Debt securities held-to-maturity

6 Months Ended

Jun. 30, 2023

Held To Maturity Debt Securities

Schedule of Held-to-maturity Securities [Line Items]

Investments in debt and marketable equity securities

Note 7 –Debt securities held-to-maturity

The 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 June 30, 2023 and December 31,

2022.

At June 30, 2023

Allowance

Carrying

Value 

Gross 

Gross 

Weighted

Amortized 

Book

[1]

for Credit

Net of 

unrealized

unrealized

Fair 

average

(In thousands)

cost

Value

Losses

Allowance

gains 

losses

value

yield

U.S. Treasury securities 

Within 1 year

$

598,603

$

598,603

$

-

$

598,603

$

-

$

8,926

$

589,677

2.55

%

After 1 to 5 years

7,056,531

6,471,438

-

6,471,438

-

106,735

6,364,703

1.42

After 5 to 10 years

1,427,865

1,266,528

-

1,266,528

-

14,050

1,252,478

1.50

Total U.S. Treasury securities

9,082,999

8,336,569

-

8,336,569

-

129,711

8,206,858

1.51

Obligations of Puerto Rico, States and

political subdivisions

Within 1 year

4,730

4,730

12

4,718

12

5

4,725

6.14

After 1 to 5 years

20,282

20,282

195

20,087

95

156

20,026

3.74

After 5 to 10 years

1,025

1,025

33

992

33

-

1,025

5.80

After 10 years

40,434

40,434

5,905

34,529

3,172

2,801

34,900

1.41

Total obligations of Puerto Rico, States and

political subdivisions

66,471

66,471

6,145

60,326

3,312

2,962

60,676

2.53

Collateralized mortgage obligations - federal

agencies

Within 1 year

16

16

-

16

-

-

16

6.44

After 10 years

1,550

1,550

-

1,550

-

110

1,440

2.87

Total collateralized mortgage obligations -

federal agencies

1,566

1,566

-

1,566

-

110

1,456

2.91

Securities in wholly owned statutory business

trusts

After 10 years

5,960

5,960

-

5,960

-

-

5,960

6.33

Total securities in wholly owned statutory

business trusts

5,960

5,960

-

5,960

-

-

5,960

6.33

Total debt securities held-to-maturity [2]

$

9,156,996

$

8,410,566

$

6,145

$

8,404,421

$

3,312

$

132,783

$

8,274,950

1.52

%

[1]

Book value includes $

746

 million of net unrealized loss which remains in Accumulated other comprehensive income (AOCI) related to certain

securities transferred from available-for-sale securities portfolio to the held-to-maturity securities portfolio as discussed in Note 6.

[2]

Includes $

7.4

 billion pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral. The

Corporation had unpledged held-to-maturities securities with a fair value of $

934

 million that could be used to increase its borrowing facilities.

At December 31, 2022

Allowance 

Carrying

Value 

Gross 

Gross 

Weighted 

Amortized 

Book

[1]

for Credit

Net of

unrealized

unrealized

Fair 

average 

(In thousands)

cost

Value

Losses

Allowance

gains 

losses

value

yield

U.S. Treasury securities 

Within 1 year

$

499,034

$

499,034

$

-

$

499,034

$

-

$

6,203

$

492,831

2.83

%

After 1 to 5 years

6,147,568

5,640,767

-

5,640,767

-

59,806

5,580,961

1.49

After 5 to 10 years

2,638,238

2,313,666

-

2,313,666

-

14,857

2,298,809

1.41

Total U.S. Treasury securities

9,284,840

8,453,467

-

8,453,467

-

80,866

8,372,601

1.54

Obligations of Puerto Rico, States and

political subdivisions

`

Within 1 year

4,530

4,530

8

4,522

5

-

4,527

6.08

%

After 1 to 5 years

19,105

19,105

234

18,871

150

82

18,939

4.24

After 5 to 10 years

1,025

1,025

34

991

34

-

1,025

5.80

After 10 years

41,261

41,261

6,635

34,626

4,729

2,229

37,126

1.40

Total obligations of Puerto Rico, States and

political subdivisions

65,921

65,921

6,911

59,010

4,918

2,311

61,617

2.61

Collateralized mortgage obligations - federal

agencies

After 1 to 5 years

19

19

-

19

-

-

19

6.44

Total collateralized mortgage obligations -

federal agencies

19

19

-

19

-

-

19

6.44

Securities in wholly owned statutory business

trusts

After 10 years

5,959

5,959

-

5,959

-

-

5,959

6.33

Total securities in wholly owned statutory

business trusts

5,959

5,959

-

5,959

-

-

5,959

6.33

Total debt securities held-to-maturity [2]

