this analysis, the Company determined that it is more likely than not that it will recover all interest and principal invested in this Puerto Rico government bond and is therefore not required to recognize a credit loss as of December 31, 2015.

Also, the Company’s conclusion is based on the assessment of the specific source of repayment of the outstanding bond, which continues to perform. PRHTA started principal repayments on July 1, 2014. All scheduled principal and interest payments are being collected.

For PRIDCO and PBA obligations amounting to $12.6 million, amortized cost, or 64% of the Puerto Rico government debt securities held by the Company, the discounted cash flow analysis showed a cumulative default at maturity in the range up to 46.03% using a recovery rate of 65%. Taking into consideration that the PBA bonds are guaranteed by the full faith and credit of the Commonwealth of Puerto Rico and the recent downgrades of the general obligation debts after the government announced it needs to restructure its debt, the Company concluded that it is more likely than not that this bond will default during its remaining term until maturity in 2028. Based on the above, during the year ended December 31, 2015 an other-than-temporary impairment was recorded in earnings for the amount of $1.5 million, which represents the estimated loss resulting from the discounted cash flow analysis. The non-credit related portion of the unrealized losses amounting to $3.2 million was recognized in other comprehensive income, net of related taxes.

Prospectively, for debt securities for which other-than-temporary impairments was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted as interest income. If upon subsequent evaluation, there is a significant increase in the cash flows expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, such changes will be accounted for as a prospective adjustment to the accretable yield. Subsequent increases and decreases (if not other-than-temporary impairment) in the fair value of available-for-sale securities will be included in other comprehensive income (loss).

Further negative evidence impacting the liquidity and sources of repayment of the obligations of Puerto Rico and its political subdivisions, could result in a further charge to earnings to recognize estimated credit losses determined to be other-than-temporary.

At December 31, 2015, the Company has cash flow capacity, sufficient liquidity and a strong capital position to maintain the bonds and does not need to sell them in a loss position and it is not likely that the Company will have to sell the investment securities prior to recovery of their amortized cost basis.

The following table presents a rollforward of credit-related impairment losses recognized in earnings for the year ended December 31, 2015 (non in 2014 and 2013) on available-for-sale securities that the Company does not have the intent to sell or will not more-likely-than-not be required to sell:

	Year Ended December 31,
	2015

Balance at beginning of year	$	-
Additions from credit losses recognized on available-for-sale securities that had no previous impairment losses		1,490
Balance at end of year	$	1,490

- Definition

The entire disclosure for investments in certain debt and equity securities.

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