

NOTE 11 – REGULATORY MATTERS

Regulatory Capital Requirements

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

U.S. Basel III Capital Rules

In July 2013, the Federal Reserve Board approved final rules (the U.S. Basel III Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations and implementing the Basel Committee on Banking Supervision's December 2010 framework for strengthening international capital standards. The U.S. Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions.

The new minimum regulatory capital requirements established by the U.S. Basel III Capital Rules became effective for the Corporation on January 1, 2015, and become fully phased in on January 1, 2019.

When fully phased in, the U.S. Basel III Capital Rules will require the Corporation and its bank subsidiaries to:


•	Meet a new minimum Common Equity Tier 1 capital ratio of 4.50% of risk-weighted assets and a minimum Tier 1 capital of 6.00% of risk-weighted assets;


•	Continue to require the current minimum Total capital ratio of 8.00% of risk-weighted assets and the minimum Tier 1 leverage capital ratio of 4.00% of average assets;


•	Maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus payments; and

•

Comply with a revised definition of capital to improve the ability of regulatory capital instruments to absorb losses. Certain non-qualifying capital instruments, including cumulative preferred stock and TruPS, will be excluded as a component of Tier 1 capital for institutions of the Corporation's size. In July 2015, the previously outstanding trust preferred securities issued by Fulton Capital Trust I were redeemed.

The U.S. Basel III Capital Rules use a standardized approach for risk weightings that expand the risk-weightings for assets and off-balance sheet exposures from the previous 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and off-balance sheet exposures, resulting in higher risk weights for a variety of asset categories.

When fully phased in on January 1, 2019, the Corporation and its bank subsidiaries will also be required to maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements. The required minimum capital conservation buffer began to be phased in incrementally, starting at 0.625%, on January 1, 2016, and will increase to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.50% on January 1, 2019. The rules provide that the failure to maintain the "capital conservation buffer" will result in restrictions on capital distributions and discretionary cash bonus payments to executive officers. As a result, under the U.S. Basel III Capital Rules, if any of the Corporation's bank subsidiaries fails to maintain the required minimum capital conservation buffer, the Corporation will be subject to limits, and possibly prohibitions, on its ability to obtain capital distributions from such subsidiaries. If the Corporation does not receive sufficient cash dividends from its bank subsidiaries, it may not have sufficient funds to pay dividends on its capital stock, service its debt obligations or repurchase its common stock. In addition, the restrictions on payments of discretionary cash bonuses to executive officers may make it more difficult for the Corporation to retain key personnel.

As of December 31, 2015, the Corporation believes its current capital levels would meet the fully-phased in minimum capital requirements, including the new capital conservation buffers, as prescribed in the U.S. Basel III Capital Rules.

As of December 31, 2015 and 2014, each of the Corporation’s subsidiary banks were well capitalized under the regulatory framework for prompt corrective action based on their capital ratio calculations. To be categorized as well capitalized, these banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since December 31, 2015 that management believes have changed the institutions’ categories.

The following table presents the Total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage requirements for the Corporation and its four significant subsidiaries, Fulton Bank, N.A., Fulton Bank of New Jersey, The Columbia Bank and Lafayette Ambassador Bank with total assets in excess of $1 billion, as of December 31, 2015, under the U.S. Basel III Capital Rules:



	2015
	Actual				For Capital Adequacy Purposes				Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Total Capital (to Risk-Weighted Assets):
Corporation	$	1,997,926	13.2	%	$	1,214,868	8.0	%	N/A		N/A
Fulton Bank, N.A.	1,088,709		12.2		714,734		8.0		$	893,418	10.0	%
Fulton Bank of New Jersey	373,465		12.6		236,691		8.0		295,864		10.0
The Columbia Bank	211,355		13.7		123,260		8.0		154,075		10.0
Lafayette Ambassador Bank	172,345		14.1		97,792		8.0		122,240		10.0
Tier I Capital (to Risk-Weighted Assets):
Corporation	$	1,544,495	10.2	%	$	911,151	6.0	%	N/A		N/A
Fulton Bank, N.A	1,000,603		11.2		536,051		6.0		$	714,734	8.0	%
Fulton Bank of New Jersey	336,319		11.4		177,518		6.0		236,691		8.0
The Columbia Bank	192,090		12.5		92,445		6.0		123,260		8.0
Lafayette Ambassador Bank	162,092		13.3		73,344		6.0		97,792		8.0
Common Equity Tier I Capital (to Risk-weighted Assets):
Corporation	$	1,541,214	10.2	%	$	683,363	4.5	%	N/A		N/A
Fulton Bank, N.A	956,603		10.7		402,038		4.5		$	580,721	6.5	%
Fulton Bank of New Jersey	336,319		11.4		133,139		4.5		192,311		6.5
The Columbia Bank	192,090		12.5		69,334		4.5		100,149		6.5
Lafayette Ambassador Bank	162,092		13.3		55,008		4.5		79,456		6.5
Tier I Capital (to Average Assets):
Corporation	$	1,544,495	9.0	%	$	688,500	4.0	%	N/A		N/A
Fulton Bank, N.A	1,000,603		10.2		391,783		4.0		$	489,729	5.0	%
Fulton Bank of New Jersey	336,319		9.5		141,257		4.0		176,572		5.0
The Columbia Bank	192,090		9.7		79,618		4.0		99,523		5.0
Lafayette Ambassador Bank	162,092		11.0		59,152		4.0		73,940		5.0

N/A – Not applicable as "well capitalized" applies to banks only.

