INVESTMENT SECURITIES

12 Months Ended

Dec. 31, 2015

INVESTMENT SECURITIES [Text Block]

NOTE 5 – INVESTMENT SECURITIES

Investment Securities Available for Sale

The amortized cost, non-credit loss component of OTTI recorded in OCI, gross unrealized gains and losses recorded in OCI, approximate fair value, and weighted-average yield of investment securities available for sale by contractual maturities as of December 31, 2015 and 2014 were as follows:

		December 31, 2015
		Amortized cost		Noncredit Loss Component of OTTI Recorded in OCI		Gross						Fair value		Weighted-average yield%
								Unrealized
								Gains			Losses
(Dollars in thousands)
U.S. Treasury securities:
	After 1 to 5 years	$	7,530	$	-	$	-		$	33		$	7,497	0.57
Obligations of U.S.
government-sponsored
agencies:
	Due within one year		14,624		-		4			10			14,618	0.68
	After 1 to 5 years		384,323		-		174			4,305			380,192	1.32
	After 5 to 10 years		58,150		-		343			242			58,251	2.34
Puerto Rico Government
obligations:
	After 1 to 5 years		25,663		14,662		-			-			11,001	4.38
	After 5 to 10 years		855		-		-			-			855	5.20
	After 10 years		23,162		5,255		134			1,680			16,361	5.40
United States and Puerto
Rico Government
obligations			514,307		19,917		655			6,270			488,775	1.75
Mortgage-backed securities:
FHLMC certificates:
	After 5 to 10 years		336		-		31			-			367	4.95
	After 10 years		287,711		-		1,073			1,706			287,078	2.14
			288,047		-		1,104			1,706			287,445	2.15
GNMA certificates:
	Due within one year		2		-		-			-			2	1.70
	After 1 to 5 years		109		-		5			-			114	4.26
	After 5 to 10 years		120,298		-		3,182			-			123,480	3.07
	After 10 years		165,175		-		12,822			20			177,977	4.38
			285,584		-		16,009			20			301,573	3.83
FNMA certificates:
	After 1 to 5 years		2,552		-		74			-			2,626	3.32
	After 5 to 10 years		21,557		-		433			233			21,757	2.73
	After 10 years		759,247		-		5,628			6,063			758,812	2.34
			783,356		-		6,135			6,296			783,195	2.35
Other mortgage pass-through
trust certificates:
	After 5 to 10 years		92		-		1			-			93	7.26
	After 10 years		34,905		9,691		-			-			25,214	2.26
			34,997		9,691		1			-			25,307	2.26
Total mortgage-backed securities
	securities		1,391,984		9,691		23,249			8,022			1,397,520	2.61
Other
	After 1 to 5 years		100		-		-			-			100	1.50
Total investment securities
	available for sale	$	1,906,391	$	29,608	$	23,904		$	14,292		$	1,886,395	2.38

		December 31, 2014
		Amortized cost		Noncredit Loss Component of OTTI Recorded in OCI		Gross						Fair value		Weighted-average yield%
								Unrealized
								Gains			Losses
(Dollars in thousands)
U.S. Treasury securities:
	Due within one year	$	7,498	$	-	$	1		$	-		$	7,499	0.11
Obligations of U.S.
government-sponsored
agencies:
	After 1 to 5 years		260,889		-		42			4,219			256,712	1.22
	After 5 to 10 years		78,234		-		246			2,077			76,403	1.72
Puerto Rico Government
obligations:
	After 1 to 5 years		39,827		-		-			12,419			27,408	4.49
	After 5 to 10 years		886		-		1			-			887	5.20
	After 10 years		20,498		-		-			5,571			14,927	5.83
United States and Puerto
Rico Government
obligations			407,832		-		290			24,286			383,836	1.86
Mortgage-backed securities:
FHLMC certificates:
	After 10 years		315,311		-		1,743			1,260			315,794	2.17
GNMA certificates:
	After 1 to 5 years		39		-		1			-			40	3.26
	After 5 to 10 years		17,108		-		501			-			17,609	3.65
	After 10 years		338,842		-		20,957			-			359,799	3.83
			355,989		-		21,459			-			377,448	3.83
FNMA certificates:
	After 1 to 5 years		4,160		-		181			-			4,341	3.40
	After 5 to 10 years		9,584		-		521			5			10,100	3.49
	After 10 years		837,597		-		7,756			4,854			840,499	2.36
			851,341		-		8,458			4,859			854,940	2.37
Collateralized mortgage
	obligations issued or
	guaranteed by the FHLMC:
Other mortgage pass-through
trust certificates:
	After 5 to 10 years		111		-		1			-			112	7.27
	After 10 years		45,677		12,141		-			-			33,536	2.17
			45,788		12,141		1			-			33,648	2.17
Total mortgage-backed
	securities		1,568,429		12,141		31,661			6,119			1,581,830	2.66
Equity securities (without
Total investment securities
	available for sale	$	1,976,261	$	12,141	$	31,951		$	30,405		$	1,965,666	2.49

