Investment Securities

3 Months Ended

Mar. 31, 2016

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 March 31, 2016 and December 31, 2015, money market instruments included as part of cash and cash equivalents amounted to $5.9 million and $4.7 million, respectively.

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by the Company at March 31, 2016 and December 31, 2015 were as follows:

	March 31, 2016
			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	$	431,411	$	13,445	$	-	$	444,856	2.63%
GNMA certificates		79,477		3,220		-		82,697	3.15%
CMOs issued by US government-sponsored agencies		128,957		353		728		128,583	1.86%
Total mortgage-backed securities		639,845		17,018		728		656,136	2.54%
Investment securities
Obligations of US government-sponsored agencies		4,785		51		-		4,837	1.36%
Obligations of Puerto Rico government and public instrumentalities		6,720		-		873		5,847	5.55%
Other debt securities		2,323		142		-		2,465	2.99%
Total investment securities		13,828		193		873		13,149	3.67%
Total securities available for sale	$	653,673	$	17,211	$	1,601	$	669,285	2.56%
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	612,012		4,402		81		616,333	2.23%
Investment securities
US Treasury securities		25,024		-		11		25,013	0.49%
Total securities held to maturity		637,036		4,402		92		641,346	2.17%
Total	$	1,290,709	$	21,613	$	1,693	$	1,310,631	2.37%

	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 public instrumentalities		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%

The amortized cost and fair value of the Company’s investment securities at March 31, 2016, 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.

	March 31, 2016
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)				(In thousands)
Mortgage-backed securities
Due from 5 to 10 years
FNMA and FHLMC certificates	$	13,936	$	14,250	$	-	$	-
Total due from 5 to 10 years		13,936		14,250		-		-
Due after 10 years
FNMA and FHLMC certificates		417,475		430,606		612,012		616,333
GNMA certificates		79,477		82,697		-		-
CMOs issued by US government-sponsored agencies		128,957		128,583		-		-
Total due after 10 years		625,909		641,886		612,012		616,333
Total mortgage-backed securities		639,845		656,136		612,012		616,333
Investment securities
Due from 1 to 5 years
US Treasury securities		-		-		25,024		25,013
Obligations of Puerto Rico government and public instrumentalities		6,720		5,847		-		-
Total due from 1 to 5 years		6,720		5,847		25,024		25,013
Due from 5 to 10 years
Obligations of US government and sponsored agencies		4,785		4,837		-		-
Other debt securities		2,323		2,465		-		-
Total due from 5 to 10 years		7,108		7,302		-		-
Total investment securities		13,828		13,149		25,024		25,013
Total securities available-for-sale and held-to-maturity	$	653,673	$	669,285	$	637,036	$	641,346

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 first quarter ended March 31, 2016, the Company retained securitized Government National Mortgage Association ("GNMA") pools totaling $23.0 million amortized cost, at a yield of 3.06% from its own originations. Previously, the Company was selling all securitized GNMA pools. The GNMA pools were sold until June 2015. During the first quarter of 2015, the Company sold $26.8 million of available-for-sale GNMA certificates as part of its recurring mortgage loan origination and securitization activities. These sales did not realize any gains or losses during such period.

During the first quarter of 2016, the Company sold $272.1 million of mortgage-backed securities and $11.1 million of Puerto Rico government bonds, and recorded a net gain on sale of securities of $12.0 million. Among the 2016 sales, the Company sold all but one of the Puerto Rico government bonds it held. The Company had book other-than-temporary impairment charges on such securities sold totaling $1.5 million during the previous two quarters. During the first quarter of 2015, the Company sold $37.7 million of mortgage-backed securities and recorded a net gain on sale of securities of $2.6 million. The table below presents the gross realized gains and gross realized losses by category for such periods.

	Quarter Ended March 31, 2016
			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	$	288,194	$	272,081	$	16,113	$	-
Investment securities
Obligations of Puerto Rico government and public instrumentalities		6,978		11,095		-		4,117
Total	$	295,172	$	283,176	$	16,113	$	4,117

	Quarter Ended March 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	$	37,735	$	2,572	$	-
GNMA certificates		26,768		26,768		-		-
Total	$	67,075	$	64,503	$	2,572	$	-

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 March 31, 2016 and December 31, 2015:

	March 31, 2016
	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	83,400	$	728	$	82,672
Obligations of Puerto Rico government and public instrumentalities		6,720		873		5,847
		90,120		1,601		88,519
Securities held to maturity
FNMA and FHLMC certificates		30,309	$	46	$	30,263
	$	120,429	$	1,647	$	118,782

	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities held-to-maturity
FNMA and FHLMC certificates		58,589		35		58,554
US Treausury Securities		25,024		11		25,013
	$	83,613	$	46	$	83,567


	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	83,400	$	728	$	82,672
Obligations of Puerto Rico government and public instrumentalities		6,720		873		5,847
		90,120		1,601		88,519
Securities held-to-maturity
FNMA and FHLMC certificates		88,898		81		88,817
US Treasury Securities		25,024		11		25,013
	$	204,042	$	1,693	$	202,349

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

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 ($197.3 million, amortized cost, or 97%) with an unrealized loss position at March 31, 2016 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 ($6.7 million, amortized cost, or 3%) with an unrealized loss position at March 31, 2016 consist of obligations issued or guaranteed by the government of Puerto Rico and its 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 the government's credit default, a protracted economic recession, sizable government debt-service obligations and structural budget deficits, high unemployment and a shrinking population.

As of March 31, 2016, the Company applied a discounted cash flow analysis to the 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.

The only obligation issued or guaranteed by the government of Puerto Rico and its instrumentalities held at the end of the first quarter of 2016 by the Company was the Puerto Rico Highways and Transportation Authority (“PRHTA”) – Teodoro Moscoso Bridge revenue bond. The pledge income sources of this bond comes from gross revenues from Teodoro Moscoso Bridge operations. Although PRHTA is included in the Puerto Rico Governor's executive order of November 30, 2015 ordering the '"clawback" of certain government revenues the toll bridge revenues for the repayment of such bonds were not subject to the “clawback”. All other securities were sold during the first quarter of 2016. The PRHTA bond in the principal amount of $6.7 million had an aggregate fair value of $5.8 million at March 31, 2016 (0.45% of the portfolio's total fair value). The discounted cash flow analysis for the investments showed a cumulative default probability at maturity of 8.81%, thus reflecting that it is more likely than not that the bond will not default during its remaining term. 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 March 31, 2016. 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 to date have been collected. As a result of the aforementioned analysis, no other-than-temporary losses were recorded during the quarter ended March 31, 2016 and 2015.

The following table presents a rollforward of credit-related impairment losses recognized in earnings for the quarters ended March 31, 2016 and 2015 on available-for-sale securities:.

	Quarter Ended March 31,
	2016		2015

Balance at beginning of period	$	1,490	$	-
Reductions for securities sold during the period (realized)		(1,490)		-
Balance at end of period	$	-	$	-

- Definition

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

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