UPDATE 2 pm, includes CEO Christopher Annas' comments.
EARLIER: Meridian Bank, a $422 million-asset, three-branch lender based in Paoli, defied the slow local economy and grown rapidly in the past year, boosting loans by $42 million, drawing $31 million in new deposits, increasing fees for new or expanded services, and hiring 86 workers, bringing total staff to 190, according to its Federal Deposit Insurance Corp. report for Sept. 30, the most recent available.
Unlike Beneficial Bank and other local lenders that depend on old-fashioned lending and deposits -- and have had little growth to show during the slump -- Meridian has expanded in part by offering new services, for example by adding workers from Harleysville National Bank's former mortgage unit, and by acting as a third-party payment processor for both retail merchants and independent sales organizations (ISOs) that process credit card payments for online and other merchants - Meridian's E-Payments Program.
But since October, Meridian has been laboring under a 21-page FDIC consent order that points to obstacles that would make it harder for Meridian to keep growing through E-Payments.
UPDATE: Christopher Annas, Meridian's founder, chairman and CEO, addressed the FDIC's points at my request. He says the FDIC was concerned by the rapid growth of Meridian's payment processing for independent sales organizations (ISOs) for "such a small bank." As a result, Meridian's ISO clients "are leaving us and going to Wells Fargo, BofA," and other large banks. Some of his additional comments are noted below. Find Meridian's FDIC consent order here.
According to the FDIC order, Meridian's board agreed, "without admitting or denying any charges or unsafe or unsound banking practices or violations of law or regulation," to:
- "Develop a written capital plan" by January, subject to FDIC approval, so Meridian's reserves "reflect the risk profile and operations of the bank," including E-Payments. "We already have" a plan and "are well capitalized," with return on equity of 11%, says Annas.
- Strengthen management by guaranteeing "at a minimum" to employ an officer "with the proven ability to oversee a complex (Bank Security Act) program," another to oversee Meridian's E-Payments program, and a "consumer compliance officer" -- so Meridian could, in Annas' words, "scrutinize our customer's customers", and not just our customers";
- Ensure the Meridian board, made up of Upper Main Line business people, meets at least once a month and "at a minimum" takes "full responsibliity" for E-Payments, Bank Security Act compliance audits, internal controls, and capital raising; and sets up an "Oversight committee" to report monthly on the bank's progress and compliance with the order;
- Pay "qualified" outside lawyers to report on Meridian's "legal, reputational, and fraud risk related to any potential illegal activities performed or facilitated by sites offering tobacco, pharmaceuticals and online gaming," which are illegal in some states and for some buyers (such as young people);
- List potential Meridian E-Payment clients who "present elevated risk or potential for consumer harm and for whom the banks will not process transactions";
- Keep 'adequate reserves" to cover potential E-Payment losses from buyer chargebacks, as Meridian processed an extra $1.5 billion in monthly payments. "I understand their concern."
Meridian also agreed to improve E-Payment employee training, risk assessment, "formalized" reporting of "unusual or suspicious activity," and financial tracking, review, targets and planning of and for E-Payment's "actual" clients, financial flows, profits and expenses, subject to FDIC review. Annas said Meridian is "well on the way to meeting the FDIC requirements" and has hired the needed new complaince people. That's "not cheap, but it's the new reality" under the Dodd-Frank banking reform bill signed by President Obama in 2010.
Community banking is a tough business right now, with interest rates (and therefore loan/deposit profit margins) so low and a more detailed regulatory regime.
Banks want to lend more, supporting "new business lines and new employees for local companies," but "many bankers are not feeling confident," Annas added.