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Investment Securities | 9 Months Ended
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Sep. 30, 2016
Investments [Abstract] |
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 September 30, 2016 and December 31, 2015, money market instruments i ncluded as part of cash and cash equivalents amounted to $5.5 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 September 30, 2016 and December 31, 2015 were as follows:
| September 30, 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 | $ | 376,242 |  | $ | 13,365 |  | $ | - |  | $ | 389,607 |  | 2.60%
GNMA certificates |  | 125,188 |  |  | 5,797 |  |  | - |  |  | 130,985 |  | 3.02%
CMOs issued by US government-sponsored agencies |  | 111,808 |  |  | 398 |  |  | 370 |  |  | 111,836 |  | 1.88%
Total mortgage-backed securities |  | 613,238 |  |  | 19,560 |  |  | 370 |  |  | 632,428 |  | 2.56%
Investment securities |  |  |  |  |  |  |  |  |  |  |  |  |
Obligations of US government-sponsored agencies |  | 4,170 |  |  | - |  |  | 5 |  |  | 4,165 |  | 1.37%
Obligations of Puerto Rico government and public instrumentalities |  | 4,680 |  |  | - |  |  | 607 |  |  | 4,073 |  | 5.55%
Other debt securities |  | 1,906 |  |  | 111 |  |  | - |  |  | 2,017 |  | 2.94%
Total investment securities |  | 10,756 |  |  | 111 |  |  | 612 |  |  | 10,255 |  | 3.47%
Total securities available for sale | $ | 623,994 |  | $ | 19,671 |  | $ | 982 |  | $ | 642,683 |  | 2.57%
Held-to-maturity |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities |  |  |  |  |  |  |  |  |  |  |  |  |
FNMA and FHLMC certificates | $ | 616,883 |  |  | 8,141 |  |  | 18 |  |  | 625,006 |  | 2.17%
Investment securities |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury securities |  | 25,007 |  |  | 10 |  |  | - |  |  | 25,017 |  | 0.49%
Total securities held to maturity |  | 641,890 |  |  | 8,151 |  |  | 18 |  |  | 650,023 |  | 2.11%
Total | $ | 1,265,884 |  | $ | 27,822 |  | $ | 1,000 |  | $ | 1,292,706 |  | 2.34%
| 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%
The amortized cost and fair value of the Company’s investment securities at September 30, 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.
| September 30, 2016
| Available-for-sale |  | Held-to-maturity
| Amortized Cost |  | Fair Value |  | Amortized Cost |  | Fair Value
| (In thousands) |  | (In thousands)
Mortgage-backed securities |  |  |  |  |  |  |  |  |  |  |
Due from 1 to 5 years |  |  |  |  |  |  |  |  |  |  |
FNMA and FHLMC certificates | $ | 11,294 |  | $ | 11,629 |  | $ | - |  | $ | -
Total due from 1 to 5 years |  | 11,294 |  |  | 11,629 |  |  | - |  |  | -
Due from 5 to 10 years |  |  |  |  |  |  |  |  |  |  |
CMOs issued by US Government-sponsored agencies |  | 2,244 |  |  | 2,245 |  |  | - |  |  | -
FNMA and FHLMC certificates |  | 27,173 |  |  | 27,837 |  |  | - |  |  | -
Total due from 5 to 10 years |  | 29,417 |  |  | 30,082 |  |  | - |  |  | -
Due after 10 years |  |  |  |  |  |  |  |  |  |  |
FNMA and FHLMC certificates |  | 337,775 |  |  | 350,141 |  |  | 616,883 |  |  | 625,006
GNMA certificates |  | 125,188 |  |  | 130,985 |  |  | - |  |  | -
CMOs issued by US government-sponsored agencies |  | 109,564 |  |  | 109,591 |  |  | - |  |  | -
Total due after 10 years |  | 572,527 |  |  | 590,717 |  |  | 616,883 |  |  | 625,006
Total mortgage-backed securities |  | 613,238 |  |  | 632,428 |  |  | 616,883 |  |  | 625,006
Investment securities |  |  |  |  |  |  |  |  |  |  |
US Treasury securities |  | - |  |  | - |  |  | 25,007 |  |  | 25,017
Total due in less than one year |  | - |  |  | - |  |  | 25,007 |  |  | 25,017
Due from 1 to 5 years |  |  |  |  |  |  |  |  |  |  |
Obligations of Puerto Rico government and public instrumentalities |  | 4,680 |  |  | 4,073 |  |  | - |  |  | -
Total due from 1 to 5 years |  | 4,680 |  |  | 4,073 |  |  | - |  |  | -
Due from 5 to 10 years |  |  |  |  |  |  |  |  |  |  |
