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FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 14 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file Number:
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DIMECO, INC.
(Name of small business issuer in its charter)
Pennsylvania 23-2250152
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
820-822 Church Street, Honesdale, Pennsylvania 18431
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (717) 253-1970
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
(Title of class)
Indicate by check mark whether the issuer (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if there is no disclosure of delinquent
filers in response to Item 405 of Regulation S-B is not contained in this form,
and no disclosure will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year:
$11,002,583
The aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days: $17,376,917 at March 17, 1997.
As of March 17, 1997, the registrant had outstanding 724,038
shares of its common stock, par value $.50 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 definitive Proxy Statement are
incorporated by reference in Part III of this Annual Report. In addition,
portions of the Annual Report to stockholders of the registrant for the year
ended December 31, 1996, are incorporated by reference in Part II of this
Annual Report.
Transitional Small Business Disclosure Format (check one):
Yes No X
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Page 1 of 31
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DIMECO, INC.
FORM 10-KSB
Index
Part I Page
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Item 1. Description of the Business 2
Item 2. Description of Property 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of
Security Holders Not Applicable
Part II
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Item 5. Market for Common Equity and Related
Stockholder Matters 17
Item 6. Management's Discussion and Analysis or Plan
of Operation 17
Item 7. Financial Statements and Schedules 26
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Not Applicable
Part III
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Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 27
Item 10. Executive Compensation 27
Item 11. Security Ownership of Certain Beneficial Owners
and Management 27
Item 12. Certain Relationships and Related Transactions 27
Item 13. Exhibits and Reports on Form 8-K 28
Signatures 29
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DIMECO, INC.
FORM 10-KSB
Part I
Item 1. Description of the Business
General
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Dimeco, Inc. (the "Company"), a Pennsylvania business corporation,
is a bank holding company, registered with and supervised by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). The
Company was incorporated on October 29, 1992, and commenced operations on
June 1, 1993, upon consummation of the acquisition of all of the outstanding
stock of The Dime Bank of Honesdale, Pennsylvania (the "Bank"). Since
commencing operations, the Company's business has consisted primarily of
managing and supervising the Bank, and its principal source of income, if any,
has been dividends paid by the Bank. The Company has one wholly-owned
subsidiary, the Bank. At December 31, 1996, the Company had total
consolidated assets, deposits and shareholders' equity of approximately
$140,284,204, $126,002,507 and $13,147,275, respectively.
The Bank was organized in 1905. The Bank is a Pennsylvania-
chartered banking institution, the deposits of which are insured by the
Federal Deposit Insurance Corporation (the "FDIC") under the Bank Insurance
Fund ("BIF"). In 1991, the Bank was granted limited fiduciary powers to
engage in an investment management service. The Bank has three branch offices
located in Hawley, Damascus and Greentown, Pennsylvania. It's business is
as a full service commercial bank providing a wide range of services to
individuals and small to medium sized businesses in its Northeastern
Pennsylvania market area, including accepting time, demand, and savings
deposits and making secured and unsecured commercial, real estate and consumer
loans.
Supervision and Regulation - The Company
----------------------------------------
The Company is subject to the jurisdiction of the Securities and
Exchange Commission (the "SEC") and of state securities laws administrators
for matters relating to the offering and sale of its securities. The Company
is currently subject to the SEC's rules and regulations relating to periodic
reporting, insider trading reports and proxy solicitation materials in
accordance with the Securities Exchange Act of 1934. Furthermore, the Company
qualifies as a "small business issuer" as that term is defined under Item 10
of Regulation S-B of the SEC, and has elected to make its SEC filings under
the disclosure requirements afforded to small business issuers.
The Company is also subject to the provisions of the Bank Holding
Company Act of 1956, as amended ("Bank Holding Company Act"), and to
supervision by the Federal Reserve Board. The Bank Holding Company Act will
require the Company to secure the prior approval of the Federal Reserve Board
before it owns or controls, directly or indirectly, more than 5% of the voting
shares of substantially all of the assets of any institution, including
another bank.
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The Bank Holding Company Act prohibits acquisition by the Company
of more than 5% of the voting shares of, or interest in, or substantially all
of the assets of, any bank located outside Pennsylvania unless such an
acquisition is specifically authorized by laws of the state in which such bank
is located.
A bank holding company is prohibited from engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any company
engaged in non-banking activities unless the Federal Reserve Board, by order
or regulation, has found such activities to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. In
making this determination, the Federal Reserve Board considers whether the
performance of these activities by a bank holding company would offer benefits
to the public that outweigh possible adverse effects.
The Bank Holding Company Act also prohibits acquisitions of
control of a bank holding company, such as the Company, without prior notice
to the Federal Reserve Board. Control is defined for this purpose as the
power, directly or indirectly, to direct the management or policies of a bank
holding company or to vote twenty-five percent (25%) (or ten percent (10%), if
no other person or persons acting in concert, holds a greater percentage of
the Common Stock) or more of the Company's Common Stock.
The Company is required to file an annual report with the Federal
Reserve Board and any additional information that the Federal Reserve Board
may require pursuant to the Bank Holding Company Act. The Federal Reserve
Board may also make examinations of the Company and any or all of its
subsidiaries. Further, under Section 106 of the 1970 amendments to the Bank
Holding Company Act and the Federal Reserve Board's regulations, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or provision of
credit or provision of any property or services. The so-called "Anti-tie-in"
provisions state generally that a bank may not extend credit, lease, sell
property or furnish any service to a customer on the condition that the
customer provide additional credit or service to the bank, to its bank holding
company or to any other subsidiary of its bank holding company or on the
condition that the customer not obtain other credit or service from a
competitor of the bank, its bank holding company or any subsidiary of its bank
holding company.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, on investments in the
stock or other securities of the bank holding company and on taking of such
stock or securities as collateral for loans to any borrower.
Permitted Non-Banking Activities
--------------------------------
The Federal Reserve Board permits bank holding companies to engage
in non-banking activities so closely related to banking, managing or
controlling banks as to be a proper incident thereto. While the types of
permissible activities are subject to change by the Federal Reserve Board, the
principal non-banking activities that presently may be conducted by a bank
holding company are:
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1. Making, acquiring or servicing loans and other extensions
of credit for its own account or for the account of others, such as would be
made by the following types of companies: consumer finance, credit card,
mortgage, commercial finance and factoring.
2. Operating as an industrial bank, Morris Plan bank or
industrial loan company in the manner authorized by state law so long as the
institution does not accept demand deposits or make commercial loans.
3. Operating as a trust company in the manner authorized by
federal or state law so long as the institution does not make certain types of
loans or investments or accept deposits, except as may be permitted by the
Federal Reserve Board.
4. Subject to certain limitations, acting as an investment or
financial advisor to investment companies and other persons.
5. Leasing personal and real property or acting as agent,
broker, or advisor in leasing property, provided that it is reasonably
anticipated that the transaction will compensate the lessor for not less than
the lessor's full investment in the property and provided further that the
lessor may rely on estimated residual values of up to 100% of the acquisition
cost of the leased property.
6. Making equity and debt investments in corporations or
projects designed primarily to promote community welfare, such as the economic
rehabilitation and development of low-income areas by providing housing,
services or jobs for residents.
7. Providing to others financially oriented data processing
or bookkeeping services.
8. Subject to certain limitations, acting as an insurance
principal, agent or broker in relation to insurance for itself and its
subsidiaries or for insurance directly related to extensions of credit by the
bank holding company system.
9. Owning, controlling or operating a savings association, if
the savings association engages only in deposit taking activities and lending,
and other activities permissible for bank holding companies.
10. Providing courier services of a limited character.
11. Subject to certain limitations, providing management
consulting advice to nonaffiliated banks and nonbank depository institutions.
12. Selling money orders having a face value of $1,000 or
less, travelers' checks and United States savings bonds.
13. Performing appraisals of real estate and personal
property, including securities.
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14. Subject to certain conditions, acting as intermediary for
the financing of commercial or industrial income-producing real estate by
arranging for the transfer of the title, control and risk of such a real
estate project to one or more investors.
15. Subject to certain limitations, providing full-service
brokerage and financial advisory activities; and selling, solely as an agent
or broker for customers, shares of investment companies advised by an
affiliate of the bank holding company or providing investment advice to
customers about the purchase and sale of shares of investment companies
advised by an affiliate of the bank holding company.
16. Underwriting and dealing in obligations of the United
States, general obligations of states and their political subdivisions and
other obligations such as bankers' acceptances and certificates of deposits.
17. Subject to certain limitations, providing by any means,
general information and statistical forecasting with respect to foreign
exchange markets; advisory services designed to assist customers in
monitoring, evaluating and managing their foreign exchange exposures; and
certain transactional services with respect to foreign exchange.
18. Subject to certain limitations, acting as a futures
commission merchant in the execution and clearance on major commodity
exchanges of futures contracts and options on futures contracts for bullion,
foreign exchange, government securities, certificates of deposit and other
money market instruments.
19. Subject to certain limitations, providing commodity
trading and futures commission merchant advice, including counsel,
publications, written analysis and reports.
20. Providing consumer financial counseling that involves
counseling, educational courses and distribution of instructional materials to
individuals on consumer-oriented financial management matters, including debt
consolidation, mortgage applications, bankruptcy, budget management, real
estate tax shelters, tax planning, retirement and estate planning, insurance
and general investment management, so long as this activity does not include
the sale of specific products or investments.
21. Providing tax planning and preparation advice such as
strategies designed to minimize tax liabilities and includes, for individuals,
analysis of the tax implications of retirement plans, estate planning and
family trusts. For a corporation, tax planning includes the analysis of the
tax implications of mergers and acquisitions, portfolio mix, specific
investments, previous tax payments and year-end tax planning. Tax preparation
involves the preparation of tax forms and advice concerning liability based on
records and receipts supplied by the client.
22. Providing check guaranty services to subscribing
merchants.
23. Subject to certain limitations, operating a collection
agency.
24. Operating a credit bureau that maintains files on the
past credit history of consumers and providing such information to a lender
that is considering a borrower's application for credit, provided that the
credit bureau does not grant preferential treatment to an affiliated bank in
the bank holding company system.
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The Company did not and does not intend to commence or conduct any
of the above-delineated activities during calendar years 1997 and 1996,
respectively.
Pennsylvania Banking Law
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Under the Pennsylvania Banking Code of 1965, as amended (the
"Code"), the Company is permitted to control an unlimited number of banks.
However, the Company would be required, under the Bank Holding Company Act, to
obtain the prior approval of the Federal Reserve Board before it could acquire
all or substantially all of the assets of any bank, or acquire ownership or
control of any voting shares of any bank other than the Bank, if, after such
acquisition, it would own or control more than five percent (5%) of the voting
shares of such bank.
Interstate Banking and Branching
--------------------------------
On September 29, 1994, the President signed into law the Riegle-
Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Banking Act"). The following discussion describes those provisions of the
Interstate Banking Act that would pertain to the Company. It is not an
exhaustive description of all provisions of the Interstate Banking Act.
In general, the Federal Reserve Board may approve an application
by the Company to acquire control of, or acquire all or substantially all of
the assets of, a bank located outside of the Commonwealth of Pennsylvania
without regard to whether such acquisition is prohibited under the law of any
state. The Federal Reserve Board may approve such application if it finds,
among other things, that the Company is "adequately capitalized" and
"adequately managed." Moreover, the Federal Reserve Board may not approve
such acquisition if the target bank has not been in existence for the minimum
period of time, if any, required by such target bank's "host" state. The
Federal Reserve Board may, however, approve the acquisition of the target bank
that has been in existence for at least five years without regard to any
longer minimum period of time required under the law of the "host" state of
the target bank. These above provisions took effect on September 30, 1995.
Furthermore, the Interstate Banking Law provides that, beginning
June 1, 1997, appropriate federal supervisory agencies may approve a merger of
the Bank with another bank located in a different state or the establishment
by the Bank of a new branch office either by acquisition or de novo, unless
the Commonwealth of Pennsylvania enacts a law prior to June 1, 1997, allowing
an interstate merger or expressly prohibiting merger with an out-of-state
bank. The Commonwealth of Pennsylvania has enacted a law to "opt-in" early to
these interstate mergers.
Moreover, the Interstate Banking Law provides that the Bank may
establish and operate a de novo branch in any state that "opts-in" to de novo
branching. A "de novo branch" is a branch office that is originally
established as a branch and does not become a branch as a result of an
acquisition or merger. The Commonwealth of Pennsylvania has enacted a law to
"opt-in" early to de novo interstate branching.
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On December 13, 1995, the Banking Commissioners of the states of
Delaware, Maryland, Pennsylvania and Virginia executed a Cooperative Agreement
which governs the manner in which state-chartered banks (such as the Bank)
with branches in multiple states will be supervised. This Cooperative
Agreement was necessitated by the Interstate Banking Law and was drafted to
create a level playing field for state-chartered banks with respect to
supervision and regulation of branch offices in a multiple state setting.
Specifically, this agreement outlines general principles for determining
whether home or host state law applies, including the following: (1) host
state law applies to operational issues relating to a branch located in a host
state, including antitrust, community reinvestment, consumer protection, usury
and fair lending laws; (2) the state law of the home state will apply to
corporate structure issues, such as, charter, by-laws, incorporation,
liquidation, stockholders and directors, capital and investments; and (3) bank
powers issues will be resolved with reference to both home and host state
laws.
As of the filing date of this report, the Company and the Bank
have no plans to engage in interstate banking or branching.
