Investment Securities

6 Months Ended

Jun. 30, 2018

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 both, June 30, 2018 and December 31, 2017, money market instruments included as part of cash and cash equivalents amounted to $7.0 million.

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by Oriental at June 30, 2018 and December 31, 2017 were as follows:

	June 30, 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	$	600,978	$	266	$	11,571	$	589,673	2.58%
GNMA certificates		198,301		459		3,902		194,858	3.03%
CMOs issued by US government-sponsored agencies		74,147		-		2,992		71,155	1.90%
Total mortgage-backed securities		873,426		725		18,465		855,686	2.62%
Investment securities
US Treasury securities		10,610		-		161		10,449	1.30%
Obligations of US government-sponsored agencies		2,622		-		81		2,541	1.38%
Obligations of Puerto Rico government and public instrumentalities		2,455		-		-		2,455	5.55%
Other debt securities		1,195		15		-		1,210	2.95%
Total investment securities		16,882		15		242		16,655	2.05%
Total securities available for sale	$	890,308	$	740	$	18,707	$	872,341	2.61%

Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	465,427	$	-	$	17,480	$	447,947	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 June 30, 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.

	June 30, 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	$	4,907	$	4,833	$	-	$	-
Total due from 1 to 5 years		4,907		4,833		-		-
Due after 5 to 10 years
CMOs issued by US government-sponsored agencies	$	65,480	$	62,680	$	-	$	-
FNMA and FHLMC certificates		227,886		223,185		-		-
Total due after 5 to 10 years		293,366		285,865		-		-
Due after 10 years
FNMA and FHLMC certificates	$	368,185	$	361,655	$	465,427	$	447,947
GNMA certificates		198,301		194,858		-		-
CMOs issued by US government-sponsored agencies		8,667		8,475		-		-
Total due after 10 years		575,153		564,988		465,427		447,947
Total mortgage-backed securities		873,426		855,686		465,427		447,947
Investment securities
Due less than one year
US Treasury securities	$	646	$	646	$	-	$	-
Obligations of Puerto Rico government and public instrumentalities		2,455		2,455		-		-
Total due in less than one year		3,101		3,101		-		-
Due from 1 to 5 years
US Treasury securities	$	9,964	$	9,803	$	-	$	-
Obligations of US government and sponsored agencies		2,622		2,541		-		-
Total due from 1 to 5 years		12,586		12,344		-		-
Due from 5 to 10 years
Other debt securities		1,195		1,210		-		-
Total due after 5 to 10 years		1,195		1,210		-		-
Total investment securities		16,882		16,655		-		-
Total	$	890,308	$	872,341	$	465,427	$	447,947

During the six-month period ended June 30, 2018, Oriental retained securitized GNMA pools totaling $37.6 million, amortized cost, at a yield of 3.45% from its own originations while, during the six-month period ended June 30, 2017, that amount totaled $49.8 million, amortized cost, at a yield of 3.15%.

During the six-month period ended June 30, 2017, Oriental sold $166.0 million of mortgage-backed securities and $39.3 million of US Treasury securities, and recorded a net gain on sale of securities of $6.9 million.

	Six-Month Period Ended June 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		39,409		39,297		112		-
Total mortgage-backed securities	$	212,203	$	205,312	$	6,891	$	-

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 June 30, 2018 and December 31, 2017:

	June 30, 2018
	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	66,298	$	2,822	$	63,476
FNMA and FHLMC certificates		101,571		4,296		97,275
Obligations of US Government and sponsored agencies		2,622		81		2,541
GNMA certificates		20,388		1,055		19,333
US Treasury Securities		9,964		161		9,803
	$	200,843	$	8,415	$	192,428
Securities held to maturity
FNMA and FHLMC certificates	$	324,963	$	13,594	$	311,369

	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	7,849	$	170	$	7,679
FNMA and FHLMC certificates		413,181		7,275		405,906
GNMA certificates		142,431		2,847		139,584
US Treasury Securities		324		-		324
	$	563,785	$	10,292	$	553,493
Securities held-to-maturity
FNMA and FHLMC Certificates	$	140,464	$	3,886	$	136,578

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	74,147	$	2,992	$	71,155
FNMA and FHLMC certificates		514,752		11,571		503,181
Obligations of US government and sponsored agencies		2,622		81		2,541
GNMA certificates		162,819		3,902		158,917
US Treausury Securities		10,288		161		10,127
	$	764,628	$	18,707	$	745,921
Securities held-to-maturity
FNMA and FHLMC certificates	$	465,427	$	17,480	$	447,947

	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 Treasury 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.

All of the investments ($1.2 billion, amortized cost) with an unrealized loss position at June 30, 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) at June 30, 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 PRHTA bond had an aggregate fair value of $2.5 million at June 30, 2018 and matured on July 1, 2018. The full payment was received on July 2, 2018.