Regulatory & Capital Matters

3 Months Ended

Mar. 31, 2023

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 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 March 31, 2023, the Bank exceeded those thresholds.

At March 31, 2023, the Bank’s Tier 1 capital leverage ratio was 9.83%, an increase of 51 basis points from December 31, 2022, and is above the 8.00% objective.  The Bank’s total capital ratio was 13.10%, an increase of 35 basis points from December 31, 2022, and 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 March 31, 2023, and December 31, 2022.

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, 2022, under the heading “Supervision and Regulation.”

At March 31, 2023 and December 31, 2022, 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
March 31, 2023
Common equity tier 1 capital to risk weighted assets
Consolidated	$	478,610	9.91	%	$	338,070	7.00	%		N/A	N/A
Old Second Bank		577,986	11.98			337,721	7.00		$	313,598	6.50	%
Total capital to risk weighted assets
Consolidated		617,527	12.79			506,961	10.50			N/A	N/A
Old Second Bank		631,903	13.10			506,487	10.50			482,369	10.00
Tier 1 capital to risk weighted assets
Consolidated		503,610	10.43			410,420	8.50			N/A	N/A
Old Second Bank		577,986	11.98			410,090	8.50			385,967	8.00
Tier 1 capital to average assets
Consolidated		503,610	8.56			235,332	4.00			N/A	N/A
Old Second Bank		577,986	9.83			235,193	4.00			293,991	5.00
December 31, 2022
Common equity tier 1 capital to risk weighted assets
Consolidated	$	457,206	9.67	%	$	330,966	7.00	%		N/A	N/A
Old Second Bank		552,404	11.70			330,498	7.00		$	306,891	6.50	%
Total capital to risk weighted assets
Consolidated		592,039	12.52			496,518	10.50			N/A	N/A
Old Second Bank		602,237	12.75			495,960	10.50			472,343	10.00
Tier 1 capital to risk weighted assets
Consolidated		482,206	10.20			401,838	8.50			N/A	N/A
Old Second Bank		552,404	11.70			401,319	8.50			377,712	8.00
Tier 1 capital to average assets
Consolidated		482,206	8.14			236,956	4.00			N/A	N/A
Old Second Bank		552,404	9.32			237,083	4.00			296,354	5.00

¹ Amounts 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 March 31, 2023, the capital measures of the Company exclude $1.9 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 March 31, 2023, the Bank had capacity to pay dividends of $51.2 million to the Company without prior regulatory approval.  Pursuant to the Basel III rules, 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.