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Investment Securities

9 Months Ended

Sep. 30, 2017

Investments [Abstract]

Investments Securities

NOTE 4 – INVESTMENT SECURITIES

Money Market Investments

Oriental 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, 2017 and December 31, 2016, money market instruments included as part of cash and cash equivalents amounted to $6.5 million and $5.6 million, respectively.

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by Oriental at September 30, 2017 and December 31, 2016 were as follows:

	September 30, 2017
				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	$	344,581		$	2,464		$	1,462		$	345,583		2.36%
GNMA certificates		162,993			2,197			423			164,767		2.94%
CMOs issued by US government-sponsored agencies		86,905			6			1,038			85,873		1.90%
Total mortgage-backed securities		594,479			4,667			2,923			596,223		2.45%
Investment securities
US Treasury securities		10,269			-			51			10,218		1.26%
Obligations of US government-sponsored agencies		3,121			-			29			3,092		1.38%
Obligations of Puerto Rico government and public instrumentalities		2,455			-			249			2,206		5.55%
Other debt securities		1,612			72			-			1,684		3.00%
Total investment securities		17,457			72			329			17,200		2.42%
Total securities available for sale	$	611,936		$	4,739		$	3,252		$	613,423		2.44%
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	530,178		$	367		$	4,715		$	525,830		2.09%

	December 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	$	422,168		$	6,354		$	3,036		$	425,486		2.59%
GNMA certificates		163,614			2,241			620			165,235		2.95%
CMOs issued by US government-sponsored agencies		103,990			64			2,223			101,831		1.88%
Total mortgage-backed securities		689,772			8,659			5,879			692,552		2.57%
Investment securities
US Treasury securities		49,672			-			618			49,054		1.73%
Obligations of US government-sponsored agencies		3,903			-			19			3,884		1.38%
Obligations of Puerto Rico government and public instrumentalities		4,680			-			607			4,073		5.55%
Other debt securities		1,840			81			-			1,921		3.00%
Total investment securities		60,095			81			1,244			58,932		2.04%
Total securities available-for-sale	$	749,867		$	8,740		$	7,123		$	751,484		2.53%
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	599,884		$	145		$	7,266		$	592,763		2.15%

The amortized cost and fair value of Oriental’s investment securities at September 30, 2017, 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, 2017
	Available-for-sale						Held-to-maturity
	Amortized Cost			Fair Value			Amortized Cost			Fair Value
	(In thousands)
Mortgage-backed securities
Due from 1 to 5 years
FNMA and FHLMC certificates	$	7,160		$	7,246		$	-		$	-
Total due from 1 to 5 years		7,160			7,246			-			-
Due after 5 to 10 years
CMOs issued by US government-sponsored agencies	$	76,877		$	75,884		$	-		$	-
FNMA and FHLMC certificates		132,716			132,163			-			-
Total due after 5 to 10 years		209,593			208,047			-			-
Due after 10 years
FNMA and FHLMC certificates	$	204,705		$	206,174		$	530,178		$	525,830
GNMA certificates		162,993			164,767			-			-
CMOs issued by US government-sponsored agencies		10,028			9,989			-			-
Total due after 10 years		377,726			380,930			530,178			525,830
Total mortgage-backed securities		594,479			596,223			530,178			525,830
Investment securities
Due less than one year
US Treasury securities	$	324		$	323		$	-		$	-
Obligations of Puerto Rico government and public instrumentalities		2,455			2,206			-			-
Total due in less than one year		2,779			2,529			-			-
Due from 1 to 5 years
US Treasury securities	$	9,945		$	9,895		$	-		$	-
Obligations of US government and sponsored agencies		3,121			3,092			-			-
Total due from 1 to 5 years		13,066			12,987			-			-
Due from 5 to 10 years
Other debt securities		1,612			1,684			-			-
Total due after 5 to 10 years		1,612			1,684			-			-
Total investment securities		17,457			17,200			-			-
Total	$	611,936		$	613,423		$	530,178		$	525,830

During the nine-month period ended September 30, 2017 Oriental retained securitized GNMA pools totaling $69.3 million amortized cost, at a yield of 3.14% from its own originations while during the nine-month period ended September 30, 2016 that amount totaled $71.8 million, amortized cost, at a yield of 2.99%.

During the nine-month period ended September 30, 2017, Oriental sold $166.0 million of mortgage-backed securities and $84.1 million of US Treasury securities, and recorded a net gain on sale of securities of $6.9 million. During the nine-month period ended September 30, 2016, Oriental sold $277.2 million on 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.

