What changed in this filing

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Item 1. Business

2022-03-16 compared with 2021-03-29 · 101 added, 121 removed, 310 unchanged (42% of the section changed)

Meridian Corporation is a bank holding company engaged in banking activities through its wholly-owned subsidiary, Meridian Bank (the “Bank”), a full-service, state-chartered commercial bank with offices in the Delaware Valley tri-state market, which includes Pennsylvania, New Jersey and Delaware, in addition to Maryland.

We have a financial services business model with significant non-interest income streams from mortgage lending, small business (“SBA”) lending and wealth management services.

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Our portfolio includes business lines of credit, term loans, small business lending (“SBA”), lease financing and shared national credits (“SNCs”).

Our SBA team and their alliances with local economic development councils provide SBA and other financing options to help grow local businesses, create and retain jobs and stimulate our local economy.

Our SBA team and their alliances with local economic development councils provide SBA 504 and 7(a) financing options to help grow local businesses, create and retain jobs and stimulate our local economy.

In addition, Meridian understands that connections with the local professional industries benefit us, not only with these individuals as customers or investors, but also given the proven potential for business referrals.

The commercial real estate division offers permanent/amortizing loans, owner-occupied commercial real estate loans and land development and construction loans for residential and commercial projects.

The commercial real estate division offers permanent financing for owner-occupied commercial real estate loans and land development and construction loans for residential and commercial projects.

Our approach is to apply disciplined and integrated standards to underwriting, credit and portfolio management.

The extensive backgrounds of our commercial real estate lending team, not only in banking, but also directly in the builder/developer fields, bring a unique perspective and ability to communicate and consider all elements of a project and related risk from the clients’ viewpoint as well as ours.

The extensive backgrounds of our commercial real

estate lending team, not only in banking, but also directly in the builder/developer fields, bring a unique perspective and ability to communicate and consider all elements of a project and related risk from the clients’ viewpoint as well as ours.

Mortgage Banking

The second line of business is mortgage banking.

Our mortgage consultants guide our clients through the complex process of obtaining a loan to meet individual specific needs.

Originations consist of consumer for-sale mortgage lending, loans to be held within our portfolio, and wholesale mortgage lending services.

Our mortgage consultants guide our clients through the complex process of obtaining a loan to meet consumer needs.

Originations consist of consumer for-sale mortgage loans, loans to be held within our portfolio, and wholesale mortgage loans.

Clients include homeowners and smaller scale investors.

The mortgage division operates and originates mortgage loans in the Delaware Valley tri-state market, in addition to the Maryland markets, most typically for 1-4 family dwellings, with the intention of selling substantially all of these loans in the secondary market to qualified investors, while retaining the servicing rights on these loans.

The mortgage division operates and originates mortgage loans in the Delaware Valley tri-state market, and Maryland markets, most typically for 1-4 family dwellings, with the intention of selling substantially all of these loans in the secondary market to qualified investors, while retaining the servicing rights on these loans.

Mortgages are originated through sales and marketing initiatives, as well as realtor, builder, bank, advertising and customer referral resources.

The mortgage division performs origination, processing, underwriting, closing and post-closing functions both from our Blue Bell mortgage headquarters with 8 other production/processing offices in the Delaware Valley tri-state market, and from Maryland through our expanded footprint of 7 other production/processing offices in the state starting in early 2020.

Wealth Management and Advisory Services

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Meridian Wealth offers a significant enhancement to both our capacity and the variety of tools we can use to help bring effective financial planning and wealth management services to a broad segment of customers.

Meridian is headquartered in Malvern, PA and has six full-service branches.

Meridian is headquartered in Malvern, PA and has six full-service branches in Philadelphia and surrounding counties.

Its main branch, in Paoli, serves the Main Line.

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These branches provide “Relationship Hubs” for our regional lending groups and allow Meridian to proceed in its plan for serving markets in each of the central (at or near the county seat) townships of the counties in and surrounding Philadelphia.

In addition to our deposit taking branches, there are currently 17 other locations, including headquarters for Corporate, and the Wealth Division and the Mortgage Divisions.

Demographic information for the five county Philadelphia metropolitan area shows our primary market to be stable, with moderate population growth.