$

9,356,739

$

8,525,366

$

6,911

$

8,518,455

$

4,918

$

83,177

$

8,440,196

1.55

%

[1]

Book value includes $

831

 million of net unrealized loss which remains in Accumulated other comprehensive income (AOCI) related to certain

securities transferred from available-for-sale securities portfolio to the held-to-maturity securities portfolio as discussed in Note 6.

[2]

Includes $

6.9

 billion pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral. The

Corporation had unpledged held-to-maturities securities with a fair value of $

1.5

 billion that could be used to increase its borrowing facilities.

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.

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.

As discussed in Note 2 to the Consolidated Financial Statements on the 2022 Form 10-K, U.S. Treasury securities carry an explicit

guarantee from the U.S. Government are highly rated by major rating agencies, and have a long history of no credit losses.

Accordingly, the Corporation applies a zero-credit loss assumption and no ACL for these securities has been established.

At June 30, 2023 and December 31, 2022, the “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-

maturity, includes securities issued by municipalities of Puerto Rico that are generally not rated by a credit rating agency. This

includes $

22

 million of general and special obligation bonds issued by three municipalities of Puerto Rico, that are payable primarily

from certain property taxes imposed by the issuing municipality (December 31, 2022 - $

25

 million). 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.

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 June 30, 2023

At December 31, 2022

(In thousands)

Securities issued by Puerto Rico municipalities

Watch

$

2,905

$

13,735

Pass

18,655

10,925

Total

$

21,560

$

24,660

At June 30, 2023, the portfolio of “Obligations of Puerto Rico, States and political subdivisions” also includes $

40

 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 (December 31, 2022 - $

42

 million). 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. At June 30, 2023, the average

refreshed FICO score for the representative sample, comprised of

66

% of the nominal value of the securities, used for the loss

estimate was of

709

 (compared to

65

% and

707

, respectively, at December 31, 2022). 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

to the Consolidated Financial Statements

for additional information on the Corporation’s exposure to the Puerto

Rico Government.

At June 30, 2023, the portfolio of “Obligations of Puerto Rico, States and political subdivisions” also includes $

5

 million in securities

issued by the HFA for which the underlying source of payment is U.S. Treasury securities. The Corporation applies a

zero

-credit

loss assumption for these securities, and no ACL has been established for these securities given that U.S. Treasury securities carry

an explicit guarantee from the U.S. Government, are highly rated by major rating agencies, and have a long history of no credit

losses. Refer to Note 2 to the Consolidated Financial Statements in the 2022 Form 10-K for further details.

Delinquency status

At June 30, 2023 and December 31, 2022, there were

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

at June 30, 2023 and June 30, 2022:

For the quarters ended June 30, 

2023

2022

(In thousands)

Obligations of Puerto Rico, States and political subdivisions

Allowance for credit losses:

Beginning balance

$

6,792

$

7,844

Provision for credit losses (benefit)

(647)

(349)

Securities charged-off

-

-

Recoveries

-

-

Ending balance

$

6,145

$

7,495

For the six months ended June 30, 

2023

2022

(In thousands)

Obligations of Puerto Rico, States and political subdivisions

Allowance for credit losses:

Beginning balance

$

6,911

$

8,096

Provision for credit losses (benefit)

(766)

(601)

Securities charged-off

-

-

Recoveries

-

-

Ending balance

$

6,145

$

7,495

The allowance for credit losses for the Obligations of Puerto Rico, States and political subdivisions includes $

0.3

 million for

securities issued by municipalities of Puerto Rico, and $

5.9

 million for bonds issued by the Puerto Rico HFA, which are secured by

second mortgage loans on Puerto Rico residential properties (compared to $

0.3

 million and $

6.6

 million, respectively, at December

31, 2022).