

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 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 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 a minimum Total capital ratio of 8.00% of risk-weighted assets and a 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.

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 increasing to 1.25% on January 1, 2017, and will continue to increase to 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, 2016, 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, 2016 and 2015, each of the Corporation’s subsidiary banks was 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, Common Equity 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, 2016 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 with total assets in excess of $1 billion, as of December 31, 2016, under the U.S. Basel III Capital Rules:



	2016
	Actual				For Capital Adequacy Purposes				Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Total Capital (to Risk-Weighted Assets):
Corporation	$	2,074,526	13.2	%	$	1,255,292	8.0	%	N/A		N/A
Fulton Bank, N.A.	1,142,326		12.2		747,359		8.0		$	934,199	10.0	%
Fulton Bank of New Jersey	385,807		13.1		234,782		8.0		293,427		10.0
The Columbia Bank	203,890		12.2		133,836		8.0		167,294		10.0
Lafayette Ambassador Bank	175,254		14.6		96,100		8.0		120,125		10.0
Tier I Capital (to Risk-Weighted Assets):
Corporation	$	1,637,150	10.4	%	$	941,469	6.0	%	N/A		N/A
Fulton Bank, N.A	1,050,175		11.2		560,519		6.0		$	747,359	8.0	%
Fulton Bank of New Jersey	348,992		11.9		176,086		6.0		234,782		8.0
The Columbia Bank	185,983		11.1		100,377		6.0		133,836		8.0
Lafayette Ambassador Bank	166,186		13.8		72,075		6.0		96,100		8.0
Common Equity Tier I Capital (to Risk-weighted Assets):
Corporation	$	1,637,150	10.4	%	$	706,102	4.5	%	N/A		N/A
Fulton Bank, N.A	1,006,175		10.8		420,389		4.5		$	607,229	6.5	%
Fulton Bank of New Jersey	348,992		11.9		132,065		4.5		190,760		6.5
The Columbia Bank	185,983		11.1		72,282		4.5		108,741		6.5
Lafayette Ambassador Bank	166,186		13.8		54,056		4.5		78,081		6.5
Tier I Capital (to Average Assets):
Corporation	$	1,637,150	9.0	%	$	727,745	4.0	%	N/A		N/A
Fulton Bank, N.A	1,050,175		10.1		415,981		4.0		$	519,977	5.0	%
Fulton Bank of New Jersey	348,992		9.4		148,472		4.0		185,590		5.0
The Columbia Bank	185,983		8.6		86,310		4.0		107,888		5.0
Lafayette Ambassador Bank	166,186		10.9		61,129		4.0		76,412		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, 2015, under 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.

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 $233 million as of December 31, 2016, 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.