12) Capital Requirements

The Company and its subsidiary bank are subject to various regulatory capital requirements administered by the banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements and operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and HBC must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. There are no conditions or events since September 30, 2017, that management believes have changed the categorization of the Company or HBC as “well-capitalized.”

As of January 1, 2015, HCC and HBC along with other community banking organizations became subject to new capital requirements and certain provisions of the new rules will be phased in from 2015 through 2019. The Federal Banking regulators approved the new rules to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, as amended. The Company’s consolidated capital ratios and the Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at September 30, 2017.

Quantitative measures established by regulation to help ensure capital adequacy require the Company and HBC to maintain minimum amounts and ratios (set forth in the tables below) of total, Tier 1 capital, and common equity Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes that, as of September 30, 2017 and December 31, 2016, the Company and HBC met all capital adequacy guidelines to which they were subject.

The Company’s consolidated capital amounts and ratios are presented in the following table, together with capital adequacy requirements, under the Basel III regulatory requirements as of September 30, 2017, and December 31, 2016.


					Required For
					Capital
					Adequacy
					Purposes
	Actual				Under Basel III
	Amount		Ratio		Amount		Ratio (1)
	(Dollars in thousands)
As of September 30, 2017
Total Capital	$	289,231	14.6	%	$	183,750	9.25	%
(to risk-weighted assets)
Tier 1 Capital	$	229,656	11.6	%	$	144,020	7.25	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	229,656	11.6	%	$	114,223	5.75	%
(to risk-weighted assets)
Tier 1 Capital	$	229,656	8.3	%	$	111,329	4.00	%
(to average assets)

(1)

Includes 1.25% capital conservation buffer, effective January 1, 2017, except the Tier 1 Capital to average assets ratio.


					Required For
					Capital
					Adequacy
					Purposes
	Actual				Under Basel III
	Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2016
Total Capital	$	234,629	12.5	%	$	161,868	8.625	%
(to risk-weighted assets)
Tier 1 Capital	$	214,924	11.5	%	$	124,333	6.625	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	214,924	11.5	%	$	96,183	5.125	%
(to risk-weighted assets)
Tier 1 Capital	$	214,924	8.5	%	$	100,625	4.000	%
(to average assets)

(1)

Includes 0.625% capital conservation buffer, effective January 1, 2016, except the Tier 1 Capital to average assets ratio.

HBC’s actual capital amounts and ratios are presented in the following table, together with capital adequacy requirements, under the Basel III regulatory requirements as of September 30, 2017, and December 31, 2016.


									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
	(Dollars in thousands)
As of September 30, 2017
Total Capital	$	265,269	13.4	%	$	198,513	10.0	%	$	183,625	9.25	%
(to risk-weighted assets)
Tier 1 Capital	$	244,831	12.3	%	$	158,811	8.0	%	$	143,922	7.25	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	244,831	12.3	%	$	129,034	6.5	%	$	114,145	5.75	%
(to risk-weighted assets)
Tier 1 Capital	$	244,831	8.8	%	$	139,101	5.0	%	$	111,281	4.00	%
(to average assets)

(1)

Includes 1.25% capital conservation buffer, effective January 1, 2017, except the Tier 1 Capital to average assets ratio.


									Required For
									Capital
					To Be Well-Capitalized				Adequacy
					Under Basel III Regulatory				Purposes
	Actual				Requirements				Under Basel III
	Amount		Ratio		Amount		Ratio		Amount		Ratio (1)
		(Dollars in thousands)
As of December 31, 2016
Total Capital	$	231,069	12.3	%	$	187,602	10.0	%	$	161,807	8.625	%
(to risk-weighted assets)
Tier 1 Capital	$	211,364	11.3	%	$	150,082	8.0	%	$	124,287	6.625	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	211,364	11.3	%	$	121,942	6.5	%	$	96,146	5.125	%
(to risk-weighted assets)
Tier 1 Capital	$	211,364	8.4	%	$	125,746	5.0	%	$	100,597	4.000	%
(to average assets)

(1)

Includes 0.625% capital conservation buffer, effective January 1, 2016, except the Tier 1 Capital to average assets ratio.

The Subordinated Debt, net of unamortized issuance costs, totaled $39,137,000 at September 30, 2017, and qualifies as Tier 2 capital for the Company under the guidelines established by the Federal Reserve Bank. The issuance of Subordinated Debt resulted in an increase in the Company’s total risk‑based capital ratio at September 30, 2017, compared to December 31, 2016, but had no effect on the other regulatory capital ratios of the Company. All of HBC’s regulatory capital ratios increased at September 30, 2017, compared to December 31, 2016, primarily due to the downstream of $20,000,000 of the proceeds of the Subordinated Debt from the Company to HBC, and from the retention of $24,051,000 in earnings, net of distributed dividends totaling $12,000,000 from HBC to the Company during the first nine months of 2017.

HCC is dependent upon dividends from HBC. Under California General Corporation Law, the holders of common stock are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available. The California Financial Code provides that a state licensed bank may not make a cash distribution to its shareholders in excess of the lesser of the following: (i) the bank’s retained earnings; or (ii) the bank’s net income for its last three fiscal years, less the amount of any distributions made by the bank to its shareholders during such period. However, a bank, with the prior approval of the Commissioner of the California Department of Business Oversight—Division of Financial Institutions (“DBO”) may make a distribution to its shareholders of an amount not to exceed the greater of: (i) a bank’s retained earnings; (ii) its net income for its last fiscal year; or (iii) its net income for the current fiscal year. Also with the prior approval of the Commissioner of the DBO and the shareholders of the bank, the bank may make a distribution to its shareholders, as a reduction in capital of the bank. In the event that the Commissioner determines that the shareholders’ equity of a bank is inadequate or that the making of a distribution by a bank would be unsafe or unsound, the Commissioner may order a bank to refrain from making such a proposed distribution. As of September 30, 2017, HBC would not be required to obtain regulatory approval, and the amount available for cash dividends is $21,260,000. Similar restrictions applied to the amount and sum of loan advances and other transfers of funds from HBC to the parent company. During each of the third, second, and first quarters of 2017, HBC distributed dividends of $4,000,000, for a total of $12,000,000 for the first nine months of 2017.