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Regulatory & Capital Matters | 9 Months Ended
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Sep. 30, 2014
Regulatory & Capital Matters |
Regulatory & Capital Matters | Note 11 – Regulatory & Capital Matters The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies. In connection with the current economic environment, the Bank’s current level of nonperforming assets and the risk-based capital guidelines, the Bank’s board of directors has determined that the Bank should maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%). The Bank currently exceeds those thresholds. The Bank exceeded both board of directors’ capital ratio objectives. At September 30, 2014, the Bank’s Tier 1 capital leverage ratio was 11.67%, up 70 basis points from December 31, 2013, and well above the 8.00% objective. The Bank’s total capital ratio was 18.47%, up 43 basis points from December 31, 2013, and also well above the objective of 12.00%. On July 22, 2011, the Company entered into a Written Agreement with the Reserve Bank designed to maintain the financial soundness of the Company. Pursuant to the Written Agreement, the Company took certain actions and operated in compliance with the Written Agreement’s provisions during its term. On January 17, 2014, the Reserve Bank terminated the Written Agreement. Although the Written Agreement has been terminated, the Company expects that it will continue to seek approval from the Reserve Bank prior to paying any dividends on its capital stock and incurring any additional indebtedness. Bank holding companies are required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System. The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of September 30, 2014, and December 31, 2013. The Company’s total risk-based capital ratio has been adjusted to correctly account for the Company's subordinated debt, a portion of which was excluded from Tier 2 capital because the subordinated debt is within five years of maturity. This change has also been made in all relevant prior quarters and has resulted in an immaterial reduction in the Company's total risk-based capital ratio for those periods. The reduction in regulatory capital amounts and ratios has no impact on the Company's historical consolidated financial statements or stockholders' equity, which were stated in accordance with GAAP. The Company completed the redemption of certain of its Series B Fixed Rate Cumulative Preferred Stock (the “Series B Stock”) in the second quarter, 2014. The Company completed a public offering of common stock in April. Net proceeds of over $64.0 million were used to pay the accrued but unpaid interest on trust preferred securities, the accumulated but unpaid dividends on the Series B Stock and to complete this redemption. All ratios for September 30, 2014 reflect these changes in the Company’s capital. At September 30, 2014, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “adequately capitalized” under current regulatory defined capital ratios. The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital levels and industry defined regulatory minimum required levels:
|  |  |  |  |  |  |  | Minimum Required |  |  | Minimum Required |
|  |  |  |  |  |  |  | for Capital |  |  | to be Well |
|  | Actual |  | Adequacy Purposes |  | Capitalized 1 |
|  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio |
September 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital to risk weighted assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 234,500 |  | 17.56 | % |  | $ | 106,834 |  | 8.00 | % |  |  | N/A |  | N/A |
Old Second Bank |  |  | 246,873 |  | 18.47 |  |  |  | 106,929 |  | 8.00 |  |  | $ | 133,662 |  | 10.00 | %
Tier 1 capital to risk weighted assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 190,724 |  | 14.28 |  |  |  | 53,424 |  | 4.00 |  |  |  | N/A |  | N/A |
Old Second Bank |  |  | 230,087 |  | 17.22 |  |  |  | 53,446 |  | 4.00 |  |  |  | 80,170 |  | 6.00 |
Tier 1 capital to average assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 190,724 |  | 9.68 |  |  |  | 78,812 |  | 4.00 |  |  |  | N/A |  | N/A |
Old Second Bank |  |  | 230,087 |  | 11.67 |  |  |  | 78,864 |  | 4.00 |  |  |  | 98,581 |  | 5.00 |
December 31, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital to risk weighted assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 191,139 |  | 15.16 | % |  | $ | 100,865 |  | 8.00 | % |  |  | N/A |  | N/A |
Old Second Bank |  |  | 227,467 |  | 18.04 |  |  |  | 100,872 |  | 8.00 |  |  | $ | 126,090 |  | 10.00 | %
Tier 1 capital to risk weighted assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 134,199 |  | 10.65 |  |  |  | 50,403 |  | 4.00 |  |  |  | N/A |  | N/A |
Old Second Bank |  |  | 211,568 |  | 16.78 |  |  |  | 50,433 |  | 4.00 |  |  |  | 75,650 |  | 6.00 |
Tier 1 capital to average assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  |  | 134,199 |  | 6.96 |  |  |  | 77,126 |  | 4.00 |  |  |  | N/A |  | N/A |
Old Second Bank |  |  | 211,568 |  | 10.97 |  |  |  | 77,144 |  | 4.00 |  |  |  | 96,430 |  | 5.00 |
