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Investment Securities

3 Months Ended

Mar. 31, 2018

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 March 31, 2018 and December 31, 2017, money market instruments included as part of cash and cash equivalents amounted to $7.4 million and $7.0 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 March 31, 2018 and December 31, 2017 were as follows:

	March 31, 2018
				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	$	538,900		$	328		$	9,133		$	530,095		2.51%
GNMA certificates		182,055			317			2,870			179,502		2.97%
CMOs issued by US government-sponsored agencies		78,104			-			2,729			75,375		1.90%
Total mortgage-backed securities		799,059			645			14,732			784,972		2.56%
Investment securities
US Treasury securities		10,280			-			156			10,124		1.28%
Obligations of US government-sponsored agencies		2,773			-			72			2,701		1.38%
Obligations of Puerto Rico government and public instrumentalities		2,455			-			43			2,412		5.55%
Other debt securities		1,403			29			-			1,432		2.98%
Total investment securities		16,911			29			271			16,669		2.06%
Total securities available for sale	$	815,970		$	674		$	15,003		$	801,641		2.55%
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	485,143		$	-		$	17,163		$	467,980		2.07%

	December 31, 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	$	383,194		$	1,402		$	2,881		$	381,715		2.39%
GNMA certificates		166,436			1,486			584			167,338		2.94%
CMOs issued by US government-sponsored agencies		82,026			-			1,955			80,071		1.90%
Total mortgage-backed securities		631,656			2,888			5,420			629,124		2.47%
Investment securities
US Treasury securities		10,276			-			113			10,163		1.25%
Obligations of US government-sponsored agencies		2,927			-			48			2,879		1.38%
Obligations of Puerto Rico government and public instrumentalities		2,455			-			362			2,093		5.55%
Other debt securities		1,486			52			-			1,538		2.97%
Total investment securities		17,144			52			523			16,673		2.04%
Total securities available-for-sale	$	648,800		$	2,940		$	5,943		$	645,797		2.46%
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	506,064		$	-		$	8,383		$	497,681		2.07%

The amortized cost and fair value of Oriental’s investment securities at March 31, 2018, 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, 2018
	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	$	5,651		$	5,598		$	-		$	-
Total due from 1 to 5 years		5,651			5,598			-			-
Due after 5 to 10 years
CMOs issued by US government-sponsored agencies	$	69,086		$	66,513		$	-		$	-
FNMA and FHLMC certificates		216,028			212,418			-			-
Total due after 5 to 10 years		285,114			278,931			-			-
Due after 10 years
FNMA and FHLMC certificates	$	317,221		$	312,079		$	485,143		$	467,980
GNMA certificates		182,055			179,502			-			-
CMOs issued by US government-sponsored agencies		9,018			8,862			-			-
Total due after 10 years		508,294			500,443			485,143			467,980
Total mortgage-backed securities		799,059			784,972			485,143			467,980
Investment securities
Due less than one year
US Treasury securities	$	322		$	322		$	-		$	-
Obligations of Puerto Rico government and public instrumentalities		2,455			2,412			-			-
Total due in less than one year		2,777			2,734			-			-
Due from 1 to 5 years
US Treasury securities	$	9,958		$	9,802		$	-		$	-
Obligations of US government and sponsored agencies		2,773			2,701			-			-
Total due from 1 to 5 years		12,731			12,503			-			-
Due from 5 to 10 years
Other debt securities		1,403			1,432			-			-
Total due after 5 to 10 years		1,403			1,432			-			-
Total investment securities		16,911			16,669			-			-
Total	$	815,970		$	801,641		$	485,143		$	467,980

During the quarter ended March 31, 2018, Oriental retained securitized GNMA pools totaling $18.0 million amortized cost, at a yield of 3.26% from its own originations while, during the quarter ended March 31, 2017, that amount totaled $25.0 million, amortized cost, at a yield of 3.14%.

During the quarters ended March 31, 2018 and 2017, Oriental did not sell any mortgage-backed securities or investment securities.