In addition to our deposit taking branches, there are currently 19 other locations, including Corporate headquarters, that serve as loan production offices primarily for our mortgage division.

These offices extend from the Philadelphia market area to Central Maryland.

Demographic information for the five county Philadelphia metropolitan area (Philadelphia County, Chester County, Delaware County, Montgomery County, Bucks County) shows our primary market to be stable, with moderate population growth.

According to the U.S.

Census Bureau – Quick Facts 2015 – 2019, the median household income in the area is $80,261 compared to the national average of $62,843.

Unemployment in the five county Philadelphia metropolitan area is 6.2%, compared to the national average of 6.7%, according to the Bureau of Labor Statistics for November 2020.

Overall, the banking business in the suburban Philadelphia market area is highly competitive.

Census Bureau – 2020, the median household income in this area is $80,261 compared to the national average of $62,843, while the total population in this market was 4,218,131.

Demographic information for the five county Baltimore metropolitan area (Baltimore County, Howard County, Montgomery County, Anne Arundel County, Prince George’s County) also shows that this secondary market is stable.

According to the U.S.

Census Bureau – 2020, the median household income in the Baltimore metropolitan area is $98,513 compared to the national average of $62,843, while the total population in this market was 3,804,375.

United States

Population (1)

Median household income (1)

Unemployment rate (2)

Philadelphia Metropolitan Area Counties

Montgomery County

Delaware County

Chester County

Philadelphia County

Population (1)

Median household income (1)

Unemployment rate (2)

Baltimore Metropolitan Area Counties

Howard County

Montgomery County

Anne Arundel County

Prince George's County

Baltimore County

Population (1)

Median household income (1)

Unemployment rate (2)

(1) – Source:

Census Data – 2020

(2) – Source:

Bureau of Labor Statistics – December 2021

Overall, the banking business in our market area is highly competitive.

Meridian Bank faces substantial competition both in attracting deposits and in originating loans.

Meridian Bank competes with local, regional and national commercial banks, savings banks, and savings and loan associations.

Other competitors include money market mutual funds, mortgage bankers, insurance companies, stock brokerage firms, regulated small loan companies, credit unions, and issuers of commercial paper and other securities.

Other competitors include non-bank fintech and finance companies, money market mutual funds, mortgage bankers, insurance companies, securities brokerage firms, regulated small loan companies, credit unions, and issuers of commercial paper and other securities.

Meridian Bank seeks to compete for business principally on the basis of high quality, personal service to customers, customer access to our decision-makers, and customer preferred electronic delivery channels while providing an attractive banking platform and competitive interest rates and fees.

Human Capital Resources

At December 31, 2020, we employed 381 individuals, nearly all of whom are full-time.

None of these employees are covered by collective bargaining agreements, and the Corporation believes it enjoys good relations with its personnel.

In December of 2020, the Bank was named by the Independent Community Bankers of American (“ICBA”) as one of their ‘Best Community Banks to Work For’ in 2020.

At December 31, 2021, we employed 413 individuals, nearly all of whom are full-time and of which 48% are women.

Women make up 32% of all officers throughout the Meridian organization.

None of these employees are covered by collective bargaining agreements, and Meridian believes it enjoys good relations with its personnel.

In December of 2020, the Bank was named by the Independent Community Bankers of American (“ICBA”) as one of their ‘Best Community Banks to Work For’.

As an integrated full-service financial institution, approximately 36% of our employees are employed through our banking segment, 62% through our mortgage segment, and 2% for our wealth segment.

We encourage and support the development of our employees and, whenever possible, strive to fill vacancies with internal candidates.

The safety of our employees has been our top priority over the last two years due to the COVID-19 pandemic.

A portion of our workforce continues to work remotely and we have occasionally closed lobbies to appointment-only during times of heightened transmission of COVID-19 to protect the health of our employees.

We will continue to follow all of the appropriate guidance and engage our staff members as needed to deal with new challenges.

Meridian is committed to giving back to our communities.

In 2021 we donated $486 thousand to nearly 100 organizations throughout the various communities that we serve in Pennsylvania, New Jersey, Delaware, and Maryland.

Meridian also sponsors individual / group service days and provides time off to employees to participate.

In order to compete effectively and continue to provide excellent service to our clients, we must attract, retain, and motivate qualified professionals.

