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Regulatory & Capital Matters

9 Months Ended

Sep. 30, 2022

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, 2022, the Bank exceeded those thresholds.

At September 30, 2022, the Bank’s Tier 1 capital leverage ratio was 9.24%, a decrease of 34 basis points from December 31, 2021, but is above the 8.00% objective. The Bank’s total capital ratio was 12.64%, a decrease of 82 basis points from December 31, 2021, but also 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, 2022, and December 31, 2021.

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”, which are generally holding companies with consolidated assets of less than $3.0 billion. 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, 2021, under the heading “Supervision and Regulation.”

At September 30, 2022 and December 31, 2021, 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, 2022
Common equity tier 1 capital to risk weighted assets
Consolidated	$	434,155	9.16	%	$	331,778	7.00	%		N/A	N/A
Old Second Bank		550,635	11.60			332,280	7.00		$	308,545	6.50	%
Total capital to risk weighted assets
Consolidated		568,429	11.99			497,790	10.50			N/A	N/A
Old Second Bank		599,909	12.64			498,342	10.50			474,612	10.00
Tier 1 capital to risk weighted assets
Consolidated		459,155	9.68			403,184	8.50			N/A	N/A
Old Second Bank		550,635	11.60			403,483	8.50			379,748	8.00
Tier 1 capital to average assets
Consolidated		459,155	7.70			238,522	4.00			N/A	N/A
Old Second Bank		550,635	9.24			238,370	4.00			297,963	5.00

December 31, 2021
Common equity tier 1 capital to risk weighted assets
Consolidated	$	394,421	9.46	%	$	291,855	7.00	%		N/A	N/A
Old Second Bank		514,992	12.41			290,487	7.00		$	269,738	6.50	%
Total capital to risk weighted assets
Consolidated		522,932	12.55			437,513	10.50			N/A	N/A
Old Second Bank		558,503	13.46			435,682	10.50			414,935	10.00
Tier 1 capital to risk weighted assets
Consolidated		419,421	10.06			354,382	8.50			N/A	N/A
Old Second Bank		514,992	12.41			352,734	8.50			331,985	8.00
Tier 1 capital to average assets
Consolidated		419,421	7.81			214,812	4.00			N/A	N/A
Old Second Bank		514,992	9.58			215,028	4.00			268,785	5.00

¹Amounts are shown inclusive of a capital conservation buffer of 2.50%.

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. As of September 30, 2022, the capital measures of the Company exclude $2.9 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. As of September 30, 2022, the Bank had capacity to pay dividends of $17.7 million to the Company without prior regulatory approval. 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 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.

- 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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