Maturities of mortgage-backed securities are based on contractual terms assuming no prepayments. Expected maturities of investments might differ from contractual maturities because they may be subject to prepayments and/or call options.The weighted-average yield on investment securities available for sale is based on amortized cost and, therefore, does not give effect to changes in fair value. The net unrealized gain or loss on securities available for sale and the noncredit loss component of OTTI are presented as part of OCI.

The aggregate amortized cost and approximate market value of investment securities available for sale as of December 31, 2015 by contractual maturity, are shown below:
	Amortized Cost		Fair Value
(Dollars in thousands)
Within 1 year	$	14,626	$	14,620
After 1 to 5 years		420,277		401,530
After 5 to 10 years		201,288		204,803
After 10 years		1,270,200		1,265,442
Total investment securities available for sale	$	1,906,391	$	1,886,395

The following tables show the Corporation's available-for-sale investments' fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2015 and 2014. The tables also include debt securities for which an OTTI was recognized and only the amount related to a credit loss was recognized in earnings. Unrealized losses for which OTTI was recognized and the related credit loss was charged against the amortized cost basis of the debt security.

	As of December 31, 2015
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
(In thousands)
Debt securities:
Puerto Rico Government
obligations	$	-	$	-	$	23,008	$	21,597	$	23,008	$	21,597
U.S Treasury and U.S. government
agencies obligations		198,243		929		210,504		3,661		408,747		4,590
Mortgage-backed securities:
FNMA		437,305		4,516		88,013		1,780		525,318		6,296
FHLMC		141,890		1,338		19,306		368		161,196		1,706
GNMA		1,047		20		-		-		1,047		20
Collateralized mortgage obligations
Other mortgage pass-through trust
certificates		-		-		25,214		9,691		25,214		9,691
	$	778,485	$	6,803	$	366,045	$	37,097	$	1,144,530	$	43,900
	As of December 31, 2014
	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
(In thousands)
Debt securities:
Puerto Rico Government
obligations	$	-	$	-	$	42,335	$	17,990	$	42,335	$	17,990
U.S Treasury and U.S. government
obligations		46,436		74		257,996		6,222		304,432		6,296
Mortgage-backed securities:
FNMA		2,038		5		541,642		4,854		543,680		4,859
FHLMC		-		-		135,277		1,260		135,277		1,260
Collateralized mortgage
obligations issued or
Other mortgage pass-through trust
certificates		-		-		33,536		12,141		33,536		12,141
	$	48,474	$	79	$	1,010,786	$	42,467	$	1,059,260	$	42,546

Assessment for OTTI

Debt securities issued by U.S. government agencies, government-sponsored entities, and the U.S. Department of the Treasury (the “U.S. Treasury”) accounted for approximately 97% of the total available-for-sale portfolio as of December 31, 2015 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government. The Corporation's OTTI assessment was concentrated mainly on Puerto Rico Government debt securities, with an amortized cost of $49.7 million, and on private label MBSwith an amortized cost of $34.9 million for which credit losses are evaluated on a quarterly basis. The Corporation considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