During the hiring process Meridian looks to bring onboard well-qualified individuals, without bias to race or gender.

As we are currently in a very competitive hiring market, we utilize various methods to find well-qualified talent including third party search firms, social media, internal candidates already in our organization and on campus recruiting at local universities.

During 2021 we hired 84 professionals, 46% of which were women, and 21% of which were ethnically diverse.

For 2021 our turnover rate was approximately 1.5%, which makes our overall retention rate very high compared to peers.

We believe our culture, our effort to maintain a meritocracy in terms of opportunity and our continued evolution and growth contribute to our success in attracting and retaining strong talent.

Our benefits are designed to attract and retain employees by providing employees and their families with health and wellness programs (medical, dental, vision), retirement wealth accumulation, paid time off, income replacement (paid sick and disability leaves and life insurance) and family oriented benefits (parental leaves and child care assistance).

We aim to continually build on the expertise of our workforce.

At entry levels, we have implemented trainee and internship programs.

During 2021 Meridian invested throughout the organization in terms of in-house and external training programs to help our employees develop leadership skills, stay current on professional development topic in their area of focus, as well as to keep up to date on cybersecurity, and risk & compliance matters that impact the organization overall.

Our Current Capital Stock Structure

As of December 31, 2020 Meridian had 6,135,566 shares of common stock, $1 par value, issued and outstanding.

As of December 31, 2021 Meridian had 6,534,587 shares of common stock, $1 par value, issued and 6,107,894 shares outstanding.

There is no preferred stock outstanding.

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We have elected to take advantage of the scaled disclosure requirements and other relief described above and may take advantage of these exemptions for so long as we remain an emerging growth company.

We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1,070,000,000 or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of our initial public offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the end of the fiscal year in which the market value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year.

We will remain an emerging growth company until December 31, 2022, the end of the fiscal year following the fifth anniversary of the completion of our initial public offering.

In addition to scaled disclosure and the other relief described above, the JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies.

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Our executive offices are located at 9 Old Lincoln Highway, Malvern, PA 19355 and our telephone number is (484) 568-5000.

Our Internet website is www.meridianbanker.com.

Our Internet website is www.meridianbanker.com and our investor relations page can be found at investor.meridianbanker.com.

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments thereto, from November 7, 2017 through August 18, 2018 have been filed with the FDIC.

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Meridian will also furnish a paper copy of such filings free of charge upon request.

We also file reports of our condition and income, known as “Call Reports,” with the FDIC and the Parent Company Only Financial Statement for Small Holding Companies known as the “FR Y-9SP” with the Federal Reserve.

Reports of the Bank’s condition and income, known as “Call Reports,” are filed with the FDIC and the Parent Company Only Financial Statement for Small Holding Companies known as the “FR Y-9SP” with the Federal Reserve.

These reports are available on the FFIEC Central Data Repository’s Public Data Distribution website at cdr.ffiec.gov/public.

Current Overview of the Impact from the COVID-19 Pandemic

Our business has been, and continues to be, impacted by the ongoing COVID-19 pandemic.

In March 2020, the outbreak of the novel Coronavirus Disease 2019 (“COVID-19”) was recognized as a pandemic by the World Health Organization and a national emergency by the President of the United States.

The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve.

Efforts to limit the spread of COVID-19 have included shelter-in-place orders, the closure of non-essential businesses, travel restrictions, supply chain disruptions and prohibitions on public gatherings, among other things, throughout many parts of the United States and, in particular, the markets in which we operate.

These responses and restrictions have led to a loss of revenues for certain industries and a sudden increase in unemployment, volatility in oil and gas prices and in business valuations, market downturns and volatility, changes in consumer behaviors, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.

Impact on our Operations.

In the Commonwealth of Pennsylvania and neighboring states, many jurisdictions declared health emergencies.

The resulting closures and/or limited operations of non-essential businesses and related economic disruption have impacted our operations as well as the operations of our customers.

Financial services were identified as a Critical Infrastructure Sector by the Department of Homeland Security.

Accordingly, our business has remained open throughout the pandemic.