Legislation and Regulatory Changes
----------------------------------
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial institutions are frequently made in Congress, and before
various bank regulatory agencies. No prediction can be made as to the
likelihood of any major changes or the impact such changes might have on the
Company and its subsidiary bank. Certain changes of potential significance to
the Company which have been enacted or promulgated, as the case may be, by
Congress or various regulatory agencies, respectively, are discussed below.
Financial Institutions Reform, Recovery and Enforcement Act of
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1989 ("FIRREA")
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On August 9, 1989, major reform and financing legislation, i.e.,
FIRREA, was enacted into law in order to restructure the regulation of the
thrift industry, to address the financial condition of the Federal Savings and
Loan Insurance Corporation and to enhance the supervisory and enforcement
powers of the Federal bank and thrift regulatory agencies. The FDIC, as the
primary Federal regulator of the Bank, is primarily responsible for
supervision of the Bank. The FDIC has far greater flexibility to impose
supervisory agreements on an institution that fails to comply with its
regulatory requirements, particularly with respect to the capital
requirements. Possible enforcement actions include the imposition of a
capital plan, termination of deposit insurance and removal or temporary
suspension of an officer, director or other institution-affiliated party.
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Under FIRREA, civil penalties are classified into three levels,
with amounts increasing with the severity of the violation. The first tier
provides for civil penalties of up to $5,000 per day for any violation of law
or regulation. A civil penalty of up to $25,000 per day may be assessed if
more than a minimal loss or a pattern of misconduct is involved. Finally, a
civil penalty of up to $1.0 million per day may be assessed for knowingly or
recklessly causing a substantial loss to an institution or taking action that
results in a substantial pecuniary gain or other benefit. Criminal penalties
are increased to $1.0 million per violation, up to $5.0 million for continuing
violations or up to the actual amount of gain or loss. These monetary
penalties may be combined with prison sentences for up to five years.
Federal Deposit Insurance Corporation Improvement Act of 1991
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("FDICIA")
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General. The FDICIA was enacted in December, 1991, and reformed a
variety of bank regulatory laws. Some of these reforms have a direct impact
on the Bank. Certain of these new provisions are discussed below.
Examinations and Audits. Annual full-scope, on-site examinations
are required for all FDIC-insured institutions with assets of $500 million or
more. The independent accountants of an institution shall attest to the
accuracy of management's report. Such accountants shall also monitor
management's compliance with governing laws and regulations. An institution
also is required to select an independent audit committee composed of outside
directors who are independent of management, to review with management and the
independent accountants the reports that must be submitted to the appropriate
bank regulatory agencies. If the independent accountants resign or are
dismissed, written notification must be given to the FDIC and to the
appropriate federal and state bank regulatory agency.
Prompt Corrective Action. In order to reduce losses to the
deposit insurance funds, the FDICIA established a format to more closely
monitor FDIC-insured institutions and to enable prompt corrective action by
the appropriate federal supervisory agency if an institution begins to
experience any difficulty. The FDICIA established five "Capital" categories.
They are: (1) well-capitalized; (2) adequately capitalized;
(3) undercapitalized; (4) significantly undercapitalized; and (5) critically
undercapitalized. The overall goal of these new capital measures is to impose
more scrutiny and operational restrictions on depository institutions as they
descend the capital categories from well capitalized to critically
undercapitalized.
On September 15, 1992, the FDIC, the Office of the Comptroller of
the Current (the "OCC"), the Federal Reserve Board (the "FRB") and the Office
of Thrift Supervision issued jointly the final regulations relating to these
capital categories and prompt corrective action. The regulations became
effective December 19, 1992. These capital measures for prompt corrective
action are defined as follows:
A "well-capitalized" institution would be one that has at least a
10% total risk-based capital ratio, a 6% or greater Tier I risk-based capital
ratio, a 5% or greater Tier I leverage capital ratio, and is not subject to
any written order or final directive by the FDIC to meet and maintain a
specific capital level.
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An "adequately capitalized" institution would be one that meets
the required minimum capital levels, but does not meet the definition of a
"well-capitalized" institution. The existing capital rules generally require
banks to maintain a Tier I leverage capital ratio of at least 4% and an 8% or
greater total risk-based capital ratio. Since the risk-based standards also
require at least half of the total risk-based capital requirement to be in the
form of Tier I capital, this also will mean that an institution would need to
maintain at least a 4% Tier I risk-based capital ratio. Thus, an institution
would need to meet each of the required minimum capital levels in order to be
deemed "adequately capitalized."
An "undercapitalized" institution would fail to meet one or more
of the required minimum capital levels for an "adequately capitalized"
institution. An "undercapitalized" institution must file a capital
restoration plan and is automatically subject to restrictions on dividends,
management fees and asset growth. In addition, the institution is prohibited
from making acquisitions, opening new branches or engaging in new lines of
business without the prior approval of its primary federal regulator. A
number of other discretionary restrictions also may be imposed on a
case-by-case basis, and harsher restrictions that otherwise would apply to
"significantly undercapitalized" institutions may be imposed on an
"undercapitalized" institution that fails to file or implement an acceptable
capital restoration plan.
A "significantly undercapitalized" institution would have a total
risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of
less than 3%, or a Tier I leverage capital ratio of less than 3%, as the case
may be. Institutions in this category would be subject to all the
restrictions that apply to "undercapitalized" institutions. Certain other
mandatory prohibitions also would apply, such as restrictions against the
payment of bonuses or raises to senior executive officers without the prior
approval of the institution's primary federal regulator. A number of other
restrictions may be imposed.
A "critically undercapitalized" institution would be one with a
tangible equity (Tier I capital) ratio of 2% or less. In addition to the same
restrictions and prohibitions that apply to "undercapitalized" and
"significantly undercapitalized" institutions, the FDIC's rule implementing
this provision of FDICIA also addresses certain other provisions for which the
FDIC has been accorded responsibility as the insurer of depository
institutions.
At a minimum, any institution that becomes "critically undercapitalized" is
prohibited from taking the following actions without the prior written
approval of its primary federal supervisory agency: engaging in any material
transactions other than in the usual course of business; extending credit for
highly leveraged transactions ("HLTs"); amending its charter or bylaws; making
any material changes in accounting methods; engaging in certain transactions
with affiliates; paying excessive compensation or bonuses; and paying interest
on liabilities exceeding the prevailing rates in the institution's market
area. In addition, a "critically undercapitalized" institution is prohibited
from paying interest or principal on its subordinated debt and is subject to
being placed in conservatorship or receivership if its tangible equity capital
level is not increased within certain mandated time frames.
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At any time, an institution's primary federal supervisory agency
may reclassify it into a lower capital category. All institutions are
prohibited from declaring any dividends, making any other capital
distribution, or paying a management fee if it would result in downward
movement into any of the three undercapitalized categories. The FDICIA
provides an exception to this requirement for stock redemptions that do not
lower an institution's capital and would improve its financial condition, if
the appropriate federal supervisory agency has consulted with the FDIC and
approved the redemption.
The regulation requires institutions to notify the FDIC following
any material event that would cause such institution to be placed in a lower
category. Additionally, the FDIC monitors capital levels through call reports
and examination reports.
Deposit Insurance. On January 1, 1994, the FDIC implemented the
permanent Risk Related Premium System (the "RRPS") with respect to the
assessments and payment of deposit insurance premiums.
Under the RRPS, the FDIC, on a semiannual basis, will assign each
institution to one of three capital groups (well-capitalized, adequately
capitalized or undercapitalized, in each case as these terms are defined for
purposes of prompt corrective action rules described above) and further assign
such institution to one of three subgroups within a capital group
corresponding to the FDIC's judgment of its strength based on supervisory
evaluations, including examination reports, statistical analysis and other
information relevant to gauging the risk posed by the institution. Only
institutions with a total capital to risk-adjusted assets ratio of 10.00% or
greater, a Tier I capital to risk-adjusted assets ratio of 5% or a greater and
a Tier I leverage ratio of 5% or greater, are assigned to the well-capitalized
group.
Effective January 1, 1996, the FDIC board of directors had further
reduced BIF premiums. Highly-rated institutions would pay only the statutory
minimum of $2,000 annually for FDIC insurance. A change was made in the form
of the Deposit Insurance Funds Act of 1996 (DIFA) which eliminated the fourth
quarter minimum assessment of $500 for highly-rated institutions. The
remaining institutions will pay on a scale ranging from 3 to 30 cents per
every $100 of insured deposits, which is down from the scale in the latter
half of 1995 of 4 to 31 cents. If such lower FDIC insurance premium rates
were to have been in effect for all of 1995, then the Bank would have paid
$116,352 less in such premiums based upon current deposit levels.
Effective January 1, 1997, DIFA increased Bank Insurance Fund
(BIF) premiums to 1.296 basis points for BIF members.
Real Estate Lending Standards. Pursuant to the FDICIA, the OCC
and other federal banking agencies adopted real estate lending guidelines
which would set loan-to-value ("LTV") ratios for different types of real
estate loans. A LTV ratio is generally defined as the total loan amount
divided by the appraised value of the property at the time the loan is
originated. If the institution does not hold a first lien position, the total
loan amount would be combined with the amount of all senior liens when
calculating the ratio. These guidelines became effective on March 19, 1993.
In addition to establishing the LTV ratios, the guidelines require all real
estate loans to be based upon proper loan documentation and a recent appraisal
of the property.
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Bank Enterprise Act of 1991. Within the overall FDICIA is a
separate subtitle called the "Bank Enterprise Act of 1991." The purpose of
this Act is to encourage banking institutions to establish "basic transaction
services for consumers" or so-called "lifeline accounts." The FDIC assessment
rate is reduced for all lifeline depository accounts. This Act establishes
ten (10) factors which are the minimum requirements to qualify as a lifeline
depository account. Some of these factors relate to minimum opening and
balance amounts, minimum number of monthly withdrawals, the absence of
discriminatory practices against low-income individuals and minimum service
charges and fees. Moreover, the Housing and Community Development Act of 1972
requires that the FDIC's risk-based assessment system include provisions
regarding life-line accounts. Assessment rates applicable to life-line
accounts are to be established by FDIC rule.
Truth in Savings Act. The FDICIA also contains the Truth in
Savings Act ("TSA"). The FRB adopted regulations ("Regulation DD") under the
TSA. The purpose of TSA is to require the clear and uniform disclosure of the
rates of interest which are payable on deposit accounts by depository
institutions and the fees that are assessable against deposit accounts, so
that consumers can make a meaningful comparison between the competing claims
of banks with regard to deposit accounts and products. In addition to
disclosures to be provided when a customer establishes a deposit account, TSA
requires the depository institution to include, in a clear and conspicuous
manner, the following information with each periodic statement of a deposit
account: (1) the annual percentage yield earned; (2) the amount of interest
earned; (3) the amount of any fees and charges imposed; and (4) the number of
days in the reporting period. TSA allows for civil lawsuits to be initiated
by customers if the depository institution violates any provision or
regulation under TSA.
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Regulatory Capital Requirements
-------------------------------
The following table presents the Company's consolidated capital
ratios at December 31, 1996:
(In Thousands)
Tier I Capital . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,176
Tier II Capital. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,319
Total Capital. . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,495
Adjusted Total Average Assets. . . . . . . . . . . . . . . . . . $ 132,146
Total Adjusted Risk-Weighted Assets(1) . . . . . . . . . . . . . $ 105,496
Tier I Risk-Based Capital Ratio(2) . . . . . . . . . . . . . . . . . . 12.49%
Required Tier I Risk-Based Capital Ratio . . . . . . . . . . . . . . . .4.00%
Excess Tier I Risk-Based Capital Ratio . . . . . . . . . . . . . . . . .8.49%
Total Risk-Based Capital Ratio(3). . . . . . . . . . . . . . . . . . . 13.74%
Required Total Risk-Based Capital Ratio. . . . . . . . . . . . . . . . .8.00%
Excess Total Risk-Based Capital Ratio. . . . . . . . . . . . . . . . . .5.74%
Tier I Leverage Ratio(4) . . . . . . . . . . . . . . . . . . . . . . . .9.95%
Required Tier I Leverage Ratio . . . . . . . . . . . . . . . . . . . . .4.00%
Excess Tier I Leverage Ratio . . . . . . . . . . . . . . . . . . . . . .5.95%
- -----------------------------------
[FN]
(1) Includes off-balance sheet items at credit-equivalent values.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I
Capital to Total Adjusted Risk-Weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I and
Tier II Capital to Total Adjusted Risk-Weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to
Adjusted Total Average Assets.
The Company was required to implement, on January 1, 1994,
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("FASB 115"). For regulatory
capital reporting purposes, FASB 115 changed the composition of stockholders'
equity in financial statements prepared in accordance with generally accepted
accounting principles by including as a separate component of equity the
amount of net unrealized holding gains or losses on debt and equity securities
that are deemed to be available-for-sale. During 1995, in accordance with the
Financial Accounting Standards Board Special Report. "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," the Company was permitted a one time reclassification of
investment securities. Accordingly, the Company transferred from the held to
maturity classification to the available for sale classification securities
with an amortized cost of $522,017 and an estimated market value of $544,325.
The implementation of FASB 115 did not have a material effect during 1995 on
the regulatory capital ratios of the Company.
page 11
<PAGE>
Effective January 27, 1995, the FDIC has issued a final rule with
respect to the implementation of FASB 115 for regulatory capital reporting
purposes. Under this final rule, net unrealized holding losses on available-
for-sale equity securities (but not debt securities) with readily determinable
fair values will be included (i.e., deducted) when calculating the Company's
consolidated Tier 1 capital. All other unrealized holding gains and losses on
available-for-sale securities will be excluded (i.e., not deducted) from the
Company's consolidated Tier 1 capital. Such final rule had no material effect
on the Company's consolidated Tier 1 capital.
