Investment securities

9 Months Ended

Sep. 30, 2017

Note 6 – Investment securities available-for-sale

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities available-for-sale at September 30, 2017 and December 31, 2016.

		At September 30, 2017
				Gross		Gross				Weighted
		Amortized		unrealized		unrealized		Fair		average
(In thousands)		cost		gains		losses		value		yield
U.S. Treasury securities
	Within 1 year	$	594,340	$	3	$	863	$	593,480	1.01	%
	After 1 to 5 years		2,179,553		1,276		9,446		2,171,383	1.41
Total U.S. Treasury securities			2,773,893		1,279		10,309		2,764,863	1.32
Obligations of U.S. Government sponsored entities
	Within 1 year		204,201		97		282		204,016	1.22
	After 1 to 5 years		408,988		254		1,612		407,630	1.46
Total obligations of U.S. Government sponsored entities			613,189		351		1,894		611,646	1.38
Obligations of Puerto Rico, States and political subdivisions
	After 1 to 5 years		6,605		10		-		6,615	2.49
Total obligations of Puerto Rico, States and political subdivisions			6,605		10		-		6,615	2.49
Collateralized mortgage obligations - federal agencies
	Within 1 year		80		-		-		80	2.74
	After 1 to 5 years		17,330		273		44		17,559	2.89
	After 5 to 10 years		39,546		149		320		39,375	2.33
	After 10 years		974,289		4,276		19,982		958,583	2.00
Total collateralized mortgage obligations - federal agencies			1,031,245		4,698		20,346		1,015,597	2.03
Mortgage-backed securities
	Within 1 year		740		16		-		756	4.39
	After 1 to 5 years		14,721		295		189		14,827	3.70
	After 5 to 10 years		329,955		3,117		2,079		330,993	2.26
	After 10 years		4,335,400		27,249		49,699		4,312,950	2.46
Total mortgage-backed securities			4,680,816		30,677		51,967		4,659,526	2.45
Equity securities (without contractual maturity)			985		900		-		1,885	8.22
Other
	After 5 to 10 years		848		21		-		869	3.62
Total other			848		21		-		869	3.62
Total investment securities available-for-sale^[1]		$	9,107,581	$	37,936	$	84,516	$	9,061,001	1.99	%
[1]Includes $6.7 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $5.7 billion serve as collateral for public funds.

		At December 31, 2016
				Gross		Gross				Weighted
		Amortized		unrealized		unrealized		Fair		average
(In thousands)		cost		gains		losses		value		yield
U.S. Treasury securities
	Within 1 year	$	844,002	$	1,254	$	28	$	845,228	1.00	%
	After 1 to 5 years		1,300,729		214		9,551		1,291,392	1.11
Total U.S. Treasury securities			2,144,731		1,468		9,579		2,136,620	1.06
Obligations of U.S. Government sponsored entities
	Within 1 year		100,050		102		-		100,152	0.98
	After 1 to 5 years		613,293		710		2,505		611,498	1.38
	After 5 to 10 years		200		-		-		200	5.64
Total obligations of U.S. Government sponsored entities			713,543		812		2,505		711,850	1.32
Obligations of Puerto Rico, States and political subdivisions
	After 1 to 5 years		6,419		-		161		6,258	2.89
	After 5 to 10 years		5,000		-		1,550		3,450	3.80
	After 10 years		17,605		-		4,542		13,063	7.09
Total obligations of Puerto Rico, States and political subdivisions			29,024		-		6,253		22,771	5.60
Collateralized mortgage obligations - federal agencies
	Within 1 year		13		-		-		13	1.23
	After 1 to 5 years		18,524		429		28		18,925	2.89
	After 5 to 10 years		39,178		428		61		39,545	2.68
	After 10 years		1,180,686		6,313		23,956		1,163,043	1.99
Total collateralized mortgage obligations - federal agencies			1,238,401		7,170		24,045		1,221,526	2.02
Mortgage-backed securities
	Within 1 year		55		1		-		56	4.76
	After 1 to 5 years		19,960		537		43		20,454	3.86
	After 5 to 10 years		317,185		3,701		1,721		319,165	2.29
	After 10 years		3,805,675		28,772		68,790		3,765,657	2.47
Total mortgage-backed securities			4,142,875		33,011		70,554		4,105,332	2.46
Equity securities (without contractual maturity)			1,246		876		-		2,122	7.94
Other
	Within 1 year		8,539		11		-		8,550	1.78
	After 5 to 10 years		1,004		31		-		1,035	3.62
Total other			9,543		42		-		9,585	1.97
Total investment securities available-for-sale^[1]		$	8,279,363	$	43,379	$	112,936	$	8,209,806	1.94	%
[1]Includes $4.1 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $3.4 billion serve as collateral for public funds.

