Regulatory Capital Requirements

9 Months Ended

Sep. 30, 2015

Regulatory Capital Requirements [Abstract]

Regulatory Capital Requirements

Note 12.Regulatory Capital Requirements

The Company and Royal Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the our financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Royal Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 

In July 2013, the federal bank regulatory agencies adopted final rules to revise the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The July 2013 final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”).

Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements were effective on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016. As of September 30, 2015, the Company and Royal Bank satisfied the criteria for a well-capitalized institution.

In connection with a prior bank regulatory examination, the FDIC concluded, based upon its interpretation of the Call Report instructions and under regulatory accounting principles (“RAP”), that income from Royal Bank’s tax lien business should be recognized on a cash basis, not an accrual basis.  Royal Bank’s current accrual method is in accordance with U.S. GAAP.  Royal Bank disagrees with the FDIC’s conclusion and filed the Call Report for September 30, 2015 and the previous 20 quarters in accordance with U.S. GAAP.  The change in the method of revenue recognition for the tax lien business for regulatory accounting purposes affects Royal Bank’s and the Company’s capital ratios as shown below.  The resolution of this matter will be decided by additional joint regulatory agency guidance which includes the Federal Reserve Bank, the FDIC, and the OCC.

The table below sets forth Royal Bank’s capital ratios under RAP based on the FDIC’s interpretation of the Call Report instructions:

	At September 30, 2015
									To be well capitalized
					For capital				under prompt corrective
	Actual				adequacy purposes				action provision
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)	$	84,720	15.99	%	$	42,386	8.00	%	$	52,983	10.00	%
Tier 1 capital (to risk-weighted assets)	$	78,058	14.73	%	$	31,790	6.00	%	$	42,386	8.00	%
Tier 1 capital (to average assets, leverage)	$	78,058	10.65	%	$	29,307	4.00	%	$	36,634	5.00	%
Common equity Tier 1 (to risk-weighted assets)	$	58,622	11.06	%	$	23,842	4.50	%	$	34,439	6.50	%

The tables below reflect the adjustments to the net income as well as the capital ratios for Royal Bank under U.S. GAAP:

	For the nine
	months ended
(In thousands)	September 30, 2015
RAP net income	$	2,403
Tax lien adjustment, net of noncontrolling interest		2,208
U.S. GAAP net income	$	4,611

	At September 30, 2015
	As reported		As adjusted
	under RAP		for U.S. GAAP
Total capital (to risk-weighted assets)	15.99	%	16.35	%
Tier 1 capital (to risk-weighted assets)	14.73	%	15.09	%
Tier 1 capital (to average assets, leverage)	10.65	%	10.93	%
Common equity Tier 1 (to risk-weighted assets)	11.06	%	11.02	%

The tables below reflect the Company’s capital ratios:

	At September 30, 2015
										To be well capitalized
					For capital					under the Federal
	Actual				adequacy purposes				Reserve's regulations
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)	$	101,091	18.96	%	$	42,643	8.00	%	$	53,304	10.00	%
Tier 1 capital (to risk-weighted assets)	$	92,664	17.38	%	$	31,982	6.00	%	$	31,982	6.00	%
Tier 1 capital (to average assets, leverage)	$	92,664	12.52	%	$	29,609	4.00	%		N/A	N/A
Common equity Tier 1 (to risk-weighted assets)	$	50,057	9.39	%	$	23,987	4.50	%		N/A	N/A

The Company has filed the Consolidated Financial Statements for Bank Holding Companies-FR Y-9C (“FR Y-9C”) as of September 30, 2015 consistent with U.S. GAAP and the FR Y-9C instructions.  In the event that a similar adjustment for RAP purposes would be required by the Federal Reserve on the holding company level, the adjusted ratios are shown in the table below.

	For the nine
	months ended
(In thousands)	September 30, 2015
U.S. GAAP net income	$	4,586
Tax lien adjustment, net of noncontrolling interest		(2,208)
RAP net income	$	2,378

	At September 30, 2015
	As reported		As adjusted
	under U.S. GAAP		for RAP
Total capital (to risk-weighted assets)	18.96	%	18.62	%
Tier 1 capital (to risk-weighted assets)	17.38	%	16.90	%
Tier 1 capital (to average assets, leverage)	12.52	%	12.16	%
Common equity Tier 1 (to risk-weighted assets)	9.39	%	9.43	%