The Company's ability to maintain the required levels of capital
is substantially dependent upon the success of the Company's capital and
business plans, the impact of future economic events on the Company's loan
customers, and the Company's ability to manage its interest rate risk and
control its growth and other operating expenses.
Effect of Government Monetary Policies
--------------------------------------
The earnings of the Company are and will be affected by domestic
economic conditions and the monetary and fiscal policies of the United States
government and its agencies.
The monetary policies of the Federal Reserve Board have had, and
will likely continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The
Federal Reserve Board has a major effect upon the levels of bank loans,
investments and deposits through its open market operations in United States
government securities and through its regulations of, among other things, the
discount rate on borrowings of member banks and the reserve requirements
against member bank deposits. It is not possible to predict the nature and
impact of future changes in monetary and fiscal policies.
Business - Bank
---------------
The Bank's legal headquarters are located at 820-822 Church
Street, Honesdale, Pennsylvania 18431.
As of December 31, 1996, the Bank had total assets of $140,267,809
total shareholders' equity of $13,146,692 and total deposits and other
liabilities of $127,121,117.
The Bank engages in a full-service commercial banking business,
including accepting time and demand deposits, and making secured and unsecured
commercial and consumer loans. The Bank's business is not seasonal in nature.
Its deposits are insured by the FDIC to the extent provided by law.
As of December 31, 1996, the Bank had fifty-nine (59) full-time
employees and eighteen (18) part-time employees. In the opinion of
management, the Bank enjoys a satisfactory relationship with its employees.
The Bank is not a party to any collective bargaining agreement.
page 12
<PAGE>
Competition - Bank
------------------
The Bank competes actively with other area commercial banks and
savings and loan associations, many of which are larger than the Bank, as well
as with major regional banking and financial institutions headquarters in
Scranton, Pennsylvania. The Bank considers its main competitors to be:
Honesdale National Bank, Wayne Bank, Farmers & Merchants Bank, LA Bank, PNC
Bank, First Union Bank, Citizen's Savings Association and First National Bank
of Jeffersonville. The Bank is generally competitive with all competing
financial institutions in its service area with respect to interest rates paid
on time and savings deposits, service charges on deposit accounts and interest
rates charged on loans.
Supervision and Regulation - Bank
---------------------------------
The operations of the Bank are subject to federal and state
statutes applicable to banks chartered under the banking laws of the
Commonwealth of Pennsylvania, whose deposits are insured by the FDIC. Bank
operations are also subject to regulations of the Federal Reserve Board.
The primary supervisory authorities of the Bank are the
Pennsylvania Department of Banking ("Department") and the FDIC, that regularly
examine the Bank. The FDIC has the authority under the Financial Institutions
Supervisory Act to prevent a state, non-member bank from engaging in an unsafe
or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, loans a bank makes and
collateral it takes, the activities of a bank with respect to mergers and
consolidations and the establishment of branches. All banks in Pennsylvania
are permitted to maintain branch offices in any county of the state. Branches
may be established only after approval by the Department and the FDIC. These
regulatory agencies are required to grant approval only if they find that
there is a need for banking services or facilities such as are contemplated by
the proposed branch. These regulatory agencies may disapprove the application
if the bank does not have the capital and surplus deemed necessary to operate
a new branch.
Mullet-bank holding companies are permitted in Pennsylvania within
certain limitations. See section entitled "Pennsylvania Banking Law."
A subsidiary bank of a bank holding company is subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or its subsidiaries, on investments in the stock or
other securities of the bank holding company or its subsidiaries and on taking
such stock or securities as collateral for loans. The Federal Reserve Act and
Federal Reserve Board regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal shareholders of
its parent holding company, among others, and to related interests of such
principal shareholders. In addition, such legislation and regulations may
affect the terms upon which any person becoming a principal shareholder of a
holding company may obtain credit from banks with which the subsidiary bank
maintains a correspondent relationship.
page 13<PAGE>
<PAGE>
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulations of, and
restrictions on, the business of the Bank. It cannot be predicted whether any
such legislation will be adopted or how such legislation would affect the
business of the Bank. As a consequence of the extensive regulation of
commercial banking activities in the United States, the Bank's business is
particularly susceptible to being affected by federal legislation and
regulations that may increase the costs of doing business.
Under the Federal Deposit Insurance Act, the FDIC possesses the
power to prohibit institutions regulated by it (such as the Bank) from
engaging in any activity that would be an unsafe and unsound banking practice
and in violation of the law. Moreover, the Financial Institutions and
Interest Rate Control Act of 1987 ("FIRA") generally expands the circumstances
under which officers or directors of a bank may be removed by the
institution's federal supervisory agency; restricts lending by a bank to its
executive officers, directors, principal shareholders or related interests
thereof; restricts management personnel of a bank from serving as directors in
other management positions with certain depository institutions whose assets
exceed a specified amount or which have an office within a specified
geographic area; and restricts management personnel from borrowing from
another institution that has a correspondent relationship with their bank.
Additionally, FIRA requires that no person may acquire control of a bank
unless the appropriate federal supervisory agency has been given 60-days prior
written notice and within that time has not disapproved the acquisition or
extended the period for disapproval.
Under the Bank Secrecy Act ("BSA"), the Bank is required to report
to the Internal Revenue Service currency transactions of more than $10,000 or
multiple transactions of which the Bank is aware in any one day that aggregate
in excess of $10,000. Civil and criminal penalties are provided under the BSA
for failure to file a required report, for failure to supply information
required by the BSA or for filing a false or fraudulent report.
The garnets German Depository Institutions Act of 1982 ("1982
Act"), removes certain restrictions on the lending powers and liberalizes the
depository abilities of the Bank. The 1982 Act also amends FIRA (see above)
by eliminating certain statutory limits on lending of a bank to its executive
officers, directors, principal shareholders or related interests thereof and
by relaxing certain reporting requirements. However, the 1982 Act
strengthened FIRA provisions respecting management interlocks and
correspondent bank relationships by management personnel.
Community Reinvestment Act
--------------------------
The Community Reinvestment Act of 1977, as amended (the "CRA"),
and the regulations promulgated to implement the CRA are designed to create a
system for bank regulatory agencies to evaluate a depository institution's
record in meeting the credit needs of its community. Until May 1995, a
depository institution was evaluated for CRA compliance based upon 12
assessment factors.
page 14
<PAGE>
The CRA regulations were completely revised as of May 4, 1995, to
establish new performance-based standards for use in examining a depository
institution's compliance with the CRA (the "revised CRA regulations"). The
revised CRA regulations establish new tests for evaluating both small and
large depository institutions' investment in the community. A "small bank" is
defined as a bank which has total assets of less than $250 million and is
independent or is an affiliate of a holding company with less than $1 billion
in assets. Pursuant to the revised CRA regulations, a depository institution
which qualifies as a "small bank" will be examined under a streamlined
procedure which emphasizes lending activities. The streamlined examination
procedures for a small bank became effective on January 1, 1996.
A large retail institution is one which does not meet the "small
bank" definition, above. A large retail institution can be evaluated under
one of two tests: (1) a three-part test evaluating the institution's lending,
service and investment performance; or (2) a "strategic plan" designed by the
institution with community involvement and approved by the appropriate federal
bank regulator. A large institution must choose one of these options prior to
July 1997, but may opt to be examined under one of these two options prior to
that time. Effective January 1, 1996, a large retail institution that opts to
be examined pursuant to a strategic plan may submit its strategic plan to the
bank regulators for approval.
In addition, the revised CRA regulations include separate rules
regarding the manner in which "wholesale banks" and "limited purpose banks"
will be evaluated for compliance.
The new CRA regulations are being phased in over a two-year
period, beginning July 1, 1995, with a final effective date of July 1, 1997.
Until the applicable test is phased in, institutions may be examined under the
prior CRA regulations.
On December 27, 1995, the federal banking regulators issued a
joint final rule containing technical amendments to the revised CRA
regulations. Specifically, the recent technical amendments clarify the
various effective dates in the revised CRA regulations, correct certain cross
references and state that once an institution becomes subject to the
requirements of the revised CRA regulations, it must comply with all aspects
of the revised CRA regulations, regardless of the effective date of certain
provisions. Similarly, once an institution is subject to the revised CRA
regulations, the prior CRA regulations do not apply to that institution.
For the purposes of the revised CRA regulations, the Bank is
deemed to be a small depository institution, based upon financial information
as of December 31, 1995. In the future, the Bank will be evaluated for CRA
compliance using the streamlined procedures for a small bank/three-part,
performance-based test/strategic plan option. Under the 12 assessment factors
contained in the prior CRA regulations, the Bank received a "2" rating in
1995. The Dime Bank expects to receive a rating under the revised CRA
regulations which is consistent with its rating in 1995.
Concentration
-------------
The Company and the Bank are not dependent for deposits to a
single customer or to a small group of customers the loss of any one or more
of which would have a materially adverse effect on the financial condition of
the Company or the Bank.
page 15
<PAGE>
Item 2. Description of Property
The Company does not own or lease any property except through the
Bank.
The Bank has a main office located in Honesdale, Pennsylvania, and
three branch offices located in Hawley, Damascus and Greentown, Pennsylvania.
The Bank owns the Honesdale and Hawley locations. The Damascus location is a
leased facility with a twenty (20) year term providing for annual payments
of $48,179 for the entire lease period. The Greentown location is leased with
a five (5) year term and two additional five (5) year options for renewal.
The
lease amount is currently $22,600 annually with that rate fixed until December
1998 at which time an adjustment will be made annually based upon increases in
the Consumer Price Index.
It is management's opinion that the facilities currently utilized
are suitable and adequate for current and immediate future purposes.
Item 3. Legal Proceedings
General
-------
The nature of the Company's and the Bank's business generates a
certain amount of litigation involving matters arising in the ordinary course
of business. However, in the opinion of management of the Company and the
Bank, there are no proceedings pending to which the Company and the Bank is a
party or to which their property is subject, which, if determined adversely to
the Company and the Bank, would be material in relation to the Company's and
the Bank's undivided profits or financial condition, nor are there any
proceedings pending other than ordinary routine litigation incident to the
business of the Company and the Bank. In addition, no material proceedings
are pending or are known to be threatened or contemplated against the Company
and the Bank by government authorities or others.
Environmental Issues
--------------------
There are several federal and state statutes that govern the
obligations of financial institutions with respect to environmental issues.
Besides being responsible under such statutes for its own conduct, a bank also
may be held liable under certain circumstances for actions of borrowers or
other third parties on properties that collateralize loans held by the bank.
Such potential liability may far exceed the original amount of the loan made
by the bank. Currently, the Bank is not a party to any pending legal
proceedings under any environmental statue nor is the Bank aware of any
circumstances that may give rise to liability of the Bank under any such
statute.
page 16
<PAGE>
Part II
Item 5. Market for the Common Equity and Related Stockholder Matters
The caption "Market Prices of Stock/Dividends Declared" contained
in the Company's Annual Report (at page 14 ) filed as Exhibit 13 hereto is
incorporated in its entirety by reference under this Item 5.
Cash available for dividend distributions to shareholders of the
Company may come initially from dividends paid by the Bank to the Company.
Therefore, the restrictions on the Bank's dividend payments are directly
applicable to the Company. The Federal Deposit Insurance Act generally
prohibits all payments of dividends by any bank which is in default on any
assessment to the FDIC or which would be deemed by the FDIC to be an unsafe
and unsound practice. Presently, the Bank is not in default in any assessment
to the FDIC.
The Pennsylvania Banking Code of 1965 (the "Code") provides that
cash dividends may be declared and paid only out of accumulated net earnings
and that, prior to the declaration of any dividend, if the surplus fund (as
defined in the Code) of the Bank is less than the amount of its common
capital, the Bank shall, until the surplus is equal to such an amount,
transfer to the surplus an amount which is at least 10% of the net earnings of
the Bank for the period since the end of the last fiscal year or for any
shorter period since the declaration of a dividend. If the surplus of the
Bank is less than 50% of the amount of capital, no dividend may be declared or
paid without the prior approval of the Department until such surplus is equal
to 50% of the Bank's capital.
As of December 31, 1996, there were $11,086,174 accumulated net
earnings available at the Bank that could be paid as a dividend to the Company
under current Pennsylvania law.
Dividend Restrictions on the Company
------------------------------------
Under the Pennsylvania Business Corporation Law of 1988, as
amended (the "BCL"), the Company may not pay a dividend if, after giving
effect thereto, either (a) the Company would be unable to pay its debts as
they become due in the usual course of business or (b) 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 generally accepted accounting principles; (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.
Item 6. Management's Discussion and Analysis or Plan of Operation
The caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the Company's Annual Report
(at page 6 ) filed at Exhibit 13 hereto is incorporated in its entirety by
reference under this Item 6.
page 17
<PAGE>
Nonperforming Loans and Nonperforming Assets
Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by Statement No. 118, was
adopted by the Company effective January 1, 1995. This statement requires
recognition of impairment of a loan when it is probable that principal and
interest are not collectible in accordance with the terms of the loan
agreement. Measurement of impairment is based upon the present value of
expected future cash flows discounted at the loan's effective interest rate,
or as a practical expedient, at the loan's market value or the fair value of
the collateral, if known. At December 31, 1996 and 1995, the Company had
impaired loans of $1,122,196 and $863,272, respectively with related allowance
for loan loss of approximately $173,548 and$29,000, respectively. There were
no impaired loans without a related allowance for loan losses. For the year
ended December 31, 1996 and 1995, average impaired loans were $1,128,161 and
$868,000, respectively.
page 18
<PAGE>
The following table identifies nonperforming loans including
nonaccrual loans and past due loans which were contractually past due 90 days
or more as to interest or principal payments. Renegotiated loans are those
which terms have been renegotiated to provide a reduction or deferral of
principal or interest as a result of the deteriorating position of the
borrower.