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 March 31, 2018 and December 31, 2017:

	March 31, 2018
	12 months or more
	Amortized			Unrealized			Fair
	Cost			Loss			Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	69,921		$	2,594		$	67,327
FNMA and FHLMC certificates		106,196			3,804			102,392
Obligations of US Government and sponsored agencies		2,773			72			2,701
Obligations of Puerto Rico government and public instrumentalities		2,455			43			2,412
GNMA certificates		20,678			906			19,772
US Treasury Securities		9,958			156			9,802
	$	211,981		$	7,575		$	204,406
Securities held to maturity
FNMA and FHLMC certificates	$	338,260		$	13,311		$	324,949
	Less than 12 months
	Amortized			Unrealized			Fair
	Cost			Loss			Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	8,183		$	135		$	8,048
FNMA and FHLMC certificates		367,587			5,329			362,258
GNMA certificates		131,685			1,964			129,721
US Treausury Securities		322			-			322
	$	507,777		$	7,428		$	500,349
Securities held-to-maturity
FNMA and FHLMC Certificates	$	146,883		$	3,852		$	143,031
	Total
	Amortized			Unrealized			Fair
	Cost			Loss			Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	78,104		$	2,729		$	75,375
FNMA and FHLMC certificates		473,783			9,133			464,650
Obligations of Puerto Rico government and public instrumentalities		2,455			43			2,412
Obligations of US government and sponsored agencies		2,773			72			2,701
GNMA certificates		152,363			2,870			149,493
US Treausury Securities		10,280			156			10,124
	$	719,758		$	15,003		$	704,755
Securities held-to-maturity
FNMA and FHLMC certificates	$	485,143		$	17,163		$	467,980

	December 31, 2017
	12 months or more
	Amortized			Unrealized			Fair
	Cost			Loss			Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	72,562		$	1,857		$	70,705
FNMA and FHLMC certificates		111,635			2,122			109,513
Obligations of US Government and sponsored agencies		2,927			48			2,879
Obligations of Puerto Rico government and public instrumentalities		2,455			362			2,093
GNMA certificates		20,803			499			20,304
US Treasury Securities		9,952			113			9,839
	$	220,334		$	5,001		$	215,333
Securities available-for-sale
FNMA and FHLMC certificates	$	352,399			7,264			345,135
	Less than 12 months
	Amortized			Unrealized			Fair
	Cost			Loss			Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies		9,464			98			9,366
FNMA and FHLMC certificates		125,107			759			124,348
GNMA certificates		14,001			85			13,916
US Treausury Securities		324			-			324
	$	148,896		$	942		$	147,954
Securities held to maturity
FNMA and FHLMC certificates	$	153,665		$	1,119		$	152,546
	Total
	Amortized			Unrealized			Fair
	Cost			Loss			Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies		82,026			1,955			80,071
FNMA and FHLMC certificates		236,742			2,881			233,861
Obligations of Puerto Rico government and public instrumentalities		2,455			362			2,093
Obligations of US government and sponsored agencies		2,927			48			2,879
GNMA certificates		34,804			584			34,220
US Treausury Securities		10,276			113			10,163
	$	369,230		$	5,943		$	363,287
Securities held to maturity
FNMA and FHLMC certificates	$	506,064		$	8,383		$	497,681

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 improvement, 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 ($1.2 billion, amortized cost, or 99.8%) with an unrealized loss position at March 31, 2018 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 a Puerto Rico government bond ($2.5 million, amortized cost, or 0.2%) with an unrealized loss position at March 31, 2018 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 the federally-created Fiscal Oversight and Management Board of Puerto Rico. The PRHTA bond had an aggregate fair value of $2.4 million at March 31, 2018 (98% 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 2.3%, 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 March 31, 2018. 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 quarter ended March 31, 2018.

As of March 31, 2018, 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 PRHTA official statement for the investment. Such key terms include among others the interest rate, amortization schedule, if any, and the 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.

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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
-Topic 320
-Glossary Debt Security
-URI http://asc.fasb.org/extlink&oid=6509901

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 320
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