Obligations of US government and sponsored agencies |  | 4,170 |  |  | 4,165 |  |  | - |  |  | -
Other debt securities |  | 1,906 |  |  | 2,017 |  |  | - |  |  | -
Total due from 5 to 10 years |  | 6,076 |  |  | 6,182 |  |  | - |  |  | -
Total investment securities |  | 10,756 |  |  | 10,255 |  |  | 25,007 |  |  | 25,017
Total securities available-for-sale and held-to-maturity | $ | 623,994 |  | $ | 642,683 |  | $ | 641,890 |  | $ | 650,023
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 pur chased. During the nine-month period ended September 30, 2016, the Company retained securitized Government National Mortgage Association ("GNMA") poo ls totaling $71.8 million amortized cost, at a yield of 2.99% from its own originations. Previously, the Company was selling all securitized GNMA pools. The GNMA pools were sold until June 2015. During the first half of 2015, the Co mpany sold $63.5 million of available-for-sale GNMA certificates as part of its recurring mortgage loan origination and securitization activities. These sales did not realize any gai ns or losses during such period. During the nine-month period ended Septe mber 30, 2016, the Company sold $277.2 million of mortgage-backed securities and $11.1 million of Puerto Rico government bonds, and recorded a net gain on sale of securities of $12.2 million. Among the 2016 sales, the Company sold all but one of the Puert o Rico government bonds it held. The Company had other-than-temporary impairment charges on such securities sold totaling $1.5 million during the second half of 2015. During the nine-month period ended September 30, 2015, the Company sold $101.3 million of mortgage-backed securities and recorded a net gain on sale of securities of $2.6 million. T he table below presents the gross realized gains and gross realized losses by category for such periods.
| Nine-Month Period Ended September 30, 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 | $ | 293,505 |  | $ | 277,181 |  | $ | 16,324 |  | $ | -
Investment securities |  |  |  |  |  |  |  |  |  |  |
Obligations of Puerto Rico government and public instrumentalities |  | 6,978 |  |  | 11,095 |  |  | - |  |  | 4,117
Total | $ | 300,483 |  | $ | 288,276 |  | $ | 16,324 |  | $ | 4,117
| Nine-Month Period Ended September 30, 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 |  | $ | -
The following table s show the Company’s gross unrealized losses and fair value of investment securities availab le-for-sale and held-to-maturity, aggregated by investment category and the length of time that individual securities have been in a continuo us unrealized loss position at September 30, 2016 and December 31, 2015:
| September 30, 2016
| 12 months or more
| Amortized |  | Unrealized |  | Fair
| Cost |  | Loss |  | Value
| (In thousands)
Securities available-for-sale |  |  |  |  |  |  |  |
CMOs issued by US government-sponsored agencies | $ | 37,579 |  | $ | 320 |  | $ | 37,259
Obligations of Puerto Rico government and public instrumentalities |  | 4,680 |  |  | 607 |  |  | 4,073
| $ | 42,259 |  | $ | 927 |  | $ | 41,332
| Less than 12 months
| Amortized |  | Unrealized |  | Fair
| Cost |  | Loss |  | Value
| (In thousands)
Securities available-for-sale |  |  |  |  |  |  |  |
CMOs issued by US Government-sponsored agencies |  | 13,181 |  |  | 50 |  |  | 13,131
Obligations of US government and sponsored agencies |  | 4,170 |  |  | 5 |  |  | 4,165
Securities held to maturity |  |  |  |  |  |  |  |
FNMA and FHLMC certificates |  | 21,240 |  |  | 18 |  |  | 21,222
| $ | 38,591 |  | $ | 73 |  | $ | 38,518
| Total
| Amortized |  | Unrealized |  | Fair
| Cost |  | Loss |  | Value
| (In thousands)
Securities available-for-sale |  |  |  |  |  |  |  |
CMOs issued by US government-sponsored agencies | $ | 50,760 |  | $ | 370 |  | $ | 50,390
Obligations of Puerto Rico Government and political subdivisions |  | 4,680 |  |  | 607 |  |  | 4,073
Obligations of US government and sponsored agencies |  | 4,170 |  |  | 5 |  |  | 4,165