December 31,
1996 1995
---------- ----------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans $ 1,348 $ 802
Commercial 202 43
Consumer 272 251
---------- ----------
Total 1,822 1,096
---------- ----------
Accruing loans which are contractually past due 90 days or more:
Mortgage loans 692 112
Commercial 34 339
Consumer 108 12
---------- ----------
Total 834 463
---------- ----------
Renegotiated loans - -
Total nonperforming loans 2,656 1,559
Other real estate owned 461 389
Nonaccrual security - 151
---------- ----------
Total nonperforming assets $ 3,117 $ 2,099
========== ==========
Nonperforming loans as a percent of total loans 2.66% 1.74%
Nonperforming assets as a percent of assets 2.22% 1.70%
Amount of interest lost on nonperforming loans 151 83
The accrual of interest is generally discontinued when in the opinion of
management reasonable doubt exists as to the collectability of additional
interest. Loans are returned to accrual status when (a) none of the principal
and interest is due and unpaid and repayment of the remaining contractual
principal and interest is expected; or (b) when it otherwise becomes well
secured and in the process of collection.
Any loans which have been classified for regulatory purposes as loss,
doubtful, substandard or special mention that have not been disclosed under
Item III of Industry Guide 3 do not (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact
future operating results, liquidity, or capital resources, or (ii) represent
material credits about which management is aware of any information which
causes them to have serious doubts as to the ability of borrowers to comply
with the loan repayment terms as of December 31, 1996.
page 19
<PAGE>
Summary of Loan Loss Experience
The following table presents an analysis of the reserve for loan losses for
the two years ended December 31, 1996:
December 31,
1996 1995
---------- ----------
(Dollars in thousands)
Loans outstanding at end of period $ 100,013 $ 89,656
========== ==========
Average loans outstanding $ 93,430 $ 85,021
========== ==========
Reserve for possible losses:
Balance, beginning of the period $ 1,248 $ 1,133
Loans charged off:
Commercial 181 196
Real estate 175 61
Consumer 158 71
---------- ----------
Total loans charged off 514 328
---------- ----------
Recoveries:
Commercial 12 47
Real estate 36 -
Consumer 35 14
---------- ----------
Total recoveries 83 61
---------- ----------
Net loans charged off 431 267
---------- ----------
Provisions charged to expense 549 382
---------- ----------
Balance, end of period $ 1,366 $ 1,248
========== ==========
Ratios:
Net charge offs as a percent of average
loans outstanding 0.46% 0.31%
Reserve for loan losses as a percent of
average loans outstanding 1.46% 1.47%
page 20
<PAGE>
A portion of the allowance is specifically allocated to individual loans or
group of loans. As of December 31, 1996 the allowance for loan losses is
allocated as follows:
Amount of Percent of
allowance for loans in each
loan loss category to
allocated total loans
--------- ---------
(Dollars in thousands)
Commercial, financial and agricultural $ 179 14.2%
Real estate - construction 4 0.7%
Real estate - mortgage 890 68.4%
Installment loans to individuals 272 16.7%
Unallocated 21 -
--------- ---------
$ 1,366 100.0%
========= =========
Management adjusts the allowance for loan losses by provisions charged to
current earnings for estimated losses that may exist in the loan portfolio.
Management continually monitors the loan portfolio to determine an appropriate
level for the allowance for loan losses and has implemented an internal loan
review process which includes reviewing significant loans quarterly and
nonperforming loans on a continuous basis. Potential loss estimates are made
for each loan reviewed. Additionally, based upon prior history, management
also allocates specific reserves to smaller balance loans which are not
subject to individual review.
Management believes the allowance for loan losses is currently maintained at
an appropriate level based upon the known risk within the loan portfolio,
historical analysis of loan losses, current economic conditions and trends
within the financial institutions industry.
page 21
<PAGE>
Loan Maturity Schedule
Following is a maturity schedule of all accruing loans at December 31, 1996:
Due 1 year Due 1-5 Due after 5
or less years years
---------- --------- ---------
Fixed rate:
Commercial $ 797 $ 3,859 $ 485
Real estate 588 2,929 8,285
Other 937 12,815 1,189
---------- --------- ---------
Total fixed rate loans $ 2,322 $ 19,603 $ 9,959
========== ========= =========
Reprice Reprice
within 1 year within 1-5
years
-------- --------
Variable rate:
Commercial $ 10,243 $ -
Real estate 51,918 4,645
Other 1,300 71
-------- --------
Total variable rate loans $ 63,461 $ 4,716
======== ========
page 22
<PAGE>
Investment Portfolio
The following table sets forth the carrying value of the Company's investment
securities portfolio at the date indicated. At December 31, 1996 the market
value of the Company's held to maturity investment securities was $14,907,048.
Available for Sale 1996 1995
- ------------------ -------- --------
(Dollars in thousands)
U. S. Treasury securities $ 2,999 $ 6,024
U. S. Government agency securities 2,848 3,525
Obligations of states and political subdivisions - 151
Mortgage-backed securities 507 903
Commercial paper 6,501 -
Equity securities 860 850
-------- --------
Total $ 13,715 $ 11,453
======== ========
Held to Maturity 1996 1995
- ---------------- -------- --------
Obligations of states and political subdivisions $ 5,951 $ 6,404
Corporate securities 8,841 2,863
-------- --------
Total $ 14,792 $ 9,267
======== ========
There were no securities held for any issuer that were greater than ten
percent of stockholders' equity as of December 31, 1996.
Proceeds from the sale of investment securities available for sale were
$354,248 in 1996. The Company realized gross gains of $59,257 for the year
ended December 31, 1996. There were no sales of investment securities during
1995.
page 23
<PAGE>
INVESTMENT MATURITY
Investment Portfolio Maturities
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's Available
for Sale investment securities portfolio at December 31, 1996.
<TABLE>
<CAPTION>
One year One to Five to After ten Total
or less five years ten years years Investment Securities
-------------------------------------------------------------------------------------------
Available for Sale
- ------------------
Average Average Average Average Average
Carrying yield Carrying yield Carrying yield Carrying yield Carrying yield
Value (1) Value (1) Value (1) Value (1) Value (1)
--------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 2,006 5.47% $ 993 6.15% $ - - $ - - $ 2,999 5.69%
U.S. Government Agency
Securities - - 2,144 6.47% 704 7.85% - - 2,848 6.81%
Mortgage-backed securities 507 4.73% - - - - - - 507 4.73%
Commercial Paper 6,501 5.68% - - - - - - 6,501 5.68%
Equity securities - - - - - - 860 0 860 6.29%
--------------------------------------------------------------------------------------------
Total $ 9,014 5.58% $ 3,137 6.37% $ 704 7.85% $ 860 0 $13,715 5.92%
============================================================================================
</TABLE>
[FN]
(1) Weighted average yields have been computed on a taxable equivalent
basis assuming a federal income tax rate of 34%
page 24
<PAGE>
INVESTMENT MATURITY
Investment Portfolio Maturities
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's Held to
Maturity investment securities portfolio at December 31, 1996.
<TABLE>
<CAPTION>
One year One to Five to After ten Total
or less five years ten years years Investment Securities
------------------------------------------------------------------------------------------------------
Held to Maturity
- ----------------
Average Average Average Average Average
Carrying yield Carrying yield Carrying yield Carrying yield Carrying yield Market
Value (1) Value (1) Value (1) Value (1) Value (1) Value
------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of states $ 3,638 6.53% $ 1,152 7.91% $ 1,061 8.85% $ 100 12.50% $ 5,951 7.30% $ 6,042
political subdivisions
Other securities 8,240 6.04% 602 7.17% - - - - 8,842 6.12% 8,865
------- ----- ------- ----- ------- ----- -------- ------ ------- ----- -------
Total $11,878 6.19% $ 1,754 7.66% $ 1,061 8.85% $ 100 12.50% $14,793 6.59% $14,907
=====================================================================================================
</TABLE>
[FN]
(1) Weighted average yields have been computed on a taxable equivalent
basis assuming a federal income tax rate of 34%
page 25
<PAGE>
Inflation and Changing Prices
Management is aware of the impact inflation has on interest rates and,
therefore, the impact it can have on the Company's performance. The ability
of a financial institution to cope with inflation can be determined by
analysis and monitoring of its asset and liability structure. The Company
monitors its asset and liability position with particular emphasis on the mix
of interest rate sensitive assets and liabilities in order to reduce the
effect of inflation upon its performance. However, the asset and liability
structure of a financial institution is substantially different from that of
industrial corporations in that virtually all assets and liabilities are
monetary in nature, meaning that they have been or will be converted into a
fixed number of dollars regardless of changes in prices. Examples of monetary
items include cash, loans and deposits. Nonmonetary items are those assets
and liabilities which do not gain or lose purchasing power solely as a result
of general price level changes. Examples of nonmonetary items are premises
and equipment.
Inflation can have a more direct impact on categories of noninterest expenses
such as salaries and wages, supplies and employee benefit costs. These
expenses normally fluctuate more in line with changes in the general price
level and are very closely monitored by Management for both the effects of
inflation and increases related to such items as staffing levels, usages of
supplies and occupancy costs.
Regulatory Matters
Management is not aware of any known trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on the Company's
liquidity, capital resources or results of operations. Management is also not
aware of any current recommendations by regulatory authorities which, if they
were to be implemented, would have a material effect on the Company's
liquidity, capital resources or results of operations.
Item 7. Financial Statements
The Company's Consolidated Financial Statements and notes thereto
contained in the Annual Report (beginning at page 16) filed as Exhibit 13
hereto are incorporated in their entirety by reference under this Item 7.
page 26
<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The captions "Information As To Nominees, Directors and Executive
Officers," "Principal Officers of the Company," "Principal Officers of the
Bank" and "Section 16(a) Beneficial Ownership Compliance" contained in the
Company's Proxy Statement (at pages 5 & 6,10,10 and 4, respectively) filed at
Exhibit 99A hereto is incorporated in their entirety by reference under this
Item 9.
Item 10. Executive Compensation
The captions "Executive Compensation" and "Directors Compensation"
contained in the Company's Proxy Statement (at pages 6 & 8) filed as
Exhibit 99A hereto is incorporated in its entirety by reference under this
Item 10.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The caption "Principal Beneficial Owners of the Company's Stock"
contained in the Company's Proxy Statement (at pages 2 & 3) filed as Exhibit
99A hereto is incorporated in its entirety by reference under this Item 11.
Item 12. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions" contained
in the Company's Proxy Statement (at page 9) filed as Exhibit 99A hereto is
incorporated in its entirety by reference under this Item 12.
page 27
<PAGE>
Item13. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-B:
Exhibit Number Referred to
Item 601 of Regulation S-B Description of Exhibit
- -------------------------- ----------------------
2 None.
3A Articles of Incorporation of the Company at
Exhibit 3A to Form S-4 (33-58936), filed on
February 26, 1993, and hereby incorporated
by reference.
3B By-laws of the Company at Exhibit 3B to
Form S-4 (33-58936), filed on February 26,
1993, and hereby incorporated by reference.
4 None.
9 None.
10 None.
11 None.
13 Annual Report to Shareholders for Fiscal
Year Ended December 31, 1996.
16 None.
18 None.
21 List of Subsidiaries of the Company
22 None.
23 None.
24 None.
27 Financial Data Schedule.
28 None.
99A Proxy Statement, Notice of Annual Meeting
and Form of Proxy for the Annual Meeting of
Shareholders to be held April 24, 1997,
and hereby incorporated by reference.
(b) Reports on Form 8-K.
The Company has filed no reports on Form 8-K during the last
quarter of the fiscal year ended December 31, 1996.
page 28
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIMECO, INC.