	Nine-Month Period Ended September 30, 2017
				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	$	107,510		$	102,311		$	5,199		$	-
GNMA certificates		65,284			63,704			1,580			-
Investment securities
US Treasury securities		84,202			84,085			117			-
Total	$	256,996		$	250,100		$	6,896		$	-

	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 PR government and public instrumentalities		6,978			11,095			-			4,117
Total mortgage-backed securities	$	300,483		$	288,276		$	16,324		$	4,117

The following tables show Oriental’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 September 30, 2017 and December 31, 2016:

	September 30, 2017
	12 months or more
	Amortized			Unrealized			Fair
	Cost			Loss			Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	58,328		$	869		$	57,459
FNMA and FHLMC certificates		8,196			175			8,021
Obligations of US government and sponsored agencies		3,121			29			3,092
Obligations of Puerto Rico government and public instrumentalities		2,455			249			2,206
	$	72,100		$	1,322		$	70,778
Securities held to maturity
FNMA and FHLMC certificates	$	44,759		$	884		$	43,875
	Less than 12 months
	Amortized			Unrealized			Fair
	Cost			Loss			Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	27,413		$	169		$	27,244
FNMA and FHLMC certificates		146,578			1,287			145,291
GNMA certificates		29,243			423			28,820
US Treasury Securities		10,269			51			10,218
	$	213,503		$	1,930		$	211,573
Securities held-to-maturity
FNMA and FHLMC Certificates	$	386,995		$	3,831		$	383,164
	Total
	Amortized			Unrealized			Fair
	Cost			Loss			Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	85,741		$	1,038		$	84,703
FNMA and FHLMC certificates		154,774			1,462			153,312
Obligations of Puerto Rico government and public instrumentalities		2,455			249			2,206
Obligations of US government and sponsored agencies		3,121			29			3,092
GNMA certificates		29,243			423			28,820
US Treasury Securities		10,269			51			10,218
	$	285,603		$	3,252		$	282,351
Securities held-to-maturity
FNMA and FHLMC certificates	$	431,754		$	4,715		$	427,039

	December 31, 2016
	12 months or more
	Amortized			Unrealized			Fair
	Cost			Loss			Value
	(In thousands)
Securities available-for-sale
Obligations of Puerto Rico government and public instrumentalities	$	4,680		$	607		$	4,073
CMOs issued by US government-sponsored agencies		33,883			793			33,090
	$	38,563		$	1,400		$	37,163
	Less than 12 months
	Amortized			Unrealized			Fair
	Cost			Loss			Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies		67,777			1,430			66,347
FNMA and FHLMC certificates		184,782			3,036			181,746
Obligations of US government and sponsored agencies		3,903			19			3,884
GNMA certificates		29,445			620			28,825
US Treasury Securities		49,172			618			48,554
	$	335,079		$	5,723		$	329,356
Securities held to maturity
FNMA and FHLMC certificates	$	525,258		$	7,266		$	517,992
	Total
	Amortized			Unrealized			Fair
	Cost			Loss			Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies		101,660			2,223			99,437
FNMA and FHLMC certificates		184,782			3,036			181,746
Obligations of Puerto Rico government and public instrumentalities		4,680			607			4,073
Obligations of US government and sponsored agencies		3,903			19			3,884
GNMA certificates		29,445			620			28,825
US Treasury Securities		49,172			618			48,554
	$	373,642		$	7,123		$	366,519
Securities held to maturity
FNMA and FHLMC certificates	$	525,258		$	7,266		$	517,992

Oriental performs valuations of the investment securities on a monthly basis. Moreover, Oriental 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 Oriental 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 ($714.9 million, amortized cost, or 99.7%) with an unrealized loss position at September 30, 2017 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 sole exposure to PR bond ($2.5 million, amortized cost, or 0.3%) with an unrealized loss position at September 30, 2017 consists of an obligation issued by the Puerto Rico Highways and Transportation Authority ("PRHTA") secured by a pledge of toll revenues from the Teodoro Moscoso Bridge operated through a public-private partnership. The decline in the market value of this security is mainly attributed to the significant economic and fiscal challenges that Puerto Rico is facing, which is expected to result in a significant restructuring of the government under the supervision of a federally created Fiscal Oversight Board. All other Puerto Rico government securities were sold during the first quarter of 2016. The PRHTA bond had an aggregate fair value of $2.2 million at September 30, 2017 (90% of the bond's amortized cost) and matures on July 1, 2018. The discounted cash flow analysis for the investment showed a cumulative default probability at maturity of 6.6%, thus reflecting that it is more likely than not that the bond will not default during its remaining term. Based on this analysis, Oriental 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, 2017. Also, Oriental’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 period ended September 30, 2017.

As of September 30, 2017, Oriental performed a cash flow analysis of its Puerto Rico government bond to calculate the cash flows expected to be collected and determine if any portion of the decline in market value of this investment 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 investment, and included the following components:

• The contractual future cash flows of the bond are projected based on the key terms as set forth in the official statements for the 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 the investment. Constant monthly default rates are assumed throughout the life of the bond which is 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 the investment based on the purchase price and expected risk-adjusted future cash flows as of the purchase date of the investment.

The following table presents a rollforward of credit-related impairment losses recognized in earnings for the nine-month periods ended September 30, 2017 and 2016 on available-for-sale securities

		Nine-Month Period Ended September 30,
		2017			2016
	(In thousands)
Balance at beginning of period		$	-		$	1,490
Reductions for securities sold during the period (realized)			-			(1,490)
Balance at end of period		$	-		$	-

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

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-Publisher FASB
-Name Accounting Standards Codification
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-Glossary Debt Security
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Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
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