13) 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 June 30, 2018, 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 new capital rules establish a “capital conservation buffer,” which must consist entirely of common equity Tier 1 capital. The capital conservation buffer is to be phased-in over four years beginning on January 1, 2016. The buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. The Company and HBC must maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. 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 June 30, 2018.

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 June 30, 2018 and December 31, 2017, 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 June 30, 2018, and December 31, 2017.


					Required For
					Capital
					Adequacy
					Purposes
	Actual				Under Basel III
	Amount		Ratio		Amount		Ratio (1)
	(Dollars in thousands)
As of June 30, 2018
Total Capital	$	323,988	13.5	%	$	237,564	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	257,349	10.7	%	$	189,450	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	257,349	10.7	%	$	153,364	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	257,349	8.7	%	$	118,108	4.000	%
(to average assets)

(1)

Includes 1.875% capital conservation buffer, effective January 1, 2018, 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, 2017
Total Capital	$	288,754	14.4	%	$	185,338	9.250	%
(to risk-weighted assets)
Tier 1 Capital	$	229,258	11.4	%	$	145,265	7.250	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	229,258	11.4	%	$	115,210	5.750	%
(to risk-weighted assets)
Tier 1 Capital	$	229,258	8.0	%	$	114,959	4.000	%
(to average assets)

(1)

Includes 1.25% capital conservation buffer, effective January 1, 2017, 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 June 30, 2018, and December 31, 2017.


									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 June 30, 2018
Total Capital	$	300,635	12.5	%	$	240,451	10.0	%	$	237,445	9.875	%
(to risk-weighted assets)
Tier 1 Capital	$	273,271	11.4	%	$	192,361	8.0	%	$	189,355	7.875	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	273,271	11.4	%	$	156,293	6.5	%	$	153,288	6.375	%
(to risk-weighted assets)
Tier 1 Capital	$	273,271	9.3	%	$	147,568	5.0	%	$	118,054	4.000	%
(to average assets)

(1)

Includes 1.875% capital conservation buffer, effective January 1, 2018, 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, 2017
Total Capital	$	265,102	13.2	%	$	200,274	10.0	%	$	185,253	9.250	%
(to risk-weighted assets)
Tier 1 Capital	$	244,790	12.2	%	$	160,219	8.0	%	$	145,198	7.250	%
(to risk-weighted assets)
Common Equity Tier 1 Capital	$	244,790	12.2	%	$	130,178	6.5	%	$	115,157	5.750	%
(to risk-weighted assets)
Tier 1 Capital	$	244,790	8.5	%	$	143,655	5.0	%	$	114,924	4.000	%
(to average assets)

(1)

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

The Subordinated Debt, net of unamortized issuance costs, totaled $39,275,000 at June 30, 2018, and qualifies as Tier 2 capital for the Company under the guidelines established by the Federal Reserve Bank.

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 June 30, 2018, HBC would not be required to obtain regulatory approval, and the amount available for cash dividends is $31,057,000. 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 second and first quarters of 2018, HBC distributed dividends of $4,000,000 for a total of $8,000,000 for the first six months of 2018.