(Issuer)
By:/s/ Joseph J. Murray
--------------------------------
Joseph J. Murray
President
Date: March 26, 1997
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By:/s/ David M Boyd
--------------------------------
David M. Boyd
Vice President and Director
Date: March 26, 1997
By:/s/ Maureen H. Beilman
--------------------------------
Maureen H. Beilman
Treasurer
(Principal Financial and
Accounting Officer)
Date: March 26, 1997
By:/s/ John S. Reisendahl
--------------------------------
John S. Kiesendahl
Director
Date: March 26, 1997
page 29
<PAGE>
By:/s/ Joseph J. Murray
--------------------------------
Joseph J. Murray
President, Chief Executive
Officer and Director
(Chief Executive Officer)
Date: March 26, 1997
By:/s/ Thomas A. Peifer
--------------------------------
Thomas A. Peifer
Director
Date: March 26, 1997
By:/s/ William E. Schwarz
--------------------------------
William E. Schwarz
Chairman of the Board
and Director
Date: March 26, 1997
By:/s/ Henry M. Skier
--------------------------------
Henry M. Skier
Director
Date: March 26, 1997
By:/s/ Gerard J. Weniger
--------------------------------
Gerald J. Weniger
Secretary and Director
Date: March 26, 1997
page 30
<PAGE>
INDEX TO EXHIBITS
Item Number Description Page
13 Annual Report to Shareholders for
Fiscal Year Ended December 31, 1996. . . . . . . . . 32
21 List of Subsidiaries of the
Company. . . . . . . . . . . . . . . . . . . . . . . 62
27 Financial Data Schedule. . . . . . . . . . . . . . . 63
page 31
<PAGE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
- ----------------------------------
<TABLE>
<CAPTION>
For the twelve months ended
December 31,
% increase
(amounts in thousands, except per share) 1996 1995 (decrease)
------- ------- -----------
<S> <C> <C> <C>
Performance
- ------------
Net income $ 1,612 $ 1,567 2.9%
Return on average assets 1.22% 1.31% (6.9%)
Return on average equity 12.92% 14.37% (10.1%)
Shareholders' Value (per share)
- --------------------------------
Net income $ 2.24 $ 2.24 0.0%
Dividends $ 0.60 $ 0.54 11.1%
Book value $ 18.21 $ 16.58 9.8%
Market value $ 23.75 $ 17.38 36.7%
Market value/book value ratio 130.41% 104.82% 24.4%
Price/earnings multiple 10.6 X 7.8 X
Dividend yield 2.53% 3.11% (18.8%)
Safety and Soundness
- ---------------------
Shareholders' equity/asset ratio 9.37% 9.41% (0.4%)
Dividend payout ratio 26.79% 24.11% 11.1%
Nonperforming assets/total assets 2.22% 1.70% 30.6%
Allowance for loan loss as a % of loans 1.36% 1.39% (2.2%)
Net charge-offs/average loans 0.46% 0.31% 48.4%
Allowance for loan loss/nonaccrual loans 74.98% 113.85% (34.1%)
Allowance for loan loss/non-performing loans 43.90% 63.42% (30.8%)
Risk-based capital 13.74% 15.23% (11.0%)
Balance Sheet Highlights at December 31,
- -----------------------------------------
Total assets $ 140,284 $ 124,808 12.4%
Investment securities $ 28,507 $ 20,721 37.6%
Loans, net unearned discount $ 100,013 $ 89,656 11.6%
Allowance for loan losses $ 1,366 $ 1,248 9.5%
Deposits $ 126,003 $ 109,878 14.7%
Stockholders' equity $ 13,147 $ 11,743 12.0%
Trust assets under management $ 10,750 $ 8,978 19.7%
</TABLE>
1
page 32
<PAGE>
1996 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
- ------------------------------------------
Total Assets
Thousands
(BAR GRAPH IN THIS AREA IN LEFT SIDE OF MARGIN ON PAGE)
$140,284 $124,808 $115,080 $110,662 $106,367
- ------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------
Deposits
Thousands
(BAR GRAPH IN THIS AREA IN RIGHT SIDE OF MARGIN OF PAGE)
$126,003 $109,878 $102,571 $98,119 $93,747
- -------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------
This consolidated review and analysis of Dimeco, Inc. (the Company) is
intended to assist the reader in evaluating the performance of the Company for
the years ended December 31, 1996 and 1995. This information should be read
in conjunction with the Company's consolidated financial statements and
accompanying notes to the financial statements.
Dimeco, Inc. was formed in 1992 in order to create a one-bank holding company
to acquire 100% of the stock of The Dime Bank. The Company completed this
transaction on June 1, 1993. The Company and its subsidiary, The Dime Bank
(the Bank) derive their income from the operation of a commercial bank,
including earning interest on loans and investment securities. The Bank has
interest expense to customers for deposits and others for short-term
borrowing. Banking services are offered to our customers at four locations,
in Honesdale, Hawley, Damascus and Greentown, Pennsylvania.
Statement of Condition
- ----------------------
Total assets as of December 31, 1996 were $140,284,000 compared to
$124,808,000 at December 31, 1995. This represents growth of $15,476,000 or
12.4% during the year ended December 31, 1996. The main source of growth in
assets is an increase of $10,357,000 in total loans. Investment securities
increased $7,786,000 while cash and cash equivalents decreased $2,608,000.
The decrease in cash and cash equivalents of $2,608,000 or 28.6% is due mainly
to the decrease in federal funds sold of $4,725,000. During 1996 the Company
took advantage of slight increases in interest rates on short-term securities
and invested in this type of investment as the opportunity arose. In
addition, during December 1996 the Company purchased $6,479,000 of short-term
commercial paper with rates in excess of those offered on federal funds sold
at the time. Included in interest-bearing deposits in other banks is a
$1,000,000, 30 day certificate of deposit bearing a variable interest rate in
excess of federal funds sold. Due to the higher level of deposits, it is
necessary to maintain a higher level of liquidity in the form of cash and due
from banks.
Investment securities available for sale increased $2,261,000 or 19.7% during
1996. The bulk of the increase is the aforementioned $6,479,000 investment in
commercial paper. Funds received from maturities of U.S. Treasury securities
and increases in deposits were used to purchase these higher yielding type
investments.
The investment security portfolio increased $5,525,000 or 59.6% during 1996
mainly due to purchases of corporate bonds with maturities of less than two
years. With maturities in nearer term bonds, management will be able to
augment interest income as compared to interest that would be earned in
federal funds sold while maintaining flexibility to reinvest if interest rates
should rise.
Loan activity was brisk during 1996 as evidenced by growth of $10,357,000 or
11.6%. Although nearly each category of loans increased in size, the largest
gains were in two specific loan types. Consumer
2
page 33
<PAGE>
loans had the largest increase amounting to $3,595,000 or 28.5% which is
attributable to special promotions in February to assist area residents who
incurred snow and/or flood damage during the winter and a Fall promotion of
automobile financing. Residential real estate loans showed an expansion of
$2,131,000 or 5.4% over 1995 levels. This increase is the result of an
improving real estate market, somewhat more aggressive interest rate pricing
and continued participation in local real estate and builders organizations.
Management believes that loan growth in general has been strong due to a
number of factors including a slightly improved local economy, increased
marketing efforts, referrals from existing clients and the introduction of
additional loan programs along with expansion of market area generated by new
offices in Damascus and Greentown.
Deposits increased $16,124,000 or 14.7% during 1996. Growth was seen mainly
in time deposits and interest-bearing checking accounts. Over $2,000,000 is
attributable to new deposits in the Greentown branch and $4,600,000 of new
deposits in the Damascus office. Management believes that competitive rates
offered on interest-bearing deposits account for the remaining deposit growth.
Securities sold under agreement to repurchase have been eliminated with the
maturity of the last account in June 1996. With the lowering of FDIC
insurance premiums in 1996, we were able to offer our customers better rates
on large certificates of deposit without incurring higher FDIC premium costs.
Liquidity
- ---------
The Company's liquidity is reflected in its capacity to provide funds to meet
possible outflows of deposits, accommodate loan demand, maintain reserve
requirements, and to take advantage of interest rate market opportunities.
Liquidity needs can be met in two ways, either by increasing deposits or by
decreasing assets.
Management monitors liquidity regularly in order to properly match maturities
of assets and liabilities. An important aspect of liquidity is the maintenance
of sufficient net assets that mature within one year. The Company utilizes
cash and due from banks, federal funds sold, short-term investments, and
mortgage loans held for sale to meet this requirement. These assets totaled
$27,104,000 at December 31, 1996 compared to $23,488,000 at December 31, 1995.
At December 31, 1995, securities sold under agreements to repurchase are
deducted from this amount to net $21,438,000. Increases in short-term
securities, as discussed above, account for higher liquidity at December 31,
1996 than the previous year. Internal measurements of liquidity show
favorable ratios for both years.
Managing the liability segment for additional liquidity, the Company can
attract deposits by continuing to offer competitive interest rates and by
offering a greater array of products to our customers. We have increased our
deposit collecting ability by the opening of new branches in Damascus, PA in
1995 and in Greentown, PA in 1996.
In case of any additional need for cash, the Bank has available to it a
Federal Home Loan Bank "Flexline" of approximately $3,400,000. Although this
line of credit is not intended to be a mainstay for our liquidity needs it
does supplement our ability to generate additional cash.
Long-term liquidity is maintained through staggered maturities in the
investment portfolio, paydowns of existing loans, and additional deposit
growth. Membership in the Federal Home Loan Bank also enables the Bank to use
term financing for any longer term requirements if deemed necessary.
Interest Rate Sensitivity
- -------------------------
Interest rate sensitivity is the relationship between market interest rates
and earnings volatility due to the repricing characteristics of assets and
liabilities. The Company's net interest income is affected by changes in the
level of market interest rates. In order to maintain consistent earnings
performance, management seeks to control, to the extent possible, the
repricing characteristics of its assets and liabilities.
3
page 34
<PAGE>
The ratio between assets and liabilities repricing in specific time intervals
is referred to as interest rate sensitivity gap. Interest rate sensitivity
gaps can be managed to take advantage of the slope of the yield curve as well
as forecasted changes in the level of interest rate changes.
A major objective when managing the rate sensitivity of assets and liabilities
is to stabilize net interest income. Senior management, acting as the
Asset/Liability Committee, assumes responsibility for interest rate risk
management. This committee reports to the Board of Directors at least
quarterly. We employ various statistical analyses to assist in making
decisions regarding interest rates. Management uses the resources of an
outside vendor to assist in analysis of interest rate risk given hypothetical
shifts in interest rates. The models at December 31, 1996 and 1995 indicate
that the level of net interest income at risk due to varying interest rate
movements of plus or minus 200 basis points is within internal risk tolerance
guidelines that restrict the impact on net interest income.
The following table reflects the Company's consolidated gap position at
December 31, 1996:
STATEMENT OF INTEREST SENSITIVITY GAP
- -------------------------------------
(amounts in thousands)
<TABLE>
<CAPTION>
90 days > 90 days 1 - 5
or less but < 1 year years > 5 years Total
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold $ 1,195 $ - $ - $ - $ 1,195
Interest-bearing deposits 3,718 - - - 3,718
Mortgage loans held for sale 207 - - - 207
Investment securities
available-for-sale (1) 8,011 1,003 3,137 1,564 13,715
Investment securities
held-to-maturity (1) 2,034 9,843 1,754 1,161 14,792
Loans (1) 12,539 53,206 24,319 9,959 100,023
--------- --------- --------- ---------- ----------
Rate sensitive assets $ 27,704 $ 64,052 $ 29,210 $ 12,684 $ 133,650
========= ========= ========= ========= ==========
Liabilities:
Interest-bearing deposits:
Interest-bearing demand (2) $ 19,589 $ - $ - $ - $ 19,589
Money market 4,071 - - - 4,071
Savings (3) 20,712 12,139 - - 32,851
Certificates of deposit 16,825 24,485 15,421 - 56,731
--------- --------- --------- ---------- ----------
Rate sensitive liabilities $ 61,197 $ 36,624 $ 15,421 $ - $ 113,242
========= ========= ========= ========= ==========
Interest sensitivity gap $ (33,493) $ 27,428 $ 13,789 $ 12,684 $ 20,408
Cumulative gap $ (33,493) $ (6,065) $ 7,724 $ 20,408
Cumulative gap to total assets (23.88)% (4.32)% 5.51% 14.55%
</TABLE>
[FN]
(1) Investments and loans are included in the earlier of the period in which
interest rates are next scheduled to adjust or in which they are due. No
adjustment has been made for scheduled repayments or for anticipated
prepayments.
(2) Interest-bearing demand deposits are recorded as immediately repricing
and/or maturing. Historically, these liabilities have been shown to have a
greater effective maturity based on retention experience of such deposits in
changing rate environments. Management has consistently used this time period
in their analysis in order to make the information comparable.
(3) Passbook savings accounts have been included in the >90 days but < one
year period even though they have also been shown to have a greater effective
maturity in changing rate environments. The placement in this category is
done consistently to maintain comparability.
4
page 35
<PAGE>
Stockholders' Equity
Thousands
(BAR GRAPH IN THIS AREA IN RIGHT MARGIN OF PAGE)
$13,147 $11,743 $10,011 $9,060 $7,698
- ------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------
Certain shortcomings are inherent in the method of analysis presented above.
Although certain assets and liabilities may have similar maturities or periods
of repricing, they react in different ways to changes in market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types of assets and liabilities may lag behind changes in market
interest rates. Certain assets, such as adjustable rate mortgages, have
features that restrict changes in interest rates on a short-term basis and
over the life of the asset. In the event of a change in interest rates,
prepayment and early withdrawal levels may deviate significantly from those
assumed in calculating the table.
Capital Resources
- -----------------
Total Stockholders' Equity increased $1,404,000 or 12.0% during 1996 as
compared to an increase of $1,732,000 or 17.3% in 1995. The main source of
changes in both years came from increased earnings which are discussed in the
Results of Operations section. Net income was $1,612,000 in 1996 and
$1,567,000 in 1995. An additional source of equity each year is the proceeds
from the Dividend Reinvestment and Stock Purchase Plan which added $262,000 in
1996 and $334,000 in 1995. The stock purchase portion of the plan was
suspended after the first quarter of 1996 because of the strong capital
position of the Company. It is the intention of the Board of Directors to use
this tool for increasing capital from time to time as warranted by the
Company's capital position. Dividends paid per share have increased $.06 from
1995 to 1996 accounting for an a decrease in retained earnings of $432,000 in
1996 and $378,000 in 1995. In 1995 an additional source of growth came from
increased market values of investments available for sale. The market value
of these assets increased $318,000 in 1995, which, net of income taxes, added
$210,000 to Stockholders' Equity. In 1996 the unrealized loss on securities
increased $38,000 thereby decreasing Stockholders' Equity by that amount.
The Company is required by regulatory agencies to maintain certain ratios of
capital adequacy. As per Note number 12 to the consolidated financial
statements, the Company far exceeds all regulatory requirements.
Results of Operation
- --------------------
Net Interest Income
- -------------------
This discussion of net interest income should be read in conjunction with the
tables "Distribution of Asset, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential."