To address the issues arising as a result of COVID-19, we implemented the following:

implemented our communications plans to ensure our employees, customers and critical vendors are kept abreast of developments affecting our operations;

restricted all non-essential travel and large external gatherings and have instituted a mandatory quarantine period for anyone that has traveled to an impacted area;

after temporarily closing all of our branches and other corporate facilities to non-employees, except for certain limited cases by appointment only, we reopened our financial center lobbies;

Expanded remote-access availability so that nearly all of our workforce has the capability to work from home or other remote locations.

All activities are performed in accordance with our compliance and information security policies designed to ensure customer data and other information is properly safeguarded;

and instituted mandatory social distancing policies for those employees not working remotely.

Impact on our Financial Position and Results of Operations.

Our financial position and results of operations are particularly susceptible to the ability of our loan customers to meet loan obligations, the availability of our workforce, the availability of our vendors and the decline in the value of assets held by us.

The COVID-19 pandemic has resulted in a significant decrease in commercial and consumer activity throughout the Commonwealth of Pennsylvania, and neighboring states in our market area, as well as nationally.

This decrease in business activity has caused and may continue to cause our customers, vendors and counterparties to be unable to meet existing payment or other obligations to us.

The COVID-19 pandemic, combined with certain pre-existing factors, including, but not limited to, international trade disputes, inflation risks and oil price volatility, could further destabilize the financial markets and geographies in which we operate.

The resulting economic pressure on consumers and uncertainty regarding the sustainability of any economic improvements has impacted the creditworthiness of potential and current borrowers.

Borrower loan defaults that adversely affect our earnings correlate with deteriorating economic conditions, which, in turn, are likely to impact our borrowers' creditworthiness and our ability to make loans.

See further information related to the risk exposure of our loan portfolio under the sections captioned “Loans” and “Allowance for Loan and Lease Losses” elsewhere in this discussion.

Legislative and Regulatory Developments.

Actions taken by the federal government and the Federal Reserve and other bank regulatory agencies to mitigate the economic effects of COVID-19 have had an impact on our financial position and results of operations.

The Federal Reserve lowered the target for the federal funds rate to a range of between zero to 0.25% effective on March 16, 2020.

The decline in interest rates has already led to new all-time low yields across the US Treasury maturity curve.

In September 2020, the Federal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels until such time that labor market conditions have reached levels consistent with the Federal Open Market Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.

This timeframe is currently expected to last through 2023.

To address the economic impact in the U.S., in March and April 2020, the President signed into law four economic stimulus packages to provide relief to businesses and individuals, including the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act”).

Among other measures, the CARES Act created funding for the Small Business Administration ("SBA”) Paycheck Protection Program ("PPP”), which provides loans to small businesses to keep their employees on payroll and make other eligible payments.

The original funding for the PPP was fully allocated by mid-April 2020, with additional funding made available on April 24, 2020 under the Paycheck Protection Program and Health Care Enhancement Act.

On April 9, 2020, the Federal Reserve took additional steps to bolster the economy by providing additional funding sources for small and mid-sized businesses as well as for state and local governments as they work through cash flow stresses caused by the COVID-19 pandemic.

Additionally, the Federal Reserve has taken other steps to provide fiscal and monetary stimuli, including reducing the federal funds rate and the interest rate on the Federal Reserve’s discount window, and implementing programs to promote liquidity in certain securities markets.

The Federal Reserve, along with other U.S.

banking regulators, has also issued interagency guidance to financial institutions that are working with borrowers affected by the COVID-19 pandemic.

In December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal, included as a component of appropriations legislation, was enacted to provide economic stimulus to individuals and businesses in further response to the economic distress caused by the COVID-19 pandemic.

Among other things, the legislation includes (i) payments of $600 for individuals making up to $75,000 per year, (ii) extension of the Federal Pandemic Unemployment Compensation program to include a $300 weekly enhancement in unemployment benefits beginning after December 26, 2020 up to March 14, 2021, (iii) a temporary and targeted rental assistance program, and extends the eviction moratorium through January 31, 2021, (iv) targeted funding related to transportation, education, agriculture, nutrition and other public health measures and (v) approximately $325 billion for small business relief, including approximately $284 billion for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less.

We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S.

The Federal Reserve created various additional lending facilities and expanded existing facilities to help provide financing in response to the financial disruptions caused by COVID-19.

