Regulatory Capital Requirements

12 Months Ended

Dec. 31, 2014

Regulatory Capital Requirements [Abstract]

Regulatory Capital Requirements

Regulatory Capital Requirements

The Company is a bank holding company under the supervision of the Federal Reserve Bank of San Francisco. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve Board. Heritage Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve Board capital requirements generally parallel the FDIC requirements. 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 consolidated financial statements and operations. Management believes as of December 31, 2014, the Company and the Bank meet all capital adequacy requirements to which they are subject.

Pursuant to minimum capital requirements of the FDIC, Heritage Bank is required to maintain a leverage ratio (Tier 1 capital to average assets ratio) of 4.0% and risk-based capital ratios of Tier 1 capital and total capital (to total risk-weighted assets) of 4.0% and 8.0%, respectively. As of December 31, 2014 and December 31, 2013, the most recent regulatory notifications categorized Heritage Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's categories.

	Minimum Requirements				Well- Capitalized Requirements		Actual
	$		%		$	%	$		%
	(Dollars in thousands)
As of December 31, 2014:
The Company consolidated
Tier 1 leverage capital to average assets	$	132,881	4.0	%	N/A	N/A	$	340,292	10.2	%
Tier 1 capital to risk-weighted assets	97,620		4.0		N/A	N/A	340,292		13.9
Total capital to risk-weighted assets	195,240		8.0		N/A	N/A	368,198		15.1
Heritage Bank
Tier 1 leverage capital to average assets	132,853		4.0		166,066	5.0	332,147		10.0
Tier 1 capital to risk-weighted assets	97,585		4.0		146,378	6.0	332,147		13.6
Total capital to risk-weighted assets	195,171		8.0		243,964	10.0	360,053		14.8
As of December 31, 2013:
The Company consolidated
Tier 1 leverage capital to average assets	$	65,847	4.0	%	N/A	N/A	$	185,951	11.3	%
Tier 1 capital to risk-weighted assets	47,853		4.0		N/A	N/A	185,951		15.5
Total capital to risk-weighted assets	95,706		8.0		N/A	N/A	201,076		16.8
Heritage Bank
Tier 1 leverage capital to average assets	65,831		4.0		82,288	5.0	182,543		11.1
Tier 1 capital to risk-weighted assets	47,807		4.0		71,710	6.0	182,543		15.3
Total capital to risk-weighted assets	95,613		8.0		119,517	10.0	197,656		16.5

     In July 2013, the Federal banking regulators approved a final rule to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision, commonly called Basel III, and to address relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The final rule strengthens the definition of regulatory capital, increases risk-based capital requirements, makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt corrective action thresholds. Community banking organizations, such as the Company and the Bank, become subject to the new rule on January 1, 2015 and certain provisions of the new rule will be phased in over the period of 2015 through 2019. The final rule:

• Permits banking organizations that had less than $15 billion in total consolidated assets as of December 31, 2009, or were mutual holding companies as of May 19, 2010, to include in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock that were issued and included in Tier 1 capital prior to May 19, 2010, subject to a limit of 25% of Tier 1 capital elements, excluding any non-qualifying capital instruments and after all regulatory capital deductions and adjustments have been applied to Tier 1 capital.

• Establishes new qualifying criteria for regulatory capital, including new limitations on the inclusion of deferred tax assets and mortgage servicing rights.

• Requires a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%.

• Increases the minimum Tier 1 capital to risk-weighted assets ratio requirement from 4% to 6%.

• Retains the minimum total capital to risk-weighted assets ratio requirement of 8%.

• Establishes a minimum leverage ratio requirement of 4%.

• Retains the existing regulatory capital framework for 1-4 family residential mortgage exposures.

• Permits banking organizations that are not subject to the advanced approaches rule, such as the Company and the Bank, to retain, through a one-time election, the existing treatment for most accumulated other comprehensive income, such that unrealized gains and losses on securities available for sale will not affect regulatory capital amounts and ratios.

• Implements a new capital conservation buffer requirement for a banking organization to maintain a common equity capital ratio more than 2.5% above the minimum common equity Tier 1 capital, Tier 1 capital and total risk-based capital ratios in order to avoid limitations on capital distributions, including dividend payments, and certain discretionary bonus payments. The capital conservation buffer requirement will be phased in beginning on January 1, 2016 at 0.625% and will be fully phased in at 2.50% by January 1, 2019. A banking organization with a buffer of less than the required amount would be subject to increasingly stringent limitations on such distributions and payments as the buffer approaches zero. The new rule also generally prohibits a banking organization from making such distributions or payments during any quarter if its eligible retained income is negative and its capital conservation buffer ratio was 2.5% or less at the end of the previous quarter. The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and associated tax effects not already reflected in net income.

• Increases capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term commitments and securitization exposures.

• Expands the recognition of collateral and guarantors in determining risk-weighted assets.

• Removes references to credit ratings consistent with the Dodd-Frank Act and establishes due diligence requirements for securitization exposures.

The Company’s management is currently evaluating the provisions of the final rule and their expected impact on the Company.