Regulatory & Capital Matters

6 Months Ended

Jun. 30, 2017

Regulatory & Capital Matters

Regulatory & Capital Matters

Note 12 – 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%).  At June 30, 2017, the Bank exceeded those thresholds.

At June 30, 2017, the Bank’s Tier 1 capital leverage ratio was 10.23%, a decrease of 1 basis point from December 31, 2016, but well above the 8.00% objective.  The Bank’s total capital ratio was 13.30%, a decrease of 15 basis points from December 31, 2016, but also slightly above the objective of 12.00%.

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 June 30, 2017, and December 31, 2016.

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.  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, 2016, under the heading “Supervision and Regulation.”

At June 30, 2017, and December 31, 2016, 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				To Be Well Capitalized Under
					Adequacy with Capital				Prompt Corrective
	Actual				Conservation Buffer if applicable1				Action Provisions2
	Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2017
Common equity tier 1 capital to risk weighted assets
Consolidated	$	161,114	8.55	%	$	108,352	5.750	%		N/A	N/A
Old Second Bank		234,644	12.46			108,283	5.750		$	122,407	6.50	%
Total capital to risk weighted assets
Consolidated		228,754	12.14			174,298	9.250			N/A	N/A
Old Second Bank		250,475	13.30			174,203	9.250			188,327	10.00
Tier 1 capital to risk weighted assets
Consolidated		208,397	11.06			136,607	7.250			N/A	N/A
Old Second Bank		234,644	12.46			136,530	7.250			150,654	8.00
Tier 1 capital to average assets
Consolidated		208,397	9.09			91,704	4.00			N/A	N/A
Old Second Bank		234,644	10.23			91,747	4.00			114,684	5.00
December 31, 2016
Common equity tier 1 capital to risk weighted assets
Consolidated	$	154,537	8.76	%	$	90,411	5.125	%		N/A	N/A
Old Second Bank		221,153	12.53			90,456	5.125		$	114,724	6.50	%
Total capital to risk weighted assets
Consolidated		216,769	12.29			152,126	8.625			N/A	N/A
Old Second Bank		237,306	13.45			152,176	8.625			176,436	10.00
Tier 1 capital to risk weighted assets
Consolidated		191,988	10.88			116,904	6.625			N/A	N/A
Old Second Bank		221,153	12.53			116,930	6.625			141,199	8.00
Tier 1 capital to average assets
Consolidated		191,988	8.90			86,287	4.00			N/A	N/A
Old Second Bank		221,153	10.24			86,388	4.00			107,985	5.00

1  As of June 30, 2017, amounts are shown inclusive of a capital conservation buffer of 1.25%; as compared to December 31, 2016, of 0.625%.

2The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized.”

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, the Bank must keep a buffer of 0.625% for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter of minimum capital requirements in order to avoid additional limitations on capital distributions and certain other payments.