The weighted average yield on investment securities available-for-sale is based on amortized cost; therefore, it does not give effect to changes in fair value.

Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified based on the period of final contractual maturity. The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

During the nine months ended September 30, 2017, the Corporation sold equity securities and obligations from Puerto Rico government and its political subdivisions with a realized gain of $284 thousand. The proceeds from these sales were $14.9 million. There were no securities sold during the nine months ended September 30, 2016.

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2017 and December 31, 2016.

		At September 30, 2017
		Less than 12 months				12 months or more				Total
				Gross				Gross				Gross
		Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)		value		losses		value		losses		value		losses
U.S. Treasury securities		$	2,195,874	$	10,309	$	-	$	-	$	2,195,874	$	10,309
Obligations of U.S. Government sponsored entities			496,345		1,797		24,139		97		520,484		1,894
Collateralized mortgage obligations - federal agencies			364,098		5,401		387,284		14,945		751,382		20,346
Mortgage-backed securities			3,042,806		44,187		352,342		7,780		3,395,148		51,967
Total investment securities available-for-sale in an
	unrealized loss position	$	6,099,123	$	61,694	$	763,765	$	22,822	$	6,862,888	$	84,516

		At December 31, 2016
		Less than 12 months				12 months or more				Total
				Gross				Gross				Gross
		Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)		value		losses		value		losses		value		losses
U.S. Treasury securities		$	1,162,110	$	9,579	$	-	$	-	$	1,162,110	$	9,579
Obligations of U.S. Government sponsored entities			430,273		2,426		3,126		79		433,399		2,505
Obligations of Puerto Rico, States and political
	subdivisions		6,258		161		16,512		6,092		22,770		6,253
Collateralized mortgage obligations - federal agencies			505,503		8,112		339,236		15,933		844,739		24,045
Mortgage-backed securities			3,537,606		70,173		15,113		381		3,552,719		70,554
Total investment securities available-for-sale in an
	unrealized loss position	$	5,641,750	$	90,451	$	373,987	$	22,485	$	6,015,737	$	112,936

As of September 30, 2017, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $85 million, driven by U.S. Treasury Securities, Collateralized Mortgage Obligations, and Mortgage Backed Securities.

Management evaluates investment securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis. Once a decline in value is determined to be other-than-temporary, the value of a debt security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses. Also, for equity securities that are considered other-than-temporarily impaired, the excess of the security’s carrying value over its fair value at the evaluation date is accounted for as a loss in the results of operations. The OTTI analysis requires management to consider various factors, which include, but are not limited to: (1) the length of time and the extent to which fair value has been less than the amortized cost basis, (2) the financial condition of the issuer or issuers, (3) actual collateral attributes, (4) the payment structure of the debt security and the likelihood of the issuer being able to make payments, (5) any rating changes by a rating agency, (6) adverse conditions specifically related to the security, industry, or a geographic area, and (7) management’s intent to sell the debt security or whether it is more likely than not that the Corporation would be required to sell the debt security before a forecasted recovery occurs.

During the third quarter of 2017, management performed its quarterly analysis of all debt securities in an unrealized loss position. Based on the analysis performed, management concluded that no individual debt security was other-than-temporarily-impaired as such date. During the quarter ended on June 30, 2017, the Corporation recognized an other-than-temporary impairment charge of $8.3 million on Puerto Rico Sales Tax Financing Corporation (“COFINA”) bonds classified as available-for-sale. These were subsequently sold by the Corporation during the third quarter of 2017, at a gain of approximately $0.1 million.

At September 30, 2017, the Corporation did not have the intent to sell debt securities in an unrealized loss position and it was not more likely than not that the Corporation would have to sell the investments securities prior to recovery of their amortized cost basis.

During the third quarter of 2016, management performed its quarterly analysis of all debt securities in an unrealized loss position. Based on the analysis performed, management concluded that no individual debt security was other-than-temporarily-impaired as such date. During the quarter ended on June 30, 2016 the Corporation recognized an other-temporary-impairment charge of $209 thousand on an investment security available-for-sale classified as obligations from Puerto Rico government and its political subdivisions. The security was sold during the fourth quarter of 2016.

The following table states the name of issuers, and the aggregate amortized cost and fair value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), in which the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities backed by the full faith and credit of the U.S. Government. Investments in obligations issued by a state of the U.S. and its political subdivisions and agencies, which 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.

		September 30, 2017				December 31, 2016

(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value
FNMA	$	3,531,694	$	3,502,711	$	3,255,844	$	3,211,443
Freddie Mac		1,397,117		1,383,523		1,381,197		1,361,933

Held To Maturity Securities Member

Investment

Note 7 – Investment securities held-to-maturity

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities held-to-maturity at September 30, 2017 and December 31, 2016.

