

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 revised 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 became fully phased in on January 1, 2019. The U.S. Basel III Capital Rules 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;


•	Meet 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, are 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.

Effective January 1, 2019, the Corporation and its bank subsidiaries were also required to maintain a "capital conservation buffer" of 2.50% above the minimum risk-based capital requirements. The rules provide that the failure to maintain the "capital conservation buffer" results 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 common stock, service its debt obligations or repurchase its common stock.

As of December 31, 2018, the Corporation's capital levels 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, 2018 and 2017, 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, 2018 that management believes have changed the institutions’ categories.

The following tables present the Total risk-based, Tier I risk-based, Common Equity Tier I risk-based and Tier I leverage requirements under the U.S. Basel III Capital Rules, as of December 31:



	2018
	Actual				For Capital Adequacy Purposes				Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Total Capital (to Risk-Weighted Assets):
Corporation	$	2,200,257	12.8	%	$	1,380,905	8.0	%	N/A		N/A
Fulton Bank, N.A.	1,319,090		12.1		871,413		8.0		$	1,089,267	10.0	%
Fulton Bank of New Jersey	418,207		13.3		250,999		8.0		313,748		10.0
The Columbia Bank	266,661		12.9		165,676		8.0		207,094		10.0
Lafayette Ambassador Bank	180,604		16.0		90,077		8.0		112,596		10.0
Tier I Capital (to Risk-Weighted Assets):
Corporation	$	1,764,847	10.2	%	$	1,035,679	6.0	%	N/A		N/A
Fulton Bank, N.A	1,225,797		11.3		653,560		6.0		$	871,413	8.0	%
Fulton Bank of New Jersey	378,962		12.1		188,249		6.0		250,999		8.0
The Columbia Bank	242,668		11.7		124,257		6.0		165,676		8.0
Lafayette Ambassador Bank	169,835		15.1		67,558		6.0		90,077		8.0
Common Equity Tier I Capital (to Risk-weighted Assets):
Corporation	$	1,764,847	10.2	%	$	776,759	4.5	%	N/A		N/A
Fulton Bank, N.A	1,181,797		10.8		490,170		4.5		$	708,023	6.5	%
Fulton Bank of New Jersey	378,962		12.1		141,187		4.5		203,936		6.5
The Columbia Bank	242,668		11.7		93,192		4.5		134,611		6.5
Lafayette Ambassador Bank	169,835		15.1		50,668		4.5		73,187		6.5
Tier I Leverage Capital (to Average Assets):
Corporation	$	1,764,847	9.0	%	$	783,118	4.0	%	N/A		N/A
Fulton Bank, N.A	1,225,797		10.0		487,992		4.0		$	609,989	5.0	%
Fulton Bank of New Jersey	378,962		9.4		162,098		4.0		202,623		5.0
The Columbia Bank	242,668		10.1		96,269		4.0		120,336		5.0
Lafayette Ambassador Bank	169,835		10.9		62,520		4.0		78,150		5.0

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



	2017
	Actual				For Capital Adequacy Purposes				Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
Total Capital (to Risk-Weighted Assets):
Corporation	$	2,179,147	13.0	%	$	1,338,560	8.0	%	N/A		N/A
Fulton Bank, N.A.	1,234,536		12.3		805,125		8.0		$	1,006,406	10.0	%
Fulton Bank of New Jersey	385,858		12.4		248,640		8.0		310,801		10.0
The Columbia Bank	234,647		12.2		153,441		8.0		191,801		10.0
Lafayette Ambassador Bank	173,097		14.6		94,720		8.0		118,400		10.0
Tier I Capital (to Risk-Weighted Assets):
Corporation	$	1,737,060	10.4	%	$	1,003,920	6.0	%	N/A		N/A
Fulton Bank, N.A	1,142,230		11.3		603,843		6.0		$	805,125	8.0	%
Fulton Bank of New Jersey	346,867		11.2		186,480		6.0		248,640		8.0
The Columbia Bank	215,651		11.2		115,081		6.0		153,441		8.0
Lafayette Ambassador Bank	162,292		13.7		71,040		6.0		94,720		8.0
Common Equity Tier I Capital (to Risk-weighted Assets):
Corporation	$	1,737,060	10.4	%	$	752,940	4.5	%	N/A		N/A
Fulton Bank, N.A	1,098,230		10.9		452,883		4.5		$	654,164	6.5	%
Fulton Bank of New Jersey	346,867		11.2		139,860		4.5		202,020		6.5
The Columbia Bank	215,651		11.2		86,310		4.5		124,671		6.5
Lafayette Ambassador Bank	162,292		13.7		53,280		4.5		76,960		6.5
Tier I Leverage Capital (to Average Assets):
Corporation	$	1,737,060	8.9	%	$	778,451	4.0	%	N/A		N/A
Fulton Bank, N.A	1,142,230		10.0		458,016		4.0		$	572,520	5.0	%
Fulton Bank of New Jersey	346,867		8.8		158,027		4.0		197,534		5.0
The Columbia Bank	215,651		9.3		92,797		4.0		115,996		5.0
Lafayette Ambassador Bank	162,292		10.1		64,191		4.0		80,239		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 to the Corporation was approximately $324 million as of December 31, 2018, 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.