• The length of time and the extent to which the fair value has been less than the amortized cost basis;
• Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the financial health and prospects of the issuer, credit ratings, the failure of the issuer to make scheduled principal or interest payments, recent legislation and government actions affecting the issuer's industry and actions taken by the issuer to deal with the present economic climate;
• Changes in the near term prospects of the underlying collateral for asecurity, if any, such as changes in default rates, loss severity given default, and significant changes in prepayment assumptions; and
• The level of cash flows generated from the underlying collateral, if any, supporting the principal and interest payments of the debt securities

The Corporation recorded OTTI losses on available-for-sale debt securities as follows:

		Year Ended
		2015		2014			2013
(In thousands)
Total other-than-temporary impairment losses		$	(35,806)	$	-	$	-
Noncredit-related impairment portion recognized in OCI			19,917		-		-
Portion of other-than-temporary impairment losses
previously recognized in OCI			(628)		(388)		(117)
Net impairment losses recognized in earnings (1)		$	(16,517)	$	(388)	$	(117)
(1)	For the year ended December 31, 2015, approximately $15.9 million of the credit impairment recognized in earnings consisted of credit losses on Puerto Rico Government debt securities and $0.6 million was associated with credit losses on private label MBS.

The following tables summarize the roll-forward of credit losses on debt securities held by the Corporation for which a portion of an OTTI is recognized in OCI:
	Cumulative OTTI credit losses recognized in earnings on securities still held
			Credit impairments		Credit impairments
	December 31,		recognized in earnings		recognized in earnings on		December 31,
	2014		on securities not		securities that have been		2015
	Balance		previously impaired		previously impaired		Balance
(In thousands)
Available for sale securities
Puerto Rico Government obligations	$	-	$	15,889	$	-	$	15,889
Private label MBS		5,777		-		628		6,405
Total OTTI credit losses for available-for-sale
debt securities	$	5,777	$	15,889	$	628	$	22,294

	Cumulative OTTI credit losses recognized in earnings on securities still held
			Credit impairments		Credit impairments
	December 31,		recognized in earnings		recognized in earnings on		December 31,
	2013		on securities not		securities that have been		2014
	Balance		previously impaired		previously impaired		Balance
(In thousands)
Available for sale securities
Private label MBS	$	5,389	$	-	$	388	$	5,777

	Cumulative OTTI credit losses recognized in earnings on securities still held
			Credit impairments		Credit impairments
	December 31,		recognized in earnings		recognized in earnings on		December 31,
	2012		on securities not		securities that have been		2013
	Balance		previously impaired		previously impaired		Balance
(In thousands)
Available for sale securities
Private label MBS	$	5,272	$	-	$	117	$	5,389

As of December 31, 2015, the Corporation owns Puerto Rico Government debt securities with an aggregate amortized cost of $49.7 million (net of a $15.9 million OTTI), carried on its books at a fair value of $28.2 million. During 2015, the fair value of these obligations decreased by $19.4 million. In February and March 2014, Standard & Poor's (“S&P”), Moody's Investor Service (“Moody's”) and Fitch Ratings (“Fitch”) downgraded the Puerto Rico Government general obligation bonds and other obligations of Puerto Rico instrumentalities to non-investment grade categories. In June and July 2015, the three major credit rating agencies downgraded Puerto Rico's general obligation debt further into non-investment grade after the government's announcements about concerns on its ability to pay its financial obligations. The issuers of Puerto Rico government and agencies bonds held by the Corporation, primarily bonds of the Government Development Bank for Puerto Rico (“GDB”) and of the Puerto Rico Public Buildings Authority, have not defaulted, and the contractual payments on these securities have been made as scheduled. However, in 2015 and 2016, the Puerto Rico Government has defaulted on other bonds and implemented “clawback” measures to redirect revenues pledged to support bonds from certain government agencies to service the general obligation debt.

