Debt securities

6 Months Ended

Jun. 30, 2018

Note 5 – Debt 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 debt securities available-for-sale at June 30, 2018 and December 31, 2017.

		At June 30, 2018
				Gross		Gross				Weighted
		Amortized		unrealized		unrealized		Fair		average
(In thousands)		cost		gains		losses		value		yield
U.S. Treasury securities
	Within 1 year	$	1,277,840	$	30	$	4,517	$	1,273,353	1.42	%
	After 1 to 5 years		3,372,451		977		58,687		3,314,741	1.93
	After 5 to 10 years		394,072		-		5,201		388,871	2.50
Total U.S. Treasury securities			5,044,363		1,007		68,405		4,976,965	1.85
Obligations of U.S. Government sponsored entities
	Within 1 year		288,749		10		937		287,822	1.37
	After 1 to 5 years		248,546		-		4,492		244,054	1.50
Total obligations of U.S. Government sponsored entities			537,295		10		5,429		531,876	1.43
Obligations of Puerto Rico, States and political subdivisions
	After 1 to 5 years		6,796		-		153		6,643	1.76
Total obligations of Puerto Rico, States and political subdivisions			6,796		-		153		6,643	1.76
Collateralized mortgage obligations - federal agencies
	After 1 to 5 years		1,075		-		8		1,067	1.93
	After 5 to 10 years		124,736		-		6,214		118,522	1.69
	After 10 years		721,252		1,389		32,561		690,080	2.09
Total collateralized mortgage obligations - federal agencies			847,063		1,389		38,783		809,669	2.03
Mortgage-backed securities
	Within 1 year		962		8		-		970	4.25
	After 1 to 5 years		6,768		38		202		6,604	2.70
	After 5 to 10 years		333,026		1,558		9,239		325,345	2.24
	After 10 years		4,029,804		11,325		157,872		3,883,257	2.43
Total mortgage-backed securities			4,370,560		12,929		167,313		4,216,176	2.42
Other
	After 5 to 10 years		677		4		-		681	3.62
Total other			677		4		-		681	3.62
Total debt securities available-for-sale^[1]		$	10,806,754	$	15,339	$	280,083	$	10,542,010	2.07	%
[1]Includes $8.2 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 $7.5 billion serve as collateral for public funds.

		At December 31, 2017
				Gross		Gross				Weighted
		Amortized		unrealized		unrealized		Fair		average
(In thousands)		cost		gains		losses		value		yield
U.S. Treasury securities
	Within 1 year	$	1,112,791	$	8	$	2,101	$	1,110,698	1.06	%
	After 1 to 5 years		2,550,116		-		26,319		2,523,797	1.55
	After 5 to 10 years		293,579		281		191		293,669	2.24
Total U.S. Treasury securities			3,956,486		289		28,611		3,928,164	1.46
Obligations of U.S. Government sponsored entities
	Within 1 year		276,304		21		818		275,507	1.26
	After 1 to 5 years		336,922		22		3,518		333,426	1.48
Total obligations of U.S. Government sponsored entities			613,226		43		4,336		608,933	1.38
Obligations of Puerto Rico, States and political subdivisions
	After 1 to 5 years		6,668		-		59		6,609	2.30
Total obligations of Puerto Rico, States and political subdivisions			6,668		-		59		6,609	2.30
Collateralized mortgage obligations - federal agencies
	Within 1 year		40		-		-		40	2.60
	After 1 to 5 years		16,972		173		75		17,070	2.90
	After 5 to 10 years		36,186		57		526		35,717	2.31
	After 10 years		914,568		2,789		26,431		890,926	2.01
Total collateralized mortgage obligations - federal agencies			967,766		3,019		27,032		943,753	2.03
Mortgage-backed securities
	Within 1 year		484		8		-		492	4.23
	After 1 to 5 years		14,599		206		211		14,594	3.50
	After 5 to 10 years		339,161		2,390		3,765		337,786	2.21
	After 10 years		4,385,368		19,493		69,071		4,335,790	2.46
Total mortgage-backed securities			4,739,612		22,097		73,047		4,688,662	2.44
Other
	After 5 to 10 years		789		13		-		802	3.62
Total other			789		13		-		802	3.62
Total debt securities available-for-sale^[1]		$	10,284,547	$	25,461	$	133,085	$	10,176,923	1.96	%
[1]Includes $6.6 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 $5.6 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.

The following tables present the Corporation’s fair value and gross unrealized losses of debt securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017.