Securities held to maturity |  |  |  |  |  |  |  |
FNMA and FHLMC certificates |  | 21,240 |  |  | 18 |  |  | 21,222
| $ | 80,850 |  | $ | 1,000 |  | $ | 79,850
At September 30, 2016 t here were no securities held-to-maturity in a continuous unrealized loss position for twelve months or more.
| 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 dec line 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 basi s 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 shortfa ll 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 subjec t 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. Consequen tly, 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 ($76.2 million, amortized cost, or 94%) with an unrea lized loss position at September 30, 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 los ses 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 ($4.7 million, amortized c ost, or 6%) with an unrealiz ed loss position at September 30, 2016 consist of obligations issued or guaranteed by the government of Puerto Rico and its public instrumentalities. The decline in the market value of thi s securit y is mainly attributed to an in crease 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-ser vice obligations and structural budget deficits, high unemploy ment and a shrinking population. The only obligation issued or guaranteed by the government of Puerto Rico and its instrumentalities held at the end of the third quarter of 2016 by the Company was the P uerto R ico Highway s and Transportation Authority (“PRHTA”) – Teodoro Moscoso Bridge revenue bond. The pledged income of this bond comes from gross revenues from Teodoro Moscoso Bridge operations. Although PRHTA is included in the Puerto Rico Gove rnor's executive order of November 30, 2015 ordering the '"clawback" of certain government revenues, the toll bridge revenues for the repayment of such bonds we re not subject to the “clawback." All other Puerto Rico government securities were sold during the first quarter of 2016. The PRHTA bond with a principal amount of $4.6 million had an aggregate fair value of $4.1 million at September 30, 2016 (87% of the bond's cost). The discounted cash flow analysis for the investments showed a cumulative default probability at maturity of 8.9%, thus reflecting that it is more likely th an 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 September 30, 2016. Also, the Company’s conclusion is based on the assessment of the specific source of repayment of the outstanding bo nd, which continues to perform. PRHTA started principal repayments on July 1, 2014. All scheduled pri ncipal and interest payments to date have been collected. On July 1, 2016, the Company received the scheduled principal payment of $2.0 millio n. The next p ayment is due on July 1, 2017. As a result of the aforementioned analysis, no other-than-temporary losses were recorded during the quarter ended September 30, 2016. As of September 30, 2016, the Company applied a discounted cash flow analysis to the bond guaranteed by the government of Puerto Rico 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 est imate 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 offi cial 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 di scounted 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 following table presents a roll-forward of credit-related impairment losses recognized in earnings for the nine-month period ended September 30, 2016 and 2015 on available-for-sale securities:
|  | Nine-Month Period Ended September 30,
|  | 2016 |  | 2015
Balance at beginning of period |  | $ | 1,490 |  | $ | -
Reductions for securities sold during the period (realized) |  |  | (1,490) |  |  | -
Additions from credit losses recognized on available-for-sale securities that had no previous impairment losses |  |  | - |  |  | 246
Balance at end of period |  | $ | - |  | $ | 246

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