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Regulatory & Capital Matters

9 Months Ended

Sep. 30, 2021

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 risk-based capital regulatory guidelines, the Bank’s Board of Directors has established an internal guideline requiring the Bank to 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%). At September 30, 2021, the Bank exceeded those thresholds.

At September 30, 2021, the Bank’s Tier 1 capital leverage ratio was 10.83%, an increase of 9 basis points from December 31, 2020, but is well above the 8.00% objective. The Bank’s total capital ratio was 16.69%, an increase of 168 basis points from December 31, 2020, and also well above the objective of 12.00%.

Bank holding companies are generally 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, 2021, and December 31, 2020.

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015. The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” generally holding companies with consolidated assets of less than $3.0 billion. The Company is currently considered a “small bank holding company.” As we had total assets in excess of $3.0 billion as of June 30, 2021, we will no longer be considered a small bank holding company in March of 2022. A detailed discussion of the Basel III Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, 2020, under the heading “Supervision and Regulation.”

At September 30, 2021, and December 31, 2020, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

Capital levels and industry defined regulatory minimum required levels are as follows:



					Minimum Capital				Well Capitalized
					Adequacy with Capital				Under Prompt Corrective
	Actual				Conservation Buffer, if applicable¹				Action Provisions²
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2021
Common equity tier 1 capital to risk weighted assets
Consolidated	$	292,767	12.99	%	$	157,765	7.00	%		N/A	N/A
Old Second Bank		351,663	15.65			157,293	7.00		$	146,058	6.50	%
Total capital to risk weighted assets
Consolidated		401,027	17.80			236,561	10.50			N/A	N/A
Old Second Bank		374,923	16.69			235,871	10.50			224,639	10.00
Tier 1 capital to risk weighted assets
Consolidated		317,767	14.10			191,562	8.50			N/A	N/A
Old Second Bank		351,663	15.65			190,999	8.50			179,764	8.00
Tier 1 capital to average assets
Consolidated		317,767	9.81			129,569	4.00			N/A	N/A
Old Second Bank		351,663	10.83			129,885	4.00			162,356	5.00

December 31, 2020
Common equity tier 1 capital to risk weighted assets
Consolidated	$	277,199	11.94	%	$	162,512	7.00	%		N/A	N/A
Old Second Bank		318,466	13.75			162,128	7.00		$	150,548	6.50	%
Total capital to risk weighted assets
Consolidated		331,178	14.26			243,855	10.50			N/A	N/A
Old Second Bank		347,408	15.00			243,186	10.50			231,605	10.00
Tier 1 capital to risk weighted assets
Consolidated		302,199	13.01			197,440	8.50			N/A	N/A
Old Second Bank		318,466	13.75			196,870	8.50			185,289	8.00
Tier 1 capital to average assets
Consolidated		302,199	10.21			118,393	4.00			N/A	N/A
Old Second Bank		318,466	10.74			118,609	4.00			148,262	5.00

¹Amounts are shown inclusive of a capital conservation buffer of 2.50%. Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes.

² The prompt corrective action provisions are only applicable at the Bank level. The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized.”

As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition. The cumulative amount that is not recognized in regulatory capital, in addition to the $3.8 million

Day 1 impact of CECL adoption, will be phased in at 25% per year beginning January 1, 2022. As of September 30, 2021, the capital measures of the Company exclude $4.2 million, which is the modified CECL transition adjustment.

Dividend Restrictions

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. Pursuant to the Basel III rules that came into effect January 1, 2015, and were fully phased in as of January 1, 2019, the Bank must keep a capital conservation buffer of 2.50% above the new regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

Stock Repurchase Program

In September 2019, our board of directors authorized the repurchase of up to 1,494,826 shares of our common stock (the “Repurchase Program”). The Repurchase Program expired on September 19, 2020, however, on October 20, 2020, the Company received notice of non-objection from the Federal Reserve Bank of Chicago to extend the Repurchase Program through October 20, 2021. Repurchases by us under the Repurchase Program may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means. During the third quarter of 2021, we repurchased no shares of our common stock pursuant to the Repurchase Program. As of September 30, 2021, 1,485,307 shares had been repurchased since the program’s inception, and 9,519 shares remained available for repurchase under the Repurchase Program. The Repurchase Program expired on October 21, 2021.

- Definition

The entire disclosure for regulatory capital requirement for depository and lending institutions. Institutions include, but not are not limited to, finance company, insured depository institution, bank holding company, savings and loan association holding company, bank and savings institution not federally insured, mortgage company, foreign financial institution and credit union.

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