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%). At March 31, 2015, the Bank exceeds those thresholds.

At March 31, 2015, the Bank’s Tier 1 capital leverage ratio was 12.15%, up 13 basis points from December 31, 2014, and well above the 8.00% objective. The Bank’s total capital ratio was 18.18%, down 55 basis points from December 31, 2014, 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.

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 March 31, 2015, and December 31, 2014.

The Company completed the redemption of certain of its Series B Fixed Rate Cumulative Preferred Stock (the “Series B Stock”) in the second quarter of 2014 and the first quarter of 2015. The Company completed a public offering of common stock in April of 2014. 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 March 31, 2015, reflect these changes in the Company’s capital.

At March 31, 2015, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “adequately capitalized” under current regulatory defined capital ratios. For all periods prior to 2015, all capital ratios displayed were calculated without giving effect to the final Basel III capital rules.

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
March 31, 2015
Common equity tier 1 capital to risk weighted assets
Consolidated	$	136,976	9.46	%	$	65,158	4.50	%		N/A	N/A
Old Second Bank		245,076	16.91			65,218	4.50		$	94,204	6.50	%
Total capital to risk weighted assets
Consolidated		250,416	17.30			115,799	8.00			N/A	N/A
Old Second Bank		263,398	18.18			115,907	8.00			144,883	10.00
Tier 1 capital to risk weighted assets
Consolidated		197,987	13.68			86,836	6.00			N/A	N/A
Old Second Bank		245,076	16.91			86,958	6.00			115,944	8.00
Tier 1 capital to average assets
Consolidated		197,987	9.82			80,646	4.00			N/A	N/A
Old Second Bank		245,076	12.15			80,683	4.00			100,854	5.00

December 31, 2014
Total capital to risk weighted assets
Consolidated	$	240,566	17.68	%	$	108,853	8.00	%		N/A	N/A
Old Second Bank		254,897	18.73			108,872	8.00		$	136,090	10.00	%
Tier 1 capital to risk weighted assets
Consolidated		196,499	14.44			54,432	4.00			N/A	N/A
Old Second Bank		237,828	17.47			54,454	4.00			81,681	6.00
Tier 1 capital to average assets
Consolidated		196,499	9.93			79,154	4.00			N/A	N/A
Old Second Bank		237,828	12.02			79,144	4.00			98,930	5.00

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

The Company’s credit facility with a correspondent bank includes $45.0 million in subordinated debt. That debt obligation qualifies at 60% of the original amount for Tier 2 regulatory capital at March 31, 2015, and December 31, 2014. 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. At March 31, 2015 $49.5 million and $7.1 million of the trust preferred proceeds qualified as Tier 1 regulatory capital and Tier 2 regulatory capital, respectively. All $56.6 million of the trust preferred proceeds qualified as Tier 1 regulatory capital as of December 31, 2014. All of the Series B Stock qualified as Tier 1 regulatory capital as of March 31, 2015, and December 31, 2014.

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 Common Equity Tier 1 minimum requirement in order to avoid limitations on capital distributions. 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 March 31, 2015, 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. The Company is currently paying interest as it comes due.

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. 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 currently paying dividends as they come due and $710,000 was paid on February 15, 2015 on the remaining shares outstanding at that date and is current with the Series B Stock dividends.

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. As of December 31, 2014, there were 47,331 shares of the Series B Preferred Stock outstanding, and redeemed approximately one-third of the Series B Preferred Stock in the first quarter of 2015 resulted in the redemption of 15,778 shares of Series B Preferred Stock. The redemption was successfully completed in the quarter. As of March 31, 2015, 31,553 shares of the Series B Preferred Stock remain outstanding.

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.