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Regulatory Capital Requirements
 3 Months Ended
Mar. 31, 2020
Regulatory Capital Requirements [Abstract]  
Regulatory Capital Requirements NOTE 16 — REGULATORY CAPITAL REQUIREMENTS

Regulatory Capital Requirements

 

OFG Bancorp (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and Puerto Rico banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Oriental’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Oriental and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Pursuant to the Dodd-Frank Act, federal banking regulators adopted capital rules based on the framework of the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”), which became effective January 1, 2015 for Oriental and the Bank (subject to certain phase-in periods through January 1, 2019) and that replaced their general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules. Among other matters, the Basel III capital rules: (i) introduce a capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to prior regulations. The Basel III capital rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, and resulting in higher risk weights for a variety of asset classes.

 

Pursuant to the Basel III capital rules, the minimum capital ratios requirements are as follows:

4.5% CET1 to risk-weighted assets;

6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known

as the “leverage ratio”).

 

In July 2019, the federal banking agencies adopted a final rule, pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996, that simplifies for non-advanced approaches banking organizations. It simplifies the regulatory capital treatment for mortgage servicing assets (MSA) and certain deferred tax assets arising from temporary differences (temporary difference DTAs). It increases CET1 capital threshold deductions from 10 percent to 25 percent and removes the aggregate 15 percent CET1 threshold deduction. However, it retains the 250 percent risk weight applicable to non-deducted amounts of MSAs and temporary difference DTAs. In November 2019, the agencies jointly issued a final rule that permits insured depository institutions and depository institution holding companies to implement the simplifications to the capital rule on January 1, 2020, rather than April 1, 2020. These banking organizations may elect to use the revised effective date of January 1, 2020 or wait until the quarter beginning April 1, 2020. During 1Q 2020, Oriental elected to early implement the simplifications to the capital rule, which increased the capital ratios.

 

On January 1, 2020, Oriental adopted CECL with the initial implementation adjustment to Non-PCD loans and off-balance sheet instruments against retained earnings. For more information, see Note 1 – Significant Accounting Policies. On March 27, 2020, in response to the COVID-19 pandemic, U.S. banking regulators issued an interim final rule that Oriental adopted to delay for two years the initial adoption impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during 2020 and 2021 (i.e., a five-year transition period). During the two-year delay, Oriental will add back to CET1 capital 100 percent of the initial adoption impact of CECL plus 25 percent of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting on January 1, 2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period.

 

As of March 31, 2020 and December 31, 2019, OFG Bancorp and the Bank met all capital adequacy requirements to which they are subject. As of March 31, 2020 and December 31, 2019, the Bank is “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as set forth in the tables presented below.

OFG Bancorp’s and the Bank’s actual capital amounts and ratios as of March 31, 2020 and December 31, 2019 are as follows:

 

 

 

 

 

 

Minimum Capital

 

Minimum to be Well

 

Actual

 

Requirement

 

Capitalized

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

(Dollars in thousands)

OFG Bancorp Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

$

1,020,748

 

14.62%

 

$

558,690

 

8.00%

 

$

698,363

 

10.00%

Tier 1 capital to risk-weighted assets

$

933,226

 

13.36%

 

$

419,018

 

6.00%

 

$

558,690

 

8.00%

Common equity tier 1 capital to risk-weighted assets

$

816,356

 

11.69%

 

$

314,263

 

4.50%

 

$

453,936

 

6.50%

Tier 1 capital to average total assets

$

933,226

 

10.14%

 

$

368,210

 

4.00%

 

$

460,263

 

5.00%

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

$

937,962

 

13.91%

 

$

539,268

 

8.00%

 

$

674,085

 

10.00%

Tier 1 capital to risk-weighted assets

$

852,311

 

12.64%

 

$

404,451

 

6.00%

 

$

539,268

 

8.00%

Common equity tier 1 capital to risk-weighted assets

$

735,441

 

10.91%

 

$

303,338

 

4.50%

 

$

438,155

 

6.50%

Tier 1 capital to average total assets

$

852,311

 

9.24%

 

$

369,151

 

4.00%

 

$

461,438

 

5.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

Minimum to be Well

 

Actual

 

Requirement

 

Capitalized

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

(Dollars in thousands)

Bank Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

$

978,518

 

14.06%

 

$

556,816

 

8.00%

 

$

696,020

 

10.00%

Tier 1 capital to risk-weighted assets

$

891,285

 

12.81%

 

$

417,612

 

6.00%

 

$

556,816

 

8.00%

Common equity tier 1 capital to risk-weighted assets

$

891,285

 

12.81%

 

$

313,209

 

4.50%

 

$

452,413

 

6.50%

Tier 1 capital to average total assets

$

891,285

 

9.68%

 

$

368,376

 

4.00%

 

$

460,470

 

5.00%

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

$

898,812

 

13.36%

 

$

538,279

 

8.00%

 

$

672,848

 

10.00%

Tier 1 capital to risk-weighted assets

$

813,444

 

12.09%

 

$

403,709

 

6.00%

 

$

538,279

 

8.00%

Common equity tier 1 capital to risk-weighted assets

$

813,444

 

12.09%

 

$

302,782

 

4.50%

 

$

437,351

 

6.50%

Tier 1 capital to average total assets

$

813,444

 

8.85%

 

$

367,537

 

4.00%

 

$

459,421

 

5.00%