The programs include, among others, the Paycheck Protection Program Liquidity Facility (the “PPPLF”), which is intended to extend loans to banks making PPP loans.

The Federal Reserve announced extensions through March 31, 2021 for several of its lending facilities, including the PPPLF, that were generally scheduled to expire on or around December 31, 2020.

As more fully discussed below, we are currently participating in the PPP as a lender and have also participated in the PPPLF.

Pursuant to the CARES Act, Section 1112, Congress determined that all existing borrowers under the SBA Section 7(a) program have been adversely affected by COVID-19, and therefore were entitled to a subsidy in the form of relief payments.

Specifically, the CARES Act provides that the SBA was to pay the principal and interest on any existing and current SBA 7(a) loan for a period of nine months.

These principal and interest payments were made by the SBA directly to the SBA 7(a) lender, and as such, are separate from any loan modifications made at the direction of the Bank.

The Bank is a qualified SBA Section 7(a) lender, and participated in the Section 1112 program.

As of December 31, 2020, the Bank had 120 loans eligible for the program, with an aggregate principal amount of $66.1 million.

On January 19, 2021, the SBA extended such payments under Section 1112(c)(1) of the CARES Act, as amended by Section 325 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), enacted on December 27, 2020.

Of the 120 SBA Section 7(a) loans discussed above, approximately 76 for a total value of $41.7 million are eligible to receive 2 additional monthly payments each from the SBA, with a maximum payment of $9,000 per loan.

Additionally, all SBA Section 7(a) loans originated by Meridian from February 1, 2021 to September 30, 2021 are eligible for 3 months of payments to be made by the SBA, with a maximum payment of $9,000 per loan.

In response to the COVID-19 pandemic, the Corporation’s management took the following actions to assist customers:

● Through our participation in the first round of the PPP program in 2020, Meridian originated $259.7 million in PPP loans, assisting 928 customers in need of this short-term funding.

These PPP loans helped our small business customers to support the paychecks of nearly 16,660 employees.

Approximately 89% of PPP loans were given to customers in the markets we serve in Pennsylvania, New Jersey and Delaware.

As of December 31, 2020 through ongoing forgiveness of PPP loan balances by the SBA, the total balance of PPP loans outstanding had decreased to $203.5 million.

Meridian has engaged a third-party Fintech technology partner to assist the bank and its customers to automate the forgiveness application process.

This application will also be used for the second round of PPP loan originations and forgiveness.

● Throughout the pandemic, Meridian worked with commercial, construction and residential loan customers to provide assistance with loan payment holidays of 3 to 6 months or lowered interest rates for certain construction loans.

In total, approximately $156.3 million of loans covering approximately 200 borrowers were assisted with loan payment holidays of 3-6 months.

As of December 31, 2020, $129.4 million of loans had returned to their original payment terms with $26.9 million in loans still in forbearance.

At the inception of the pandemic, local governors ordered all non-essential businesses to close, mandated stay-at-home orders, closed schools and universities and put a moratorium on construction for a period of time.

economic impact was widespread, but certain businesses have been more acutely impacted.

Aside from construction lending, Meridian continues to monitor commercial portfolios and identified various industries that have been substantially impacted by these mandates such as retail trade, hospitality, residential spec construction and advertising/marketing.

At December 31, 2020, Meridian’s exposure as a percent of the total loan portfolio to these industries was 2.8%, 2.5%, 6.1%, and 1.5%, respectively.

SUPERVISION AND REGULATION

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This framework may materially affect our growth potential and financial performance and is intended primarily for the protection of depositors, customers, federal deposit insurance funds and the banking system as a whole, not for the protection of our shareholders and creditors.

Significant elements of the statutes, regulations and policies applicable to us and our subsidiaries are described below.

The following discussion summarizes certain laws, regulations and policies to which Corporation and the Bank are subject.

It does not address all applicable laws, regulations and policies that affect us currently or might affect us in the future.

This discussion is qualified in its entirety by reference to the full texts of the laws, regulations and policies described.

The Bank is an FDIC-insured commercial bank chartered under the laws of Pennsylvania with regulatory oversight from the FDIC and the Pennsylvania Department of Banking and Securities (“PDBS”).