Net interest income increased $427,000 or 7.7% from 1995 to 1996. Referring
to the table, interest income increased $759,000 or 7.8% entirely from
increased loan volume. Interest yields received on the loan portfolio
decreased from 9.46% to 9.25% mainly due to the lower prime rate on which a
large portion of loan rates are based. Interest yields on all earning assets
decreased by .20% based upon lower interest rates in the economy. Interest
rates paid on deposits also decreased .08% from 1995 to 1996. The increase of
$332,000 in interest expense is due mainly to the larger volume of deposits
with the reduction of interest rate in interest-bearing checking and savings
accounts offsetting increased volume expense.
Net interest income, on a tax-equivalent basis, increased $711,000 or 14.7%
from 1994 to 1995 with both interest yield and the increased size of the
portfolio responsible for the change. Interest yield on all interest
earning assets increased 90 basis points, from 7.68% to 8.58% from 1994 to
1995. Interest expense also increased, $807,000 or 24.4% for the year with
increased rates paid on a larger portfolio of time deposits being the most
significant item. The average interest paid on interest-bearing liabilities
increased from 3.60% in 1994 to 4.28% in 1995. The interest spread increased
22 basis points from 4.08% in 1994 to 4.30% in 1995.
Management monitors interest rate spread and interest sensitivity regularly
and therefore has the ability to make decisions in a timely fashion to
maintain interest spread.
5
page 36
<PAGE>
Net Interest Income
Thousands
(BAR GRAPH IN THIS AREA IN LEFT MARGIN OF PAGE)
$ 5,820 $ 5,375 $ 4,699 $ 4,194 $ 3,876
- ------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------
The Company has maintained a loan-to-deposit ratio of between 75% and 82% over
the past few years. Loan demand from qualified borrowers continues to be
strong, and with stringent underwriting standards in place, management expects
to continue to maintain this ratio.
Provision for Loan Loss
- -----------------------
The provision for loan loss increased $167,000 or 43.7% from 1995 to 1996. In
1995, this expense increased $220,000 or 135.8% from 1994. During 1996, in
light of stricter internal policies regarding the timing of charge-off status
for loans, management took the initiative to charge off $514,000 of loans that
did not meet our credit criteria for loans. This increased the amount of net
charge-offs in 1996 to $431,000 compared to $267,000 in 1995. This fact,
coupled with increased loan volume, caused management to increase the
provision for loan losses in order to maintain loan loss ratios in line with
our internal evaluation of credit risk in the loan portfolio. Industry
average for banks of similar asset size, according to the Uniform Bank
Performance Report, of the ratio of the allowance for loan loss to total loans
was 1.34%. The Company's ratio at December 31, 1996 was 1.36%. Our analysis
of the allowance for loan loss reveals that the allowance is adequate.
Improved asset quality and more conservative underwriting guidelines account
for the decrease in acceptable ratios in the analysis process. The increased
expense for 1995 is a product of our attempt to maintain an adequate allowance
for loan loss while recognizing loan losses on a timely basis.
Noninterest Income
- ------------------
Service charges on deposit accounts increased $30,000 or 16.3% from 1995 to
1996. This increase correlates to increases in deposits during 1996 of 14.7%
and 7.1% in 1995. Service charge rates have not been significantly increased
in the past few years in order to keep our competitive advantage against
regional banks. Their contribution to income has been moderate.
Gains on loans held for sale decreased in 1996 to $16,000 versus $53,000 in
1995 and a loss of $10,000 in 1994. In light of the accounting for these
assets at the lower of cost or market value, there has been a bit of
volatility in this particular income line item. During 1996 market values
decreased slightly accounting for the lower income in this category. In 1995
the market values bounced back from decreases in 1994. Management attempts to
keep these assets on our books for a minimal period of time to lessen the
price volatility but is cognizant of the potential for increased income with
the proper timing of sales in the portfolio.
In the second quarter of 1996, a municipal bond which had been in nonaccrual
status and had been adjusted to a lower market value was refunded and sold
realizing a gain of $52,000. In addition, a group of mortgage-backed
securities which had been significantly repaid was sold realizing a gain of
$7,000. Management has not taken the position of selling securities on a
regular basis and therefore there was no similar activity in 1995 or 1994.
Other income increased $44,000 or 10.8% from 1995 to 1996. No one singular
item was responsible for this increase although income recognized from
commissions on sales of life insurance in connection with loan originations
increased $14,000 or 35.4% from 1995 to 1996. During 1995 the single largest
increase was $46,000 in earnings on the cash surrender value of life
insurance in relation to the new policies purchased in 1995.
Noninterest Expense
- -------------------
Salaries and employee benefits increased $160,000 or 9.0% from 1995 to 1996.
Payroll expense increased $146,000 or 11.4% due to a combination of normal
salary increases of approximately 4%, increased staffing due to the branch
openings in August 1995 at Damascus and in October 1996 at Greentown and
overtime expenses associated with the conversion to Jack Henry Silverlake
software in May 1996. Employee benefits associated with the larger payroll
increased proportionally. Further, a decrease of $17,000 is associated with
an up-front cost of the salary continuation plan which was implemented in 1995
and therefore not
6
page 37
<PAGE>
Net Income
Thousands
(BAR GRAPH IN THIS AREA IN RIGHT MARGIN OF PAGE)
$ 1,612 $ 1,567 $ 1,300 $ 1,075 $ 827
- ------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------
matched in 1996. Salaries and employee benefits increased $238,000 or 15.4%
from 1994 to 1995. The opening of the new branch in Damascus, inception of
the new salary continuation plan for executive officers and increased profit-
sharing based on increased ROA were the main reasons for the increase.
Occupancy expenses increased $45,000 or 18.9% from 1995 to 1996 and $27,000 or
12.9% from 1994 to 1995. This increase is due to costs associated with the
new branch facilities in Damascus and Greentown, mainly attributable to lease
expense of $56,000 in 1996 and $20,000 in 1995.
Furniture and equipment expense increased $51,000 from 1995 to 1996 including
a full year of depreciation and maintenance on both the assets placed in
service in 1995 at the Damascus office and platform automation of banking
services in all locations. This is coupled with added 1996 depreciation and
maintenance on the new facility in Greentown and computer hardware essential
to the May 1996 software conversion. From 1994 to 1995 this expense increased
$54,000 due to costs associated with the opening of the new branch and the
platform automation system that was placed in service during 1995.
Deposit insurance premiums decreased greatly for 1996 and for the second and
third quarter of 1995 based upon the full recapitalization of the Bank
Insurance Fund at the end of May 1995. The minimal amount of insurance
premiums charged to banks in 1996 is a decrease of $117,000 paid in 1995 and a
decrease of $221,000 compared to the 1994 expense. During 1994 the BIF fund
was not fully capitalized and therefore the premium was significantly higher
than the $1,000 paid in 1996.
Expenses incurred from ownership of other real estate increased $24,000 or
35.1% from 1995 to 1996 due to losses incurred on sales of these properties.
Although market value was discounted when recording these assets in other real
estate owned, the Company has not been able to sell the properties in a timely
fashion at the recorded values. Management believes that it is better to take
a loss on the sale of the properties than to continue indefinitely to pay
expenses associated with ownership of the properties. In 1995 this expense
declined by $79,000 or 53.9% of the 1994 expense due to sales of commercial
properties during 1994 and 1995.
Other expense increased $145,000 from 1995 to 1996. The main items were: 1)
additional amortization of $32,000 on computer software connected with
platform automation in 1995 and the mainframe conversion in 1996, 2) $31,000
of unmatched expense in 1995 associated with the outsourcing in 1996 of the
internal audit function, 3) $22,000 more spent on advertising in connection
with the Bank's 90th anniversary and opening of the new office in Greentown
and 4) a $15,000 increase in postage expense due to increased postal rates and
a greater number of customers (and therefore statements to mail.) This
expense increased $99,000 from 1994 to 1995 with the main items being $29,000
in bank supplies and $14,000 in computer software depreciation. All other
increases in each year were general in nature and without any one other
significant item affecting the total increase.
Income taxes increased $22,000 or 3.2% from 1995 to 1996 and $88,000 or 14.9%
from 1994 to 1995 based upon increased income before taxes of $67,000 or 3.0%
in 1996 and $355,000 or 18.8% in 1995. The effective tax rate of 30.2% was
constant from 1995 to 1996 and compares similarly to an effective rate of
31.2% in 1994.
In summary, 1996 was another good year for Dimeco, Inc. with return on
average assets of 1.22% and return on average equity of 12.92%. These ratios
are comparable to industry averages of well run community banking
organizations both locally and nationally. As has been and continues to be
our philosophy, management attempts to show consistent growth in earnings from
year to year. We believe that we have the personnel and systems in place to
continue to perform in a manner that adds value to the local economy while
simultaneously contributing to shareholder value.
7
page 38
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential
- -------------------------------------------------------------
The following is an analysis of the average balance sheets and net interest
income for each of the three years ended December 31, 1996, 1995 and 1994:
(amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- ------------------------------ ----------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance(3) Expense Rate Balance(3) Expense Rate Balance(3) Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Total Loans (1)(4) $ 92,667 $ 8,568 9.25% $ 83,952 $ 7,940 9.46% $ 80,568 $ 6,717 8.34%
Investment securities:
Taxable 16,304 974 5.97% 16,758 971 5.79% 17,887 943 5.27%
Exempt from federal income tax(2) 6,323 482 7.62% 6,645 528 7.95% 4,974 430 8.65%
Interest-bearing deposits 2,063 23 1.11% 1,625 13 0.80% 1,323 9 0.68%
Federal funds sold and securities
purchased under agreements to resell 7,119 383 5.38% 3,768 219 5.81% 1,368 54 3.95%
--------- --------- -------- -------- -------- --------
Total interest-earning assets/
interest income 124,476 10,430 8.38% 112,748 9,671 8.58% 106,120 8,153 7.68%
--------- -------- -------
Cash and due from banks 1,262 1,082 1,222
Premises and equipment, net 2,963 2,794 2,637
Other assets, less allowance
for loan losses 3,445 2,920 2,607
--------- --------- ---------
Total assets $ 132,146 $ 119,544 $ 112,586
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings $ 31,183 $ 989 3.17% $ 28,127 $ 913 3.25% $ 29,985 $ 887 2.96%
Interest-bearing checking 20,413 514 2.52% 18,574 512 2.76% 17,828 423 2.37%
Time deposits 53,213 2,885 5.42% 47,772 2,588 5.42% 42,276 1,927 4.56%
Securities sold under agreements to
repurchase 1,003 59 5.88% 1,524 87 5.71% 1,465 56 3.82%
Federal Home Loan Bank advances 7 - - 236 15 6.36% 293 15 5.12%
--------- --------- -------- -------- -------- --------
Total interest-bearing liabilities/
interest expense 105,819 4,447 4.20% 96,233 4,115 4.28% 91,847 3,308 3.60%
-------- -------- --------
Noninterest-bearing deposits 12,697 11,319 10,509
Other liabilities 1,151 1,084 670
--------- --------- ---------
Total liabilities 119,667 108,636 103,026
Stockholders' Equity 12,479 10,908 9,560
--------- --------- --------
Total Liabilities and
Stockholders' Equity $ 132,146 $ 119,544 $ 112,586
========= ========= =========
Net interest income/interest spread $ 5,983 4.18% $ 5,556 4.30% $ 4,845 4.08%
========= ====== ========= ====== ========= ======
Margin Analysis:
Interest income/earning assets $ 10,430 8.38% $ 9,671 8.58% $ 8,153 7.68%
Interest expense/earning assets 4,447 3.57% 4,115 3.65% 3,308 3.12%
--------- ------ --------- ------ --------- ------
Net interest income/earning assets $ 5,983 4.81% $ 5,556 4.93% $ 4,845 4.57%
========= ====== ========= ====== ========= ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 117.63% 117.16% 115.54%
</TABLE>
[FN]
(1) Nonaccrual loans are not included
(2) Income on interest-earning assets is based on a taxable equivalent basis
using a federal income tax rate of 34%.
(3) Average balances are calculated using average daily balances
(4) Interest on loans includes fee income
8
page 39
<PAGE>
The volume and rate relationship of the Bank's interest-earning assets and
interest-bearing liabilities are determining factors of net interest income.
The following table reflects the significant sensitivity to changes in
interest income and interest expense of the Company. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (changes in
volume multiplied by old rate) and, (ii) changes in rat (changes in rate
multiplied by old volume).
VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST INCOME
- ------------------------------------------------------
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
---------------------------- ------------------------------
Total Caused by Total Caused by
(amounts in thousands) Variance Rate(1) Volume Variance Rate(1) Volume
---------------------------- -------------------------------
<S> <C> <C> <C> <c > <C> <C>
Interest income:
Loans (gross) $ 628 $ (196)$ 824 $ 1,223 $ 941 $ 282
Investment securities:
Taxable 3 29 (26) 28 87 (59)
Exempt from federal income tax (46) (20) (26) 98 (47) 145
Interest-bearing deposits 10 6 4 4 2 2
Federal funds sold and securities
purchased under agreements
to resell 164 (31) 195 165 70 95
-------- ------- -------- -------- -------- ----------
Total interest-earning assets 759 (212) 971 1,518 1,053 465
-------- ------- -------- -------- -------- ----------
Interest expense:
Savings 76 (23) 99 26 81 (55)
Interest-bearing checking 2 (49) 51 89 71 18
Time deposits 297 2 295 661 410 251
Securities sold under agreements
to repurchase (28) 2 (30) 31 29 2
Federal Home Loan Bank advances (15) - (15) - 3 (3)
-------- ------- -------- -------- -------- ----------
Total interest-bearing liabilities 332 (68) 400 807 594 213
-------- ------- -------- -------- -------- ----------
Net change in net interest income $ 427 $ (144)$ 571 $ 711 $ 459 $ 252
========= ========= ========= ========= ========= ===========
</TABLE>
[FN]
(1) Changes in interest income or expense not arising solely as a result of
volume or rate variances are allocated to rate variances due to the interest
sensitivity of assets and liabilities.