During 2015, in consideration of the latest available market-based evidence implied in security valuations and information about the Puerto Rico Government'sfinancial condition, including statements as to its intentions to restructure its outstanding bond obligations, credit ratings, payment defaults and “clawback” measures, the Corporation applied a discounted cash flow analysis to its Puerto Rico Government debt securities in order to calculate the cash flows expected to be collected and to determine if any portion of the decline in market value of these securities was considered a credit-related other-than-temporary impairment. The analysis derives an estimate of value based on the present value of risk-adjusted cash flows of the underlying securities 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 security. 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 probability of default analysis and recovery rate assumptions, including the weighting of different scenarios of ultimate recovery, considering the credit rating of each security. Constant monthly default rates are assumed throughout the life of the bonds, which considers 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 discounted risk-adjusted cash flow analysis for three of the bonds held by the Corporation as part of its available-for-sale securities portfolio resulted in a cumulative default probability in the range of 67% to 87% (weighted average of 81%), thus reflecting that it is more likely than not that these three bonds will default during their remaining terms. Based on this analysis, the Corporation determined that it is unlikely to receive all the remaining contractual interest and principal amounts when due on these bonds and recorded, in 2015, other-than-temporary credit-related impairment charges amounting $15.9 million, assuming recovery rates ranging from 35% to 80% (weightedaverage of 64%).

The Corporation does not have the intention to sell these securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs; as such, only the credit loss component was reflected in earnings. Given the significant and prolonged uncertainty of a debt restructuring process, the Corporation cannot be certain that future impairment charges will not be required against these securities.

In addition, during 2015, the Corporation recorded a $0.6 million credit-related impairment loss associated with private label MBS, which are collateralized by fixed-rate mortgages on single-family residential properties in the United States. The interest rate on these private-label MBS is variable, tied to 3-month LIBOR and limited to the weighted-average coupon of the underlying collateral. The underlying mortgages are fixed-rate,single-family loans with original high FICO scores (over 700) and moderate original loan-to-value ratios (under 80%), as well as moderate delinquency levels.

Based on the expected cash flows derived from the model, and since the Corporation does not have the intention to sell the securities and has sufficient capital and liquidity to hold these securities until a recovery of the fair value occurs, only the credit loss component was reflected in earnings. Significant assumptions in the valuation of the private label MBS were as follows:

	As of		As of
	December 31, 2015		December 31, 2014
	Weighted		Weighted
	Average	Range	Average	Range
Discount rate	14.5%	14.5%	14.5%	14.5%
Prepayment rate	28%	15.92% - 100.00%	32%	19.89% - 100.00%
Projected Cumulative Loss Rate	7.0%	0.18% - 80.00%	7.9%	0.64% - 80.00%

Refer to Note 28 – Fair Value, for additional information about the valuation model for private label MBS.

No sales of securities available for sale were completed during 2015 and 2013.Total proceeds from the sale of securities available for sale during 2014 amounted to approximately$4.9 million. For the year ended December 31, 2014,a $0.3million gain was recorded on the sale of a Puerto Rico government agency bond and a $29 thousand loss was recorded on the sale of equity securities.

The following table states the names of issuers, and the aggregate amortized cost and market value of the securities of such issuers, when the aggregate amortized cost of such securities exceeds 10% of the Corporation's stockholders' equity. This information excludes securities of the U.S. and Puerto Rico government. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies that are payable and secured by the same source of revenue or taxing authority, other than the U.S. government, are considered securities of a single issuer and include debt and mortgage-backed securities.

		As of				As of
	December 31, 2015				December 31, 2014
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
(In thousands)
FHLMC	$	323,437	$	322,772	$	340,227	$	340,723
GNMA		285,584		301,573		355,989		377,448
FNMA		954,178		953,866		922,883		926,189
FHLB		223,049		219,320		232,733		227,003

Investments Held to Maturity

From time to time, the Corporation has securities held to maturity with an original maturity of three months or less that are considered cash and cash equivalents and classified as money market investments in the consolidated statements of financial condition. As of December 31, 2015 and 2014, the Corporation had no outstanding securities held to maturity that were classified as cash and cash equivalents.