		At June 30, 2018
		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		$	2,742,979	$	50,265	$	1,264,938	$	18,140	$	4,007,917	$	68,405
Obligations of U.S. Government sponsored entities			147,211		847		381,273		4,582		528,484		5,429
Obligations of Puerto Rico, States and political
	subdivisions		6,643		153		-		-		6,643		153
Collateralized mortgage obligations - federal agencies			195,626		4,469		541,559		34,314		737,185		38,783
Mortgage-backed securities			1,360,340		43,508		2,544,264		123,805		3,904,604		167,313
Total debt securities available-for-sale in an
	unrealized loss position	$	4,452,799	$	99,242	$	4,732,034	$	180,841	$	9,184,833	$	280,083

		At December 31, 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		$	2,608,473	$	14,749	$	1,027,066	$	13,862	$	3,635,539	$	28,611
Obligations of U.S. Government sponsored entities			214,670		1,108		376,807		3,228		591,477		4,336
Obligations of Puerto Rico, States and political
	subdivisions		6,609		59		-		-		6,609		59
Collateralized mortgage obligations - federal agencies			153,336		2,110		595,339		24,922		748,675		27,032
Mortgage-backed securities			1,515,295		12,529		2,652,359		60,518		4,167,654		73,047
Total debt securities available-for-sale in an
	unrealized loss position	$	4,498,383	$	30,555	$	4,651,571	$	102,530	$	9,149,954	$	133,085

As of June 30, 2018, the portfolio of available-for-sale debt securities reflects gross unrealized losses of approximately $280 million, driven mainly by mortgage-backed securities, U.S. Treasury securities, and collateralized mortgage obligations.

Management evaluates debt 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. 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.

At June 30, 2018, 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 of such date. At June 30, 2018, 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 debt securities prior to recovery of their amortized cost basis.

The following table states the name of issuers, and the aggregate amortized cost and fair value of the debt securities of such issuer (includes available-for-sale and held-to-maturity debt securities), in which the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes debt 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.

		June 30, 2018				December 31, 2017

(In thousands)	Amortized cost		Fair value		Amortized cost		Fair value
FNMA	$	3,330,286	$	3,207,410	$	3,621,537	$	3,572,474
Freddie Mac		1,212,413		1,164,737		1,358,708		1,335,685

Held To Maturity Securities Member

Debt securities

Note 6 –Debt 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 debt securities held-to-maturity at June 30, 2018 and December 31, 2017.

		At June 30, 2018
				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	$	3,445	$	-	$	7	$	3,438	5.98	%
	After 1 to 5 years		16,195		89		144		16,140	6.06
	After 5 to 10 years		26,140		317		1,369		25,088	3.62
	After 10 years		45,148		3,636		60		48,724	1.90
Total obligations of Puerto Rico, States and political subdivisions			90,928		4,042		1,580		93,390	3.29
Collateralized mortgage obligations - federal agencies
	After 5 to 10 years		61		4		-		65	5.44
Total collateralized mortgage obligations - federal agencies			61		4		-		65	5.44
Trust preferred securities
	After 5 to 10 years		1,637		-		-		1,637	8.33
	After 10 years		11,561		-		-		11,561	6.51
Total trust preferred securities			13,198		-		-		13,198	6.73
Other
	Within 1 year		250		-		-		250	3.52
	After 1 to 5 years		500		-		7		493	2.97
Total other			750		-		7		743	3.15
Total debt securities held-to-maturity^[1]		$	104,937	$	4,046	$	1,587	$	107,396	3.72	%
[1]Includes $90.9 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

		At December 31, 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	$	-	$	79	$	3,216	5.96	%
	After 1 to 5 years		15,485		-		4,143		11,342	6.05
	After 5 to 10 years		29,240		-		8,905		20,335	3.89
	After 10 years		44,734		3,834		222		48,346	1.93
Total obligations of Puerto Rico, States and political subdivisions			92,754		3,834		13,349		83,239	3.38
Collateralized mortgage obligations - federal agencies
	After 5 to 10 years		67		4		-		71	5.45
Total collateralized mortgage obligations - federal agencies			67		4		-		71	5.45
Trust preferred securities
	After 5 to 10 years		1,637		-		-		1,637	8.33
	After 10 years		11,561		-		-		11,561	6.51
Total trust preferred securities			13,198		-		-		13,198	6.73
Other
	Within 1 year		500		-		7		493	1.96
	After 1 to 5 years		500		-		-		500	2.97
Total other			1,000		-		7		993	2.47
Total debt securities held-to-maturity^[1]		$	107,019	$	3,838	$	13,356	$	97,501	3.79	%
[1]Includes $92.8 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

Debt 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 debt securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2018 and December 31, 2017.

		At June 30, 2018
		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		$	7,236	$	19	$	29,524	$	1,561	$	36,760	$	1,580
Other			250		-		493		7		743		7
Total debt securities held-to-maturity in an unrealized
	loss position	$	7,486	$	19	$	30,017	$	1,568	$	37,503	$	1,587

		At December 31, 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		$	-	$	-	$	35,696	$	13,349	$	35,696	$	13,349
Other			-		-		743		7		743		7
Total debt securities held-to-maturity in an unrealized
	loss position	$	-	$	-	$	36,439	$	13,356	$	36,439	$	13,356

As indicated in Note 5 to these Consolidated Financial Statements, management evaluates debt 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 June 30, 2018 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $47 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 $44 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 June 30, 2018. Further deterioration of the Puerto Rico economy or of the fiscal crisis of the Government of Puerto Rico (including if any of the issuing municipalities become subject to a debt restructuring proceeding under PROMESA) could further affect the value of these securities, resulting in losses to the Corporation. The Corporation does not have the intent to sell debt 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 21 for additional information on the Corporation’s exposure to the Puerto Rico Government.