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In order to adhere to regulatory expectations on an ongoing basis and to successfully prepare for the normal examination processes, Meridian maintains numerous internal controls including policies and programs appropriate to maintain the Bank’s safety and soundness, under such key areas as lending, compliance, BSA-AML, information security, human resources, deposit and cash management products, enterprise risk, merchant services, finance, title services, branch security and wealth management.

As a public company, the Corporation also files reports with the SEC and is subject to its regulatory authority, as well as the disclosure and regulatory requirements of the Securities Act, as amended, and the Exchange Act, as amended, with respect to the Corporation’s securities, financial reporting and certain governance matters.

Because the Corporation’s securities are listed on the NASDAQ Stock Market, we are subject to NASDAQ's rules for listed companies, including rules relating to corporate governance.

Permissible Activities for Bank Holding Companies

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These activities include securities underwriting and dealing, insurance underwriting and making merchant banking investments.

We have not elected to be treated as a financial holding company and currently have no plans to make a financial holding company election.

As of this filing, we have not elected to be treated as a financial holding company.

The Federal Reserve has the power to order any bank holding company or any of its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to believe that continuing such activity, ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.

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buying and selling foreign currency and, subject to certain limitations, certain investment securities;

engaging in certain insurance activities and maintaining safe deposit boxes on premises.

engaging in certain insurance activities and management services providing cash.

The FDIC has adopted regulations pertaining to the other activity restrictions imposed upon insured state banks and their subsidiaries.

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The Change in Bank Control Act (“CBCA”) prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve has been notified and has not objected to the transaction.

Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as Customers Bancorp, would, under the circumstances set forth in the presumption, constitute acquisition of control of Customers Bancorp.

Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as Meridian Corporation, would, under the circumstances set forth in the presumption, constitute acquisition of control of Meridian Corporation.

In addition, the CBCA prohibits any entity from acquiring 25% (the BHC Act has a lower limit for acquirers that are existing bank holding companies) or more of a bank holding company’s or bank’s voting securities, or otherwise obtaining control or a controlling influence over a bank holding company or bank without the approval of the Federal Reserve.

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In addition, in the current financial and economic environment, the federal banking regulators have indicated that banks should carefully review their dividend policy and have discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

Under the Capital Rules, institutions that seek to pay dividends must maintain 2.5% in Common Equity Tier

1 capital attributable to the capital conservation buffer, which is to be phased in over a three-year period that began on January 1, 2016.

Under the Capital Rules, institutions that seek to pay dividends must maintain 2.5% in Common Equity Tier 1 capital attributable to the capital conservation buffer, which was phased in over a three-year period that began on January 1, 2016.

See “—Regulatory Capital Requirements”.

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Under the Pennsylvania Banking Code, the Bank generally may not pay dividends in excess of its net profits.

On May 24, 2018 the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), amended certain aspects of the company-run stress testing requirement in section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

These updated rules require bank holding companies and banks with average total consolidated assets greater than $250 billion to conduct a periodic company-run stress test of capital, consolidated earnings and losses under one base and two stress scenarios provided by the federal banking regulators.

We are not currently subject to the stress testing requirements, but we expect that if we become subject to those requirements, the Federal Reserve, the FDIC and the PDBS will consider our results as an important factor in evaluating our capital adequacy, any proposed acquisitions by us or by the holding company and whether any proposed dividends or stock repurchases by us or by the holding company may be an unsafe or unsound practice.

Parity Regulation

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Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons.

Also, the terms of such extensions of credit may not involve more than the normal risk of non-repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons individually and in the aggregate.

Also, the terms of such extensions of credit may not

involve more than the normal risk of non-repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons individually and in the aggregate.

Source of Strength

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The Capital Rules, among other things, (i) include a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions/adjustments to capital as compared to prior regulations.

The Capital Rules also address risk weights and other issues affecting the denominator in regulatory capital ratio calculations, including replacing the existing risk-weighting approach derived from Basel I with a more risk-sensitive approach based, in part, on the standardized approach adopted by the Basel Committee in its 2004 capital accords, known as Basel II.

The Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking regulators’ rules.

Subject to a phase-in period for various provisions, the Capital Rules became effective for us beginning on January 1, 2015.

