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, 2020, the Bank exceeded those thresholds.

At March 31, 2020, the Bank’s Tier 1 capital leverage ratio was 11.36%, a decrease of 114 basis points from December 31, 2019, but is well above the 8.00% objective. The Bank’s total capital ratio was 14.07%, a decrease of 116 basis points from December 31, 2019, but also well above the objective of 12.00%. The reduction in the ratios is primarily due to a $30.0 million dividend the Bank paid the Company in March 2020.

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, 2020, and December 31, 2019.

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 billion. The Company is currently considered a “small bank holding company.” 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, 2019, under the heading “Supervision and Regulation.”

At March 31, 2020, and December 31, 2019, 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, 2020
Common equity tier 1 capital to risk weighted assets
Consolidated	$	251,168	10.85	%	$	162,044	7.000	%		N/A	N/A
Old Second Bank		296,496	12.89			161,014	7.000		$	149,513	6.50	%
Total capital to risk weighted assets
Consolidated		303,182	13.09			243,194	10.500			N/A	N/A
Old Second Bank		323,510	14.07			241,425	10.500			229,929	10.00
Tier 1 capital to risk weighted assets
Consolidated		276,168	11.93			196,767	8.500			N/A	N/A
Old Second Bank		296,496	12.89			195,517	8.500			184,016	8.00
Tier 1 capital to average assets
Consolidated		276,168	10.57			104,510	4.00			N/A	N/A
Old Second Bank		296,496	11.36			104,400	4.00			130,500	5.00

December 31, 2019
Common equity tier 1 capital to risk weighted assets
Consolidated	$	251,477	11.14	%	$	158,020	7.000	%		N/A	N/A
Old Second Bank		322,496	14.35			157,315	7.000		$	146,078	6.50	%
Total capital to risk weighted assets
Consolidated		327,886	14.53			236,944	10.500			N/A	N/A
Old Second Bank		342,280	15.23			235,978	10.500			224,741	10.00
Tier 1 capital to risk weighted assets
Consolidated		308,102	13.65			191,858	8.500			N/A	N/A
Old Second Bank		322,496	14.35			191,026	8.500			179,789	8.00
Tier 1 capital to average assets
Consolidated		308,102	11.93			103,303	4.00			N/A	N/A
Old Second Bank		322,496	12.50			103,199	4.00			128,998	5.00

1 Amounts 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 provides banking organizations that adopt 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 have 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 March 31, 2020, the capital measures of the Company exclude $5.2 million, which is the Day 1 impact to retained earnings and 25% of the $8.0 million increase in the allowance for credit losses in the first quarter of 2020, excluding PCD loans.

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”). 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 first quarter of 2020, we repurchased 312,723 shares of our common stock at a weighted average price of $7.06 per share pursuant to the Repurchase Program.