9
page 40
<PAGE>
Summary of Loan Loss Experience
- -------------------------------
Following is a summary of loans charged-off and recoveries to the allowance
for loan losses for the periods ended December 31, 1996 and 1995:
(amounts in thousands) 1996 1995
----------- -----------
Balance January 1, $ 1,248 $ 1,133
Charge-offs:
Commercial 181 188
Real Estate 175 61
Installment 158 79
----------- -----------
Total charge-offs 514 328
----------- -----------
Recoveries:
Commercial 12 46
Real Estate 36
Installment 35 15
----------- -----------
Total recoveries 83 61
----------- -----------
Net charge-offs 431 267
Additions charged to operations 549 382
----------- -----------
Balance December 31, $ 1,366 $ 1,248
============ ============
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.46% 0.31%
Allowance for Loan Loss as a
% of average loans outstanding 1.45% 1.47%
In determining the amount of loan loss expense to the current period,
management analyzes the loan portfolio using both a grading system based on
our internal review which assigns risk by category and a weighted
historical trend. We also review current delinquency reports, ratio trends
of the components of the allowance for loan losses as compared to industry
peers, local economic conditions and evaluations of the allowance which
have been completed during regular examinations by representatives of
regulatory agencies. The allowance is analyzed monthly by management
and reviewed at least quarterly with the Board of Directors.
Market Prices of Stock/Dividends Declared
- -----------------------------------------
The Company's stock is traded on the Over-the-Counter Bulletin Board using the
symbol "DIMC". The cusip number for the stock is 25432W 10 4.
The Company (and previously the Bank) have paid dividends for over 30 years.
It is the intention of the Company's Board of Directors to continue to pay
dividends in the future; however, further dividends must necessarily depend
upon earnings, financial condition, appropriate legal restrictions and other
relevant factors at the time that the Board considers dividend payments.
The table below reports the high and low bid prices and the dividends declared
per share for the periods indicated:
1996 1995
------------------------ ------------------------
Dividend Dividend
High Low Declared High Low Declared
------------------------ ------------------------
First Quarter $21.38 $19.00 $0.14 $14.88 $13.00 $0.12
Second Quarter $23.25 $19.75 $0.14 $17.00 $14.00 $0.13
Third Quarter $22.75 $21.13 $0.14 $17.00 $16.50 $0.14
Fourth Quarter $24.00 $22.13 $0.18 $18.38 $16.75 $0.15
This price information was obtained from a broker who is known to handle the
Company's stock transactions. Over-the counter stock quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not represent actual transactions.
As of December 31, 1996 there were approximately 657 holders of record of the
Company's stock.
10
page 41
<PAGE>
SUMMARY OF SELECTED FINANCIAL DATA
- ----------------------------------
(amounts in thousands, except per share)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Summary of operations
- ---------------------
Interest income $ 10,267 $ 9,491 $ 8,007 $ 7,587 $ 8,048
Interest expense $ 4,447 $ 4,115 $ 3,308 $ 3,392 $ 4,172
Net interest income $ 5,820 $ 5,375 $ 4,699 $ 4,194 $ 3,876
Provision for possible
loan losses $ 549 $ 382 $ 162 $ 345 $ 390
Net interest income after
provision for possible
loan losses $ 5,271 $ 4,993 $ 4,537 $ 3,849 $ 3,486
Other income $ 735 $ 645 $ 506 $ 474 $ 342
Other expenses $ 3,695 $ 3,394 $ 3,154 $ 3,139 $ 2,733
Income before income taxes and
cumulative effect of
accounting change $ 2,311 $ 2,244 $ 1,889 $ 1,184 $ 1,095
Income taxes $ 699 $ 677 $ 589 $ 345 $ 268
Income before cumulative effect
of accounting change $ 1,612 $ 1,567 $ 1,300 $ 839 $ 827
Cumulative effect of accounting
change for income taxes - - 236 -
Net Income $ 1,612 $ 1,567 $ 1,300 $ 1,075 $ 827
Per common share
- ----------------
Net income before cumulative
effect of accounting change $ 2.24 $ 2.24 $ 1.91 $ 1.26 $ 1.27
Cumulative effect of accounting
change for income taxes $ - $ - $ - $ 0.36 $ -
Net income $ 2.24 $ 2.24 $ 1.91 $ 1.62 $ 1.27
Cash dividends $ 0.60 $ 0.54 $ 0.43 $ 0.37 $ 0.30
Book value $ 18.21 $ 16.58 $ 14.60 $ 13.43 $ 12.08
Shares outstanding at year end $ 722 $ 708 $ 686 $ 674 $ 660
Balance sheet data - End of year
- --------------------------------
Total assets $ 140,284 $ 124,808 $ 115,080 $ 110,662 $ 106,367
Deposits $ 126,003 $ 109,878 $ 102,571 $ 98,119 $ 93,747
Loans, net $ 98,647 $ 88,409 $ 80,838 $ 73,642 $ 67,524
Loans held for sale $ 207 $ 465 $ 829 $ 4,371 $ 5,187
Investment securities available
for sale $ 13,715 $ 11,453 $ 11,236 $ - $ -
Investment securities $ 14,792 $ 9,267 $ 14,576 $ 20,993 $ 24,836
Shareholders' equity $ 13,147 $ 11,743 $ 10,011 $ 9,060 $ 7,698
Performance yardstick
- ---------------------
Return on average assets 1.22% 1.31% 1.15% 1.00% 0.81%
Return on average equity 12.92% 14.37% 13.60% 12.44% 10.91%
Dividend payout ratio 26.79% 24.11% 22.51% 22.84% 23.59%
Average equity to average
assets ratio 9.44% 9.12% 8.69% 8.02% 7.44%
</TABLE>
11
page 42
<PAGE>
CONSOLIDATED BALANCE SHEET
- --------------------------
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,600,524 $ 1,231,674
Interest-bearing deposits in other banks 3,718,168 1,970,017
Federal funds sold 1,195,000 5,920,000
-------------- --------------
Total cash and cash equivalents 6,513,692 9,121,691
Mortgage loans held for sale (market value
of $211,481 and $464,588) 206,813 464,588
Investment securities available for sale 13,714,782 11,453,419
Investment securities (market value of
$14,907,048 and $9,357,890) 14,792,495 9,267,390
Loans (net of unearned income of $1,473,603
and $2,150,429) 100,013,324 89,656,264
Less allowance for loan losses 1,366,006 1,247,629
-------------- --------------
Net loans 98,647,318 88,408,635
Premises and equipment 3,066,150 2,960,622
Other real estate 460,619 389,422
Accrued interest receivable 1,003,565 943,319
Other assets 1,878,770 1,799,179
-------------- --------------
TOTAL ASSETS $ 140,284,204 $ 124,808,265
============== ==============
LIABILITIES
Deposits:
Noninterest-bearing $ 12,760,278 $ 12,352,292
Interest-bearing 113,242,229 97,525,940
-------------- --------------
Total deposits 126,002,507 109,878,232
Short-term borrowings - 2,050,000
Accrued interest payable 521,229 568,413
Other liabilities 613,193 568,578
-------------- --------------
TOTAL LIABILITIES 127,136,929 113,065,223
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock, $.50 par value; 3,000,000
shares authorized, 721,904,
and 708,451 shares issued and outstanding 360,952 354,225
Capital surplus 2,558,151 2,303,241
Retained earnings 10,257,053 9,076,350
Net unrealized gain (loss) on securities (28,881) 9,226
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 13,147,275 11,743,042
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 140,284,204 $ 124,808,265
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
page 43
<PAGE>
DIMECO, INC.
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 8,568,178 $ 7,939,785 $ 6,716,638
Interest-bearing deposits in other banks 23,218 12,702 9,184
Federal funds sold 383,487 218,805 53,849
Investment securities:
Taxable 973,948 970,873 943,416
Exempt from federal income tax 318,281 348,809 284,068
------------ ------------ ------------
Total interest income 10,267,112 9,490,974 8,007,155
------------ ------------ ------------
INTEREST EXPENSE
Deposits 4,388,073 4,013,572 3,236,402
Short-term borrowings 59,011 101,906 71,494
------------ ------------ ------------
Total interest expense 4,447,084 4,115,478 3,307,896
------------ ------------ ------------
NET INTEREST INCOME 5,820,028 5,375,496 4,699,259
Provision for loan losses 549,000 382,000 162,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 5,271,028 4,993,496 4,537,259
------------ ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts 213,222 183,316 184,822
Gain (loss) on sale of mortgage loans 16,453 52,702 (10,372)
Investment securities gains, net 59,257 - -
Other income 446,539 402,878 331,070
------------ ------------ ------------
Total noninterest income 735,471 638,896 505,520
------------ ------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,940,853 1,780,927 1,543,062
Occupancy expense, net 280,754 236,166 208,846
Furniture and equipment expense 270,074 219,072 164,865
Deposit insurance premiums 1,493 118,352 222,467
Operations of other real estate 91,183 67,501 146,656
Other expense 1,110,802 966,298 867,628
------------ ------------ ------------
Total noninterest expense 3,695,159 3,388,316 3,153,524
------------ ------------ ------------
Income before income taxes 2,311,340 2,244,076 1,889,255
Income taxes 699,000 677,000 589,000
------------ ------------ ------------
NET INCOME $ 1,612,340 $ 1,567,076 $ 1,300,255
============ ============ ============
EARNINGS PER SHARE
NET INCOME $ 2.24 $ 2.24 $ 1.91
============ ============ ============
AVERAGE SHARES OUTSTANDING 718,531 699,055 678,999
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
page 44
<PAGE>
DIMECO, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized
Gain
Common Capital Retained (Loss) on Treasury
Stock Surplus Earnings Securities Stock Total
---------- ----------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 337,217 $ 1,842,975 $ 6,879,732 $ - $ - $ 9,059,924
Initial net unrealized loss on
securities (44,920) (44,920)
Net income 1,300,255 1,300,255
Dividend reinvestment and stock
purchase plan 5,655 138,032 143,687
Purchase of treasury stock (10,200) (10,200)
Sale of treasury stock 10 10,200 10,210
Cash dividends ($.43 per share) (292,325) (292,325)
Net unrealized loss on
securities (155,432) (155,432)
---------- ----------- ----------- --------- --------- -----------
Balance, December 31, 1994 342,872 1,981,017 7,887,662 (200,352) - 10,011,199
Net income 1,567,076 1,567,076
Dividend reinvestment and stock
purchase plan 11,353 322,224 333,577
Cash dividends ($.54 per share) (378,388) (378,388)
Net unrealized gain on
securities 209,578 209,578
---------- ----------- ----------- --------- --------- -----------
Balance, December 31, 1995 354,225 2,303,241 9,076,350 9,226 - 11,743,042
Net income 1,612,340 1,612,340
Dividend reinvestment and stock
purchase plan 6,727 254,910 261,637
Cash dividends ($.60 per share) (431,637) (431,637)
Net unrealized loss on
securities (38,107) (38,107)
---------- ----------- ----------- --------- --------- -----------
Balance, December 31, 1996 $ 360,952 $ 2,558,151 $10,257,053 $ (28,881) $ - $13,147,275
========== =========== =========== ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
page 45
<PAGE>
DIMECO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,612,340 $ 1,567,076 $ 1,300,255
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 549,000 382,000 162,000
Depreciation 256,893 213,485 170,981
Amortization of investments, net 107,486 144,651 313,570
Amortization of net deferred loan
origination fees (85,396) (65,567) (82,418)
Deferred tax provision (benefit) 39,338 86,175 170,016
Investment securities gains (59,257) - -
Net decrease in loans held for sale 259,231 364,266 3,541,671
Increase in accrued interest
receivable (60,246) (56,192) (124,583)
Increase (decrease) in accrued
interest payable (47,184) 179,436 25,795
Other, net (35,456) (39,748) 84,019
------------- ------------- --------------
Net cash provided by
operating activities 2,536,749 2,775,582 5,561,306
------------- ------------- --------------
INVESTING ACTIVITIES
Investment securities available
for sale:
Proceeds from sales of investment
securities 354,248 - -
Proceeds from the maturities or
paydown of investment securities 13,304,451 3,631,038 1,645,637
Purchases of investment securities (15,938,665) (3,013,280) (5,845,062)
Investment securities:
Proceeds from the maturities or
paydown of investment securities 6,430,001 6,753,718 7,510,195
Purchases of investment securities (12,042,470) (2,107,036) (8,747,613)
Net increase in loans (11,025,956) (7,996,340) (7,132,460)
Acquisition of premises and equipment (362,421) (513,606) (263,267)
Purchase of life insurance - (885,000) -
Proceeds from the sale of other real
estate owned 208,113 110,208 236,114
------------- ------------- --------------
Net cash used for investing
activities (19,072,699) (4,020,298) (12,596,456)
------------- ------------- --------------
FINANCING ACTIVITIES
Increase in deposits, net 16,124,275 7,306,768 4,452,289
Increase (decrease) in short-term
borrowings (2,050,000) 400,000 (1,150,000)
Proceeds from dividend reinvestment plan 261,637 333,577 143,697
Cash dividends paid (407,961) (368,125) (196,321)
------------- ------------- --------------
Net cash provided by
financing activities 13,927,951 7,672,220 3,249,665
------------- ------------- --------------
Increase (decrease) in cash and
cash equivalents (2,607,999) 6,427,504 (3,785,485)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 9,121,691 2,694,187 6,479,672
------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT $ 6,513,692 $ 9,121,691 $ 2,694,187
============= ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
page 46
<PAGE>
DIMECO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Dimeco, Inc. (Company) is a Pennsylvania company organized as the holding
company of The Dime Bank (Bank). The Bank is a state-chartered bank located
in Pennsylvania. The Company and its subsidiary derive substantially all of
their income from the banking and banking related services which include
interest earnings on residential real estate, commercial mortgage, commercial
and consumer financings, as well as interest earnings on investment securities
and deposit services to its customers through three locations. The Company is
supervised by the Federal Reserve Board, while the Bank is subject to
regulation and supervision by the Federal Deposit Insurance Corporation and
Pennsylvania Department of Banking.
