Regulatory Capital Requirements

6 Months Ended

Jun. 30, 2017

Regulatory Capital Requirements [Abstract]

Regulatory Capital Requirements

Note 11.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 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.  Effective January 1, 2019 the capital conservation buffer will effectively raise the minimum required common equity tier 1 capital ratio to 7.0%, the tier 1 capital ratio to 8.5%, and the total capital to 10.0%.  Management believes that as of June 30, 2017, the Company and Royal Bank would meet all capital adequacy requirements under the Basel III rules on a fully phased in basis as if all such requirements were currently in effect.  As of June 30, 2017, 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 June 30, 2017 and the previous 27 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 June 30, 2017
									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)	$	82,588	13.296	%	$	57,454	9.250	%	$	62,113	10.000	%
Tier 1 capital (to risk-weighted assets)	$	74,721	12.030	%	$	45,032	7.250	%	$	49,690	8.000	%
Tier 1 capital (to average assets, leverage)	$	74,721	9.148	%	$	32,671	4.000	%	$	40,838	5.000	%
Common equity Tier 1 (to risk-weighted assets)	$	74,081	11.927	%	$	35,715	5.750	%	$	40,373	6.500	%

*    Ratios related to risk-weighted assets include the capital conservation buffer of 1.25%.  

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 six months ended
(In thousands)	June 30, 2017
RAP net income	$	4,338
Tax lien adjustment, net of noncontrolling interest		903
U.S. GAAP net income	$	5,241

	At June 30, 2017
	As reported		As adjusted
	under RAP		for U.S. GAAP
Total capital (to risk-weighted assets)	13.296	%	13.426	%
Tier 1 capital (to risk-weighted assets)	12.030	%	12.160	%
Tier 1 capital (to average assets, leverage)	9.148	%	9.251	%
Common equity Tier 1 (to risk-weighted assets)	11.927	%	12.054	%

The tables below reflect the Company’s capital ratios:

	At June 30, 2017
										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)	$	88,975	14.267	%	$	57,689	9.250	%	$	62,366	10.00	%
Tier 1 capital (to risk-weighted assets)	$	75,024	12.030	%	$	45,216	7.250	%	$	37,420	6.00	%
Tier 1 capital (to average assets, leverage)	$	75,024	9.130	%	$	32,871	4.000	%		N/A	N/A
Common equity Tier 1 (to risk-weighted assets)	$	55,492	8.898	%	$	35,861	5.750	%		N/A	N/A

*Ratios related to risk-weighted assets include capital conservation buffer of 1.25%.

The Company has filed the Consolidated Financial Statements for Bank Holding Companies-FR Y-9C (“FR Y-9C”) as of June 30, 2017 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 six months ended
(In thousands)	June 30, 2017
U.S. GAAP net income	$	4,819
Tax lien adjustment, net of noncontrolling interest		(903)
RAP net income	$	3,916

	At June 30, 2017
	As reported		As adjusted
	under U.S. GAAP		for RAP
Total capital (to risk-weighted assets)	14.267	%	14.138	%
Tier 1 capital (to risk-weighted assets)	12.030	%	11.851	%
Tier 1 capital (to average assets, leverage)	9.130	%	8.991	%
Common equity Tier 1 (to risk-weighted assets)	8.898	%	8.766	%