Debt securities held-to-maturity

3 Months Ended

Mar. 31, 2020

Held To Maturity Debt Securities

Debt Securities, Held-to-maturity

Investments in debt and marketable equity securities

Note 7 –Debt securities held-to-maturityThe following tables present the amortized cost, allowance for credit losses, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of debt securities held-to-maturity at March 31, 2020 and December 31, 2019.

		At March 31, 2020
					Allowance			Gross		Gross				Weighted
		Amortized			for Credit		Net of	unrealized		unrealized		Fair		average
(In thousands)		cost			Losses		Allowance	gains		losses		value		yield
Obligations of Puerto Rico, States and political subdivisions
	Within 1 year	$	3,920	$	191	$	3,729	$	-	$	27	$	3,702	6.05	%
	After 1 to 5 years		16,390		1,683		14,707		-		131		14,576	6.13
	After 5 to 10 years		16,660		1,424		15,236		-		1,880		13,356	2.81
	After 10 years		46,191		10,092		36,099		3,083		2,520		36,662	1.65
Total obligations of Puerto Rico, States and political subdivisions			83,161		13,390		69,771		3,083		4,558		68,296	2.97
Collateralized mortgage obligations - federal agencies
	After 1 to 5 years		41		-		41		2		-		43	6.44
Total collateralized mortgage obligations - federal agencies			41		-		41		2		-		43	6.44
Securities in wholly owned statutory business trusts
	After 10 years		11,561		-		11,561		-		-		11,561	6.51
Total securities in wholly owned statutory business trusts			11,561		-		11,561		-		-		11,561	6.51
Other
	Within 1 year		500		-		500		-		-		500	2.97
Total other			500		-		500		-		-		500	2.97
Total debt securities held-to-maturity		$	95,263	$	13,390	$	81,873	$	3,085	$	4,558	$	80,400	3.40	%

		At December 31, 2019
				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	$	3,745	$	-	$	11	$	3,734	6.01	%
	After 1 to 5 years		17,580		-		320		17,260	6.11
	After 5 to 10 years		18,195		-		1,607		16,588	3.11
	After 10 years		46,036		9,384		-		55,420	1.67
Total obligations of Puerto Rico, States and political subdivisions			85,556		9,384		1,938		93,002	3.08
Collateralized mortgage obligations - federal agencies
	After 1 to 5 years		45		2		-		47	6.44
Total collateralized mortgage obligations - federal agencies			45		2		-		47	6.44
Securities in wholly owned statutory business trusts
	After 10 years		11,561		-		-		11,561	6.51
Total securities in wholly owned statutory business trusts			11,561		-		-		11,561	6.51
Other
	Within 1 year		500		-		-		500	2.97
Total other			500		-		-		500	2.97
Total debt securities held-to-maturity		$	97,662	$	9,386	$	1,938	$	105,110	3.49	%

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 December 31, 2019.

	At December 31, 2019
	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	$	17,544	$	291	$	12,673	$	1,647	$	30,217	$	1,938
Total debt securities held-to-maturity in an unrealized loss position	$	17,544	$	291	$	12,673	$	1,647	$	30,217	$	1,938

Credit Quality Indicators

The following describes the credit quality indicators by major security type that the Corporation considers in its’ estimate to develop the allowance for credit losses for investment securities held-to-maturity.

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at March 31, 2020 includes securities issued by municipalities of Puerto Rico that are generally not rated by a credit rating agency. This includes $38 million of general and special obligation bonds issued by three municipalities of Puerto Rico, which are payable primarily from 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, which is required by law to levy property taxes in an amount sufficient for the payment of debt service on such general obligation bonds. The Corporation performs periodic credit quality reviews of these securities and internally assigns standardized credit risk ratings based on its evaluation. The Corporation considers these ratings in its estimate to develop the allowance for credit losses associated with these securities. For the definitions of the obligor risk ratings, refer to the Credit Quality section of Note 9 to the Consolidated Financial Statements included in the Corporation’s Form 10K for the year ended December 31, 2019.

The following presents the amortized cost basis of securities held by the Corporation issued by municipalities of Puerto Rico aggregated by the internally assigned standardized credit risk rating:

At March 31, 2020
(In thousands)		Securities issued by Puerto Rico Municipalities
Watch	$	22,230
Special Mention		15,395
Ending Balance	$	37,625

The portfolio of “Obligations of Puerto Rico, States and political subdivisions” also includes $45 million in securities issued by the Puerto Rico Housing Finance Authority (“HFA”), a government instrumentality, for which the underlying source of payment is second mortgage loans in Puerto Rico residential properties (not the government), but for which HFA, provides a guarantee in the event of default and upon the satisfaction of certain other conditions. These securities are not rated by a credit rating agency. The Corporation assesses the credit risk associated with these securities by evaluating the refreshed FICO scores of a representative sample of the underlying borrowers. The average refreshed FICO score for the representative sample, comprised of 65% of the nominal value of the securities, used for the March 31, 2020 loss estimate was of 685. The loss estimates for this portfolio was based on the methodology established under CECL for similar loan obligations. The Corporation does not consider the government guarantee when estimating the credit losses associated with this portfolio.

A further deterioration of the Puerto Rico economy or of the fiscal health of the Government of Puerto Rico and/or its instrumentalities (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.

Refer to Note 21 for additional information on the Corporation’s exposure to the Puerto Rico Government.

Delinquency status

At March 31, 2020 there are no securities held-to-maturity in past due or non-performing status.

Allowance for credit losses on debt securities held-to-maturity

The following table provides the activity in the allowance for credit losses related to debt securities held-to-maturity by security type for the period ended March 31, 2020.

	At March 31, 2020
(In thousands)			Obligations of Puerto Rico, States and political subdivisions		Collateralized mortgage obligations - federal agencies		Securities in wholly owned statutory business trusts		Other		Total
Allowance for credit losses:
	Beginning balance, January 1, 2020	$	-	$	-	$	-	$	-	$	-
	Impact of adopting CECL		12,654		-		-		-		12,654
	Provision for credit loss expense (reversal of provision)		736		-		-		-		736
	Securities charged-off		-		-		-		-		-
	Recoveries		-		-		-		-		-
Ending Balance		$	13,390	$	-	$	-	$	-	$	13,390

The allowance for credit losses for the Obligations of Puerto Rico, States and political subdivisions, includes $3.4 million for securities issued by municipalities of Puerto Rico, and $10 million for bonds issued by the Puerto Rico HFA, which are secured by second mortgage loans on Puerto Rico residential properties.