Regulatory Capital Requirements

12 Months Ended

Dec. 31, 2016

Regulatory Capital Requirements [Abstract]

Regulatory Capital Requirements

Note 16.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 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 the final reforms on capital and liquidity generally referred to as “Basel III”, which were published by the Basel Committee on Banking Supervision and the Financial Stability Board. The agencies view the new capital requirements as a better reflection of banking organizations’ risk profiles, thereby improving the overall resiliency of the banking system. The rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement or “CET1”, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital, or tier 2 capital.  Basel III also introduced a non-risk adjusted tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets, and new liquidity requirements.  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 CET1 above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.   The new minimum capital requirements became effective on January 1, 2015.  The capital conservation buffer requirements phase in over a three-year period beginning January 1, 2016. As of December 31, 2016, the Company and Royal Bank met all capital adequacy requirements to which it is subject and Royal Bank met 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 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 December 31, 2016 and the previous 25 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:

	Actual				For capital adequacy purposes				To be well capitalized under prompt corrective action provision
(Dollars in thousands)	Amount		Ratio		Amount		Ratio*		Amount		Ratio
Total capital (to risk-weighted assets)
At December 31, 2016	$	76,716	12.185	%	$	54,301	8.625	%	$	62,957	10.000	%
At December 31, 2015	$	87,354	15.802	%	$	44,225	8.000	%	$	55,281	10.000	%
Tier 1 capital (to risk-weighted assets)
At December 31, 2016	$	68,743	10.919	%	$	41,709	6.625	%	$	50,366	8.000	%
At December 31, 2015	$	80,410	14.546	%	$	33,169	6.000	%	$	44,225	6.000	%
Tier 1 capital (to average assets, leverage)
At December 31, 2016	$	68,743	8.573	%	$	32,076	4.000	%	$	40,095	5.000	%
At December 31, 2015	$	80,410	10.589	%	$	30,374	4.000	%	$	37,968	5.000	%
Common equity Tier 1 (to risk-weighted assets)
At December 31, 2016	$	69,681	11.068	%	$	32,266	5.125	%	$	40,922	6.500	%
At December 31, 2015	$	58,824	10.641	%	$	24,876	4.500	%	$	35,933	6.500	%

*The 2016 ratios include the capital conservation buffer of 0.625%.

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 year ended		For the year ended
(In thousands)	December 31, 2016		December 31, 2015
RAP net income	$	8,775	$	9,161
Tax lien adjustment, net of noncontrolling interest		1,544		1,973
U.S. GAAP net income	$	10,319	$	11,134

	At December 31, 2016				At December 31, 2015
	As reported		As adjusted		As reported		As adjusted
	under RAP		for U.S. GAAP		under RAP		for U.S. GAAP
Total capital (to risk-weighted assets)	12.185	%	12.405	%	15.802	%	16.109	%
Tier 1 capital (to risk-weighted assets)	10.919	%	11.139	%	14.546	%	14.853	%
Tier 1 capital (to average assets, leverage)	8.573	%	8.750	%	10.589	%	10.824	%
Common equity Tier 1 (to risk-weighted assets)	11.068	%	11.040	%	10.641	%	10.962	%

The tables below reflect the Company’s capital ratios:

	Actual				For capital adequacy purposes				To be well capitalized under the Federal Reserve's regulations
(Dollars in thousands)	Amount		Ratio		Amount		Ratio*		Amount		Ratio
Total capital (to risk-weighted assets)
At December 31, 2016	$	84,056	13.302	%	$	54,503	8.625	%	$	63,192	10.000	%
At December 31, 2015	$	103,355	18.574	%	$	44,516	8.000	%	$	55,645	10.000	%
Tier 1 capital (to risk-weighted assets)
At December 31, 2016	$	68,326	10.812	%	$	41,865	6.000	%	$	37,915	6.000	%
At December 31, 2015	$	95,316	17.129	%	$	33,387	6.000	%	$	33,387	6.000	%
Tier 1 capital (to average assets, leverage)
At December 31, 2016	$	68,326	8.488	%	$	32,199	4.000	%		N/A	N/A
At December 31, 2015	$	95,316	12.444	%	$	30,638	4.000	%		N/A	N/A
Common equity Tier 1 (to risk-weighted assets)
At December 31, 2016	$	50,502	7.992	%	$	32,386	4.500	%		N/A	N/A
At December 31, 2015	$	52,115	9.366	%	$	25,040	4.500	%		N/A	N/A

*The 2016 ratios include the capital conservation buffer of 0.625%.

The Company has filed the Consolidated Financial Statements for Bank Holding Companies-FR Y-9C (“FR Y-9C”) as of December 31, 2016 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 year ended		For the year ended
(In thousands)	December 31, 2016		December 31, 2015
U.S. GAAP net income attributable to Royal Bancshares	$	10,375	$	10,993
Tax lien adjustment, net of noncontrolling interest		(1,544)		(1,973)
RAP net income	$	8,831	$	9,020

	At December 31, 2016				At December 31, 2015
	As reported		As adjusted		As reported		As adjusted
	under U.S. GAAP		for RAP		under U.S. GAAP		for RAP
Total capital (to risk-weighted assets)	13.302	%	13.084	%	18.574	%	18.277	%
Tier 1 capital (to risk-weighted assets)	10.812	%	10.512	%	17.129	%	16.710	%
Tier 1 capital (to average assets, leverage)	8.488	%	8.248	%	12.444	%	12.127	%
Common equity Tier 1 (to risk-weighted assets)	7.992	%	8.012	%	9.366	%	9.040	%