		At September 30, 2017
				Gross		Gross				Weighted
		Amortized		unrealized		unrealized		Fair		average
(In thousands)		cost		gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
	Within 1 year	$	3,295	$	-	$	1,835	$	1,460	5.97	%
	After 1 to 5 years		15,485		-		7,142		8,343	6.05
	After 5 to 10 years		29,240		-		13,145		16,095	3.89
	After 10 years		44,349		3,660		447		47,562	1.94
Total obligations of Puerto Rico, States and political subdivisions			92,369		3,660		22,569		73,460	3.39
Collateralized mortgage obligations - federal agencies
	After 5 to 10 years		69		4		-		73	5.45
Total collateralized mortgage obligations - federal agencies			69		4		-		73	5.45
Other
	Within 1 year		500		-		13		487	1.96
	After 1 to 5 years		500		-		8		492	2.97
Total other			1,000		-		21		979	2.47
Total investment securities held-to-maturity^[1]		$	93,438	$	3,664	$	22,590	$	74,512	3.38	%
[1]Includes $92.4 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

		At December 31, 2016
				Gross		Gross				Weighted
		Amortized		unrealized		unrealized		Fair		average
(In thousands)		cost		gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
	Within 1 year	$	3,105	$	-	$	1,240	$	1,865	5.90	%
	After 1 to 5 years		14,540		-		5,957		8,583	6.02
	After 5 to 10 years		18,635		-		7,766		10,869	6.20
	After 10 years		59,747		1,368		8,892		52,223	1.91
Total obligations of Puerto Rico, States and political subdivisions			96,027		1,368		23,855		73,540	3.49
Collateralized mortgage obligations - federal agencies
	After 5 to 10 years		74		4		-		78	5.45
Total collateralized mortgage obligations - federal agencies			74		4		-		78	5.45
Other
	Within 1 year		1,000		-		3		997	1.65
	After 1 to 5 years		1,000		-		39		961	2.44
Total other			2,000		-		42		1,958	2.05
Total investment securities held-to-maturity^[1]		$	98,101	$	1,372	$	23,897	$	75,576	3.46	%
[1]Includes $53.1 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2017 and December 31, 2016.

		At September 30, 2017
		Less than 12 months				12 months or more				Total
				Gross				Gross				Gross
		Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)		value		losses		value		losses		value		losses
Obligations of Puerto Rico, States and political subdivisions		$	6,981	$	77	$	26,553	$	22,492	$	33,534	$	22,569
Other			492		8		237		13		729		21
Total investment securities held-to-maturity in an unrealized
	loss position	$	7,473	$	85	$	26,790	$	22,505	$	34,263	$	22,590

		At December 31, 2016
		Less than 12 months				12 months or more				Total
				Gross				Gross				Gross
		Fair		unrealized		Fair		unrealized		Fair		unrealized
(In thousands)		value		losses		value		losses		value		losses

Obligations of Puerto Rico, States and political subdivisions		$	31,294	$	1,702	$	30,947	$	22,153	$	62,241	$	23,855
Other			491		9		1,217		33		1,708		42
Total investment securities held-to-maturity in an unrealized
	loss position	$	31,785	$	1,711	$	32,164	$	22,186	$	63,949	$	23,897

As indicated in Note 6 to these Consolidated Financial Statements, management evaluates investment securities for OTTI declines in fair value on a quarterly basis.

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at September 30, 2017 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $49 million of general and special obligation bonds issued by three municipalities of Puerto Rico, which are payable primarily from, and have a lien on, certain property taxes imposed by the issuing municipality. In the case of general obligations, they also benefit from a pledge of the full faith, credit and unlimited taxing power of the issuing municipality and issuing municipalities are required by law to levy property taxes in an amount sufficient for the payment of debt service on such general obligations bonds.

The portfolio also includes approximately $43 million in securities for which the underlying source of payment is not the central government, but in which a government instrumentality provides a guarantee in the event of default. The Corporation performs periodic credit quality reviews on these issuers. Based on the quarterly analysis performed, management concluded that no individual debt security held-to-maturity was other-than-temporarily impaired at September 30, 2017. Further deterioration of the fiscal crisis of the Government of Puerto Rico or of Puerto Rico’s economy could further affect the value of these securities, resulting in losses to the Corporation. The Corporation does not have the intent to sell securities held-to-maturity and it is more likely than not that the Corporation will not have to sell these investment securities prior to recovery of their amortized cost basis.

Refer to Note 22 for additional information on the Corporation’s exposure to the Puerto Rico Government.