1 The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized”. The Company’s credit facility with Bank of America includes $45.0 million in subordinated debt. That debt obligation qualifies at 60% and 80% of the original amount for Tier 2 regulatory capital at September 30, 2014 and December 31, 2013, respectively. In addition, the trust preferred securities continue to qualify as Tier 1 regulatory capital, and the Company treats the maximum amount of this security type allowable under regulatory guidelines as Tier 1 capital. As of September 30, 2014 all $56.6 million of the trust preferred proceeds qualified as Tier 1 regulatory capital. As of December 31, 2013, trust preferred proceeds of $51.6 million qualified as Tier 1 regulatory capital and $5.0 million qualified as Tier 2 regulatory capital. All of the Series B Stock qualified as Tier 1 regulatory capital as of September 30, 2014, and December 31, 2013. Dividend Restrictions and Deferrals In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a Bank without prior regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above. The Bank has the ability and the authority to pay dividends to the Company to pay debt and to meet preferred dividend requirements. As discussed in Note 8, as of September 30, 2014, the Company had $58.4 million of junior subordinated debentures held by two statutory business trusts that it controls. The Company has the right to defer interest payments on the debentures for a period of up to 20 consecutive quarters, and elected to begin such a deferral in August 2010. However, all deferred interest must be paid before the Company may pay dividends on its common stock. In the second quarter of 2014, the Company terminated the deferral period and paid all accumulated and unpaid interest on the junior subordinated debentures which totaled $19.7 million. T he Company is currently paying interest as it comes due and $1.1 million was paid in the third quarter of 2014. Furthermore, as with the debentures discussed above, the Company is prohibited from paying dividends on its common stock unless it has fully paid all deferred dividends on the Series B Stock. In August 2010, it also began to defer the payment of dividends on such Series B Stock. Therefore, in addition to paying all the accrued and unpaid distributions on the debentures set forth above, the Company must also fully pay all deferred and unpaid dividends on the Series B Stock before it may reinstate the payment of dividends on the common stock. On April 15, 2014, the Company declared a dividend of approximately $15.8 million on its Series B Stock to stockholders of record on May 1, 2014. Series B Stock dividends of $10.3 million were paid on May 15, 2014. The Company is curren t l y paying dividends as they come due and $1.1 million paid was paid on August 15, 2014. On April 28, 2014, the Company redeemed 25,669 shares of the Series B Stock from certain holders, which included certain of the Company’s directors, at a redemption price of 94.75% of the per share liquidation value, or $947.50 per share, for a total price of approximately $24.3 million. The Company paid $22.9 million to a large private investor and an additional $1.4 million to Company directors for these purchases. The holders of such shares waived their rights to any dividends on the Series B Stock, and such holders did not receive any part of the declared dividend on the Series B Stock. In May, the Company paid $10.3 million in Series B Stock dividends. In the second quarter, the Company also recognized benefit from $5.4 million in net income available to common stockholders reflecting both reversal of dividends previously accrued as well as dividends accumulated but not accrued by the Company and waived by holders upon redemption. Further detail on the junior subordinated debentures, the Series B Stock and the deferral of interest and dividends thereon is described in Notes 8 and 15.

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- Definition The entire disclosure for banks, savings institutions, and credit unions, for regulatory capital requirements imposed by the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS) or for any state imposed capital requirements, as applicable. The disclosure may include (1) a description of regulatory capital requirements (a) for capital adequacy purposes and (b) established by the prompt corrective action provisions of Section 38 of the Federal Depository Insurance Act; (2) the actual or possible material effects of noncompliance with such requirements; (3) whether the entity is in compliance with the regulatory capital requirements including (a) required and actual ratios and amounts of Tier 1 leverage, Tier 1 risk-based, and total risk-based capital, tangible capital (for savings institutions), and Tier 3 capital for market risk (for certain banks and bank holding companies), (b) factors that may significantly affect capital adequacy; (4) the prompt corrective action category in which the entity was classified as of its most recent notification; (5) whether management believes any conditions or events since notification have changed the entity's category. Also may include additional information that might be disclosed in situations where substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 505 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=35709795&loc=SL5958570-112826 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 505 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35709795&loc=SL5958568-112826 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 505 -Section 50 -Paragraph 1D -URI http://asc.fasb.org/extlink&oid=35709795&loc=SL5958573-112826 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 505 -Section 50 -Paragraph 1E -URI http://asc.fasb.org/extlink&oid=35709795&loc=SL5958574-112826 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 505 -Section 50 -Paragraph 1F -URI http://asc.fasb.org/extlink&oid=35709795&loc=SL5958575-112826 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 505 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=35709795&loc=SL5958569-112826 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 505 -Section 50 -Paragraph 1H -URI http://asc.fasb.org/extlink&oid=35709795&loc=d3e65071-112826 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 505 -Section 50 -Paragraph 1G -URI http://asc.fasb.org/extlink&oid=35709795&loc=SL5958577-112826 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 505 -Section 50 -Paragraph 1C -URI http://asc.fasb.org/extlink&oid=35709795&loc=SL5958572-112826 + Details
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