17. Regulatory matters:

Dividends are paid by the Company from its assets, which are mainly provided by dividends from Peoples Bank. Under the Pennsylvania Business Corporation Law of 1988, as amended, the Company may not pay a dividend if, after payment, either the Company could not pay its debts as they become due in the usual course of business, or the Company’s total assets would be less than its total liabilities. The determination of total assets and liabilities may be based upon: (i) financial statements prepared on the basis of GAAP; (ii) financial statements that are prepared on the basis of other accounting practices and principles that are reasonable under the circumstances; or (iii) a fair valuation or other method that is reasonable under the circumstances. In addition, the Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a bank holding company experiencing serious financial problems to borrow funds to pay dividends. Under the prompt corrective action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”

In addition, under the Pennsylvania Banking Code of 1965, as amended, Peoples Bank may only declare and pay dividends out of accumulated net earnings, including accumulated net earnings acquired as a result of a merger within seven years. Further, Peoples Bank may not declare or pay any dividend unless Peoples Bank’s surplus would not be reduced by the payment of the dividend below 100 percent of our capital stock. Pennsylvania law requires that each year Peoples Bank set aside as surplus, a sum equal to not less than 10 percent of its net earnings if surplus does not equal at least 100 percent of our capital stock. Under federal law and FDIC regulations, an insured bank may not pay dividends if doing so would make it undercapitalized within the meaning of the prompt corrective action law or if in default of its deposit insurance fund assessment.

Although subject to the aforementioned regulatory restrictions, the Company’s consolidated retained earnings at December 31, 2016 and 2015 were not restricted under any borrowing agreement as to payment of dividends or reacquisition of common stock.

The Company has paid cash dividends since its formation as a bank holding company in 1986. It is the present intention of the Board of Directors to continue this dividend payment policy, however, further dividends must necessarily depend upon earnings, financial condition, appropriate legal restrictions and other factors relevant at the time the Board of Directors considers payment of dividends. The Penseco merger agreement contemplates that, unless 80 percent of our Board of Directors determines otherwise, the Company will pay a quarterly cash dividend in an amount no less than $0.31 per share through 2018, provided that sufficient funds are legally available, and that the Company and Peoples Bank remain “well-capitalized” in accordance with applicable regulatory guidelines.

The amount of funds available for transfer from Peoples Bank to the Company in the form of loans and other extensions of credit is also limited. Under Federal Regulation, transfers to any one affiliate are limited to 10.0 percent of capital and surplus. At December 31, 2016, the maximum amount available for transfer from Peoples Bank to the Company in the form of loans amounted to $20,593. At December 31, 2016 and 2015, there were no loans outstanding, nor were any advances made during 2016 and 2015.

The Company and Peoples Bank are subject to certain regulatory capital requirements administered by the federal banking agencies, which are defined in Section 38 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Peoples Bank’s consolidated financial statements. In the event an institution is deemed to be undercapitalized by such standards, FDICIA prescribes an increasing amount of regulatory intervention, including the required institution of a capital restoration plan and restrictions on the growth of assets, branches or lines of business. Further restrictions are applied to the significantly or critically undercapitalized institutions including restrictions on interest payable on accounts, dismissal of management and appointment of a receiver. For well capitalized institutions, FDICIA provides authority for regulatory intervention when the institution is deemed to be engaging in unsafe and unsound practices or receives a less than satisfactory examination report rating. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Peoples Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

New risk-based capital rules became effective January 1, 2015 requiring that banks and holding companies maintain a "capital conservation buffer" of 250 basis points in excess of the "minimum capital ratio." The minimum capital ratio is equal to the prompt corrective action adequately capitalized threshold ratio. The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.

Peoples Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action at December 31, 2016 and 2015, based on the most recent notification from the Federal Deposit Insurance Corporation. To be categorized as well capitalized, Peoples Bank must maintain certain minimum Tier I risk-based, total risk-based and Tier I Leverage ratios as set forth in the following tables. The Tier I Leverage ratio is defined as Tier I capital to total average assets less intangible assets. There are no conditions or events since the most recent notification that management believes have changed Peoples Bank’s category.

The Company and Peoples Bank’s actual capital ratios at December 31, 2016 and 2015, and the minimum ratios required for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions are as follows:



									Minimum to be Well
									Capitalized under
					Minimum For Capital				Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
December 31, 2016	Amount		Ratio		Amount		Ratio		Amount		Ratio
Common equity Tier 1 capital to risk-weighted assets:
Consolidated	$	194,877	12.49	%	$	70,205	4.50	%
Peoples Bank		189,128	12.14			70,120	4.50		$	101,284	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated		194,877	12.49			93,607	6.00
Peoples Bank		189,128	12.14			93,493	6.00			124,657	8.00
Total capital to risk-weighted assets:
Consolidated		210,838	13.51			124,810	8.00
Peoples Bank		205,089	13.16			124,657	8.00			155,822	10.00
Tier 1 capital to average assets:
Consolidated		194,877	10.16			76,760	4.00
Peoples Bank	$	189,128	9.88	%	$	76,602	4.00	%	$	95,753	5.00	%



									Minimum to be Well
									Capitalized under
					Minimum For Capital				Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
December 31, 2015	Amount		Ratio		Amount		Ratio		Amount		Ratio
Common equity Tier 1 capital to risk-weighted assets:
Consolidated	$	185,365	13.52	%	$	61,675	4.50	%
Peoples Bank		179,362	13.11			61,583	4.50		$	88,954	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated		185,365	13.52			82,233	6.00
Peoples Bank		179,362	13.11			82,111	6.00			109,481	8.00
Total capital to risk-weighted assets:
Consolidated		198,340	14.47			109,644	8.00
Peoples Bank		192,337	14.05			109,481	8.00			136,852	10.00
Tier 1 capital to average assets:
Consolidated		185,365	10.80			68,638	4.00
Peoples Bank	$	179,362	10.48	%	$	68,474	4.00	%	$	85,592	5.00	%