Under the Basel III Capital Rules, the minimum capital ratios are (i) 4.5% CET1 to risk-weighted assets, (ii) 6% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets, (iii) 8% total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets and (iv) 4% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).

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In addition, the Capital Rules provide for a countercyclical capital buffer applicable only to certain covered institutions.

We do not expect the countercyclical capital

buffer to be applicable to us.

Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

We do not expect the countercyclical capital buffer to be applicable to us.

buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

In addition, under the general risk-based Capital Rules, the effects of accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios.

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Safety and Soundness Standards

exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate.

The federal banking agencies have adopted the Interagency Guidelines for Establishing Standards for Safety and Soundness.

The FDIA requires the federal banking agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate.

The federal banking agencies have adopted the

Interagency Guidelines for Establishing Standards for Safety and Soundness.

The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits.

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Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.

The Dodd-Frank Act created a new, independent federal agency, the Consumer Financial Protection Bureau (“CFPB”), which was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws with respect to certain consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations.

The Consumer Financial Protection Bureau (“CFPB”), has broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws with respect to certain consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations.

The CFPB has the authority to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices.

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Although all institutions are subject to rules adopted by the CFPB and examination by the CFPB in conjunction with examinations by the institution’s primary federal regulator, the CFPB has primary examination and enforcement authority over institutions with assets of $10 billion or more.

The FDIC has primary responsibility for examination of the Bank and enforcement with respect to various federal consumer protection laws so long as the Bank has total consolidated assets of less than $10 billion, and state authorities

are responsible for monitoring our compliance with all state consumer laws.

The CFPB also has the authority to require reports from institutions with less than $10 billion in assets, such as the Bank, to support the CFPB in implementing federal consumer protection laws, supporting examination activities, and assessing and detecting risks to consumers and financial markets.

CFPB also has the authority to require reports from institutions with less than $10 billion in assets, such as the Bank, to support the CFPB in implementing federal consumer protection laws, supporting examination activities, and assessing and detecting risks to consumers and financial markets.

The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation.

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In December 2015, the federal banking regulators released a statement entitled “Interagency Statement on Prudent Risk Management for Commercial Real Estate Lending” (the “CRE Guidance”).

monitor lending risks, and (iii) indicated that they will continue to pay special attention to commercial real estate lending activities and concentrations going forward.

In the CRE Guidance, the federal banking regulators (i) expressed concerns with institutions that ease commercial real estate underwriting standards, (ii) directed financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and (iii) indicated that they will continue to pay special attention to commercial real estate lending

activities and concentrations going forward.

The federal banking regulators previously issued guidance in December 2006, entitled “Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices”, which stated that an institution is potentially exposed to significant commercial real estate concentration risk, and should employ enhanced risk management practices, where (1) total commercial real estate loans represent 300% or more of its total capital and (2) the outstanding balance of such institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.

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We are responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence.

Failure to comply with these sanctions could have serious legal and reputational consequences and could result in civil money penalties imposed on the

institution by OFAC.

Failure to comply with these sanctions could also cause applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Failure to comply with these sanctions could have serious legal and reputational consequences and could result in civil money penalties imposed on the institution by OFAC.

Failure to comply with these sanctions could also cause applicable bank regulatory authorities not to

approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Incentive Compensation

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If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.

In June 2016, federal regulators also issued a joint statement on cybersecurity of interbank messaging and wholesale payment networks.

This statement highlights that cyberattacks have targeted interbank messaging and wholesale payment networks, resulting in large-dollar fraud at several foreign institutions.

The statement notes that financial institutions

should review their risk management practices and controls over information technology and wholesale payment systems networks, including authentication, authorization, fraud detection, and response management systems and processes.

An increasing number of state laws and regulations have been enacted in recent years to implement privacy and cybersecurity standards and regulations, including data breach notification and data privacy requirements.

Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs that meet specified requirements.

This trend of activity is expected to continue to expand, requiring continual monitoring of developments in the states and nations in which our customers are located and ongoing investments in our information systems and compliance capabilities.

In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data.

We employ an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls.

We employ a variety of preventative and detective tools

to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats.

We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats.

Notwithstanding the strength of our defensive measures, the threat from cyberattacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business