The following table presents the Total risk-based, Tier I risk-based and Tier I leverage requirements as of December 31, 2014, under the capital standards in existence prior to the U.S. Basel III Capital Rules:



	2014
	Actual				For Capital Adequacy Purposes				Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Total Capital (to Risk-Weighted Assets):
Corporation	$	1,970,569	14.7	%	$	1,076,013	8.0	%	N/A		N/A
Fulton Bank, N.A.	1,065,445		13.2		643,791		8.0		$	804,739	10.0	%
Fulton Bank of New Jersey	347,235		13.1		211,823		8.0		264,779		10.0
The Columbia Bank	203,109		13.5		119,934		8.0		149,917		10.0
Lafayette Ambassador Bank	167,800		15.9		84,407		8.0		105,508		10.0
Tier I Capital (to Risk-Weighted Assets):
Corporation	$	1,655,853	12.3		$	538,007	4.0	%	N/A		N/A
Fulton Bank, N.A	977,547		12.1		321,896		4.0		$	482,843	6.0	%
Fulton Bank of New Jersey	313,843		11.9		105,911		4.0		158,867		6.0
The Columbia Bank	184,331		12.3		59,967		4.0		89,950		6.0
Lafayette Ambassador Bank	154,817		14.7		42,203		4.0		63,305		6.0
Tier I Capital (to Average Assets):
Corporation	$	1,655,853	10.0		$	663,421	4.0	%	N/A		N/A
Fulton Bank, N.A	977,547		10.5		373,288		4.0		$	466,610	5.0	%
Fulton Bank of New Jersey	313,843		9.4		133,580		4.0		166,975		5.0
The Columbia Bank	184,331		9.4		78,186		4.0		97,733		5.0
Lafayette Ambassador Bank	154,817		10.8		57,132		4.0		71,416		5.0

N/A – Not applicable as "well capitalized" applies to banks only.

Dividend and Loan Limitations

The dividends that may be paid by subsidiary banks to the Parent Company are subject to certain legal and regulatory limitations. Dividend limitations vary, depending on the subsidiary bank’s charter and primary regulator and whether or not it is a member of the Federal Reserve System. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels. Additionally, limits may exist on paying dividends in excess of net income for specified periods. The total amount available for payment of dividends by subsidiary banks was approximately $236 million as of December 31, 2015, based on the subsidiary banks maintaining enough capital to be considered well capitalized under the U.S. Basel III Capital Rules.

Under current Federal Reserve regulations, the subsidiary banks are limited in the amount they may loan to their affiliates, including the Parent Company. Loans to a single affiliate may not exceed 10%, and the aggregate of loans to all affiliates may not exceed 20% of each bank subsidiary’s regulatory capital.

Regulatory Enforcement Orders

The Corporation and each of its bank subsidiaries are subject to regulatory enforcement orders issued during 2014 and 2015 by their respective Federal and state bank regulatory agencies relating to identified deficiencies in the Corporation’s centralized Bank Secrecy Act and anti-money laundering compliance program (the BSA/AML Compliance Program), which was designed to comply with the requirements of the Bank Secrecy Act, the USA Patriot Act of 2001 and related anti-money laundering regulations (collectively, the BSA/AML Requirements). The regulatory enforcement orders, which are in the form of consent orders or orders to cease and desist issued upon consent (Consent Orders), generally require, among other things, that the Corporation and its bank subsidiaries undertake a number of required actions to strengthen and enhance the BSA/AML Compliance Program, and, in some cases, conduct retrospective reviews of past account activity and transactions, as well as certain reports filed in accordance with the BSA/AML Requirements, to determine whether suspicious activity and certain transactions in currency were properly identified and reported in accordance with the BSA/AML Requirements. In addition to requiring strengthening and enhancement of the BSA/AML Compliance Program, while the Consent Orders remain in effect, the Corporation is subject to certain restrictions on expansion activities of the Corporation and its bank subsidiaries. Further, any failure to comply with the requirements of any of the Consent Orders involving the Corporation or its bank subsidiaries could result in further enforcement actions, the imposition of material restrictions on the activities of the Corporation or its bank subsidiaries, or the assessment of fines or penalties.