Basis of Presentation
- ---------------------
The consolidated financial statements of the Company include its
wholly-owned subsidiary, the Bank. Significant intercompany items have
been eliminated in preparing the consolidated financial statements.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement of
financial condition and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
A summary of the significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Investment Securities
- ---------------------
The Company has classified investment securities into held to maturity and
available for sale classifications. Debt securities acquired with the
intent and ability to hold to maturity are stated at cost adjusted for
amortization of premium and accretion of discount, which are computed using
the interest method and recognized as adjustments of interest income. Certain
other debt and equity securities have been classified as available for sale to
serve principally as a source of liquidity. Unrealized holding gains and
losses for available for sale securities are reported as a separate
component of stockholders' equity, net of tax, until realized. Realized
securities gains and losses are computed using the specific identification
method. Interest and dividends on investment securities are recognized as
income when earned.
Mortgage Loans Held for Sale
- ----------------------------
In general, fixed rate residential mortgage loans originated are held for sale
and are carried at the aggregate lower of cost or market. Such loans are sold
and serviced by the Bank.
Loans
- -----
Loans are stated at the principal amount outstanding, net of any unearned
income, deferred loan fees, and the allowance for loan losses. Interest on
consumer loans is credited to operations over the term of each loan using a
method which approximates level yield or the simple interest method. Interest
income on mortgage loans is accrued on the amortized balance. Interest income
on other loans is accrued on the principal amount outstanding. Loan fees
which represent an adjustment to interest yield are deferred and amortized
over the life of the loan.
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on loans is generally discontinued when
it is determined that a reasonable doubt exists as to the collectibility of
additional interest. Loans are returned to accrual status when past due
interest is collected and the collection of principal is probable.
Allowance for Loan Losses
- -------------------------
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by Statement No. 118. Under this Standard, the Company
estimates credit losses on impaired loans based on the present value of
expected cash flows or fair value of the underlying collateral if the loan
repayment is expected to come from the sale or operation of such collateral.
Prior to 1995, the credit losses related to these loans were estimated based
on undiscounted cash flows or the fair value of the underlying collateral.
Statement 118 amends Statement 114 to permit a creditor to use existing
methods for recognizing interest income on impaired loans eliminating the
income recognition provisions of Statement 114. The adoption of these
statements did not have a material effect on the Company's financial position
or results of operation.
16
page 47
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------------
Allowance for Loan Losses (Continued)
- -------------------------------------
Impaired loans are commercial and commercial real estate loans for which it is
probable that the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for impairment and does not aggregate loans
by major risk classifications. The definition of "impaired loans" is not the
same as the definition of "nonaccrual loans," although the two categories
overlap. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the
loan as impaired if the loan is not a commercial or commercial real estate
loan. Factors considered by management in determining impairment include
payment status and collateral value. The amount of impairment for these types
of impaired loans is determined by the difference between the present value of
the expected cash flows related to the loan, using the original interest rate,
and its recorded value, or, as a practical expedient in the case of
collateralized loans, the difference between the fair value of the collateral
and the recorded amount of the loans. When foreclosure is probable,
impairment is measured based on the fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which are defined as 90 days or less, generally are not classified as
impaired. Management determines the significance of payment delays on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
borrower's prior payment record, and the amount of shortfall in relation to
the principal and interest owed.
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charged to the allowance and all recoveries are credit to it. The
allowance for loan losses is established through a provision for loan losses
charged to operations. The provision for loan losses is based on management's
periodic evaluation of individual loans, economic factors, past loan loss
experience, changes in the composition and volume of the portfolio, and other
relevant factors. The estimates used in determining the adequacy of the
allowance for loan losses, including the amounts and timing of future cash
flows expected on impaired loans, are particularly susceptible to changes in
the near term.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line basis for specific items over
the estimated useful lives of the related assets. Expenditures for
maintenance and repairs are charged to operations as incurred. Costs of major
additions and improvements are capitalized.
Other Real Estate
- -----------------
Real estate acquired by foreclosure is classified separately on the balance
sheet at the lower of the recorded investment in the property or its fair
value minus estimated costs of sale. Prior to foreclosure, the value of the
underlying collateral is written down by a charge to the allowance for
possible loan losses if necessary. Any subsequent write-downs are charged
against operating expenses. Operating expenses of such properties, net of
related income and losses on their disposition, are included in operations of
other real estate.
Income Taxes
- ------------
The Company and its subsidiary file a consolidated federal income tax return.
Under this accounting standard, deferred tax assets or liabilities are
computed based on the difference between the financial statement and the
income tax basis of assets and liabilities using the enacted
marginal tax rates. Deferred income tax expenses or benefits are based on
the changes in the deferred tax asset or liability from period to period.
Earnings Per Share
- ------------------
Earnings per common share computations are based on the weighted average
number of shares outstanding.
Cash Flows
- ----------
The Company has defined cash and cash equivalents as cash and due from banks,
interest-bearing deposits, and federal funds sold.
17
page 48
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ---------------------------------------------------------------
Amounts paid for interest and income taxes are as follows:
Federal
Interest Income Taxes
Paid Paid
------------- ------------
Year ended December 31,
1996 $ 4,494,268 $ 592,000
1995 3,936,042 593,000
1994 3,282,101 444,000
Pending Accounting Pronouncement
- --------------------------------
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Statement provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings based on a control-oriented
"financial-components" approach. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when extinguished.
The provisions of Statement No. 125 are effective for transactions occurring
after December 31, 1996, except those provisions relating to repurchase
agreements, securities lending, and other similar transactions and pledged
collateral, which have been delayed until after December 31, 1997 by Statement
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125, an amendment of FASB Statement No. 125." The adoption of
these statements is not expected to have a material impact on financial
position or results of operations.
Reclassification of Comparative Amounts
- ---------------------------------------
Certain comparative amounts for prior years have been reclassified to conform
with current year presentations. The reclassified amounts did not affect net
income or equity capital.
NOTE 2 - INVESTMENT SECURITIES
- ------------------------------
Upon the adoption of Statement No. 115, the Company initially transferred from
the investment securities portfolio to the available for sale account
classification investment securities with an amortized cost of $7,419,997 and
an estimated market value of $7,351,936. The net depreciation of these
securities, at adoption, was recorded net of federal income taxes to an
unrealized securities gain (loss) account which is a component of
stockholders' equity. During 1995, in accordance with the Financial
Accounting Standards Board Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," the Company was permitted an additional one time reclassification
of investment securities. Accordingly, the Company transferred from the held
to maturity classification to the available for sale classification securities
with an amortized cost of $522,017 and an estimated market value of $544,325.
The amortized costs and estimated market value of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Costs Gains Losses Values
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U. S. Treasury securities $ 2,987,822 $ 10,936 $ - $ 2,998,758
U. S. Government corporations
and agencies 2,848,609 5,266 (6,068) 2,847,807
Mortgage-backed securities 517,370 - (10,193) 507,177
Commercial paper 6,500,540 - - 6,500,540
------------- ------------- ------------ -------------
Total debt securities 12,854,341 16,202 (16,261) 12,854,282
Equity securities 904,200 - (43,700) 860,500
------------- ------------- ------------ -------------
Total $ 13,758,541 $ 16,202 $ (59,961) $ 13,714,782
============= ============= ============= =============
</TABLE>
18
page 49
<PAGE>
NOTE 2 - INVESTMENT SECURITIES (Continued)
- ------------------------------------------
<TABLE>
<CAPTION>
1995
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Costs Gains Losses Values
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U. S. Treasury securities $ 6,021,895 $ 9,043 $ (6,794) $ 6,024,144
U. S. Government corporations
and agencies 3,518,614 6,620 - 3,525,234
Obligations of states and political
subdivisions 128,417 22,308 - 150,725
Mortgage-backed securities 887,614 16,584 (932) 903,266
------------- ------------- ------------ -------------
Total debt securities 10,556,540 54,555 (7,726) 10,603,369
Equity securities 882,900 - (32,850) 850,050
------------- ------------- ------------ -------------
Total $ 11,439,440 $ 54,555 $ (40,576) $ 11,453,419
============= ============== ============= ============
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Costs Gains Losses Values
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
HELD TO MATURITY
Obligations of states and
political subdivisions $ 5,950,944 $ 91,427 $ (775) $ 6,041,596
Corporate securities 8,841,551 24,345 (444) 8,865,452
------------- ------------- ------------ -------------
Total $ 14,792,495 $ 115,772 $ (1,219) $ 14,907,048
============= ============== ============ =============
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Costs Gains Losses Values
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
HELD TO MATURITY
Obligations of states and
political subdivisions $ 6,403,827 $ 103,970 $ (3,587) $ 6,504,210
Corporate securities 2,863,563 1,297 (11,180) 2,853,680
------------- ------------- ------------ -------------
Total $ 9,267,390 $ 105,267 $ (14,767) $ 9,357,890
============= ============= ============= =============
</TABLE>
19
page 50
<PAGE>
NOTE 2 - INVESTMENT SECURITIES (Continued)
- ------------------------------------------
The amortized cost and estimated market values of debt securities at
December 31, 1996, by contractual maturity are shown below. Expected
maturities of mortgage-backed securities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------------ -----------------------------
Estimated Estimated
Amortized Market Amortized Market
Costs Values Costs Values
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Due in one year or less $ 8,500,127 $ 8,506,798 $ 11,877,097 $ 11,906,681
Due after one year through
five years 3,132,038 3,136,554 1,754,318 1,779,224
Due after five through ten years 704,806 703,753 1,061,080 1,120,197
Due after ten years - - 100,000 100,946
------------- ------------- ------------ -------------
12,336,971 12,347,105 14,792,495 14,907,048
Mortgage-backed securities 517,370 507,177 - -
------------- ------------- ------------ -------------
Total debt securities $ 12,854,341 $ 12,854,282 $ 14,792,495 $ 14,907,048
============= ============= ============ =============
</TABLE>
Proceeds from the sales of investment securities available for sale were
$354,248 in 1996. The Company realized gross gains of $59,257 for the year
ended December 31, 1996. There were no sales of investment securities in 1995
or 1994.
Investment securities with an amortized cost of $4,038,185 and $5,348,123 and
estimated market values of $4,125,000 and $5,441,000 at December 31, 1996 and
1995, respectively, were pledged to secure deposits, short-term borrowings,
and for other purposes as required by law.
NOTE 3 - LOANS
- --------------
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Loans secured by real estate:
Construction and development $ 674,031 $ 81,520
Secured by farmland 1,340,841 710,895
Secured by 1 - 4 family residential
properties:
Revolving, open-end loans secured
by 1 - 4 family residential properties 1,909,434 2,382,117
All other loans secured by 1 - 4
family residential properties 41,760,279 39,548,144
Secured by non-farm, non-residential
properties 24,432,128 22,831,081
Commercial and industrial loans 13,823,210 12,277,876
Loans to individuals for household,
family, and other personal expenditures:
Ready credit loans 135,054 155,738
Other installment loans 16,085,111 12,469,332
Other loans:
Agricultural loans 632,776 825,293
All other loans 694,063 524,697
-------------- --------------
Total loans 101,486,927 91,806,693
Less unearned income 1,473,603 2,150,429
-------------- --------------
Loans, net of unearned income $ 100,013,324 $ 89,656,264
============== ==============
</TABLE>
20
page 51
<PAGE>
NOTE 3 - LOANS (Continued)
- --------------------------
Real estate loans, which are serviced for others, which are not included in
the consolidated balance sheet totaled $28,756,841 and $23,064,951 at December
31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, the Company had impaired loans of $1,122,196
and $863,272, respectively with related allowance for loan losses of
approximately $173,548 and $29,000, respectively. There were no impaired
loans without a related allowance for loan losses. For year ended December
31, 1996 and 1995, average impaired loans were $1,128,161 and $868,000,
respectively. Interest recognized on impaired loans for the year ended
December 31, 1996 and 1995, is $13,826 and $85,789.
Changes in the allowance for loan losses are as follows:
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,247,629 $ 1,132,982 $ 1,186,958
Provision charged to operations 549,000 382,000 162,000
Recoveries credited to allowance 83,393 61,193 43,122
-------------- -------------- --------------
Subtotal 1,880,022 1,576,175 1,392,080
Losses charged to allowance (514,016) (328,546) (259,098)
-------------- -------------- --------------
Balance, end of year $ 1,366,006 $ 1,247,629 $ 1,132,982
============== ============== ==============
</TABLE>
The bad debt deduction for federal income tax purposes for the years ended
December 31, 1996, 1995, and 1994 is as follows:
1996 $ 454,116
1995 323,044
1994 227,345
The balance of the reserve for bad debts for tax purposes was $377,671,
$354,178, and $298,487 as of December 31, 1996, 1995, and 1994.
Loans of $60,000 or more extended to officers, directors, and corporations in
which they are beneficially interested as stockholders, officers, or directors
were $2,756,529 at December 31, 1996. These loans were made on substantially
the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other persons. An analysis of
these related party loans for 1996 follows:
Balance Amounts Balance
December 31, 1995 Additions Collected December 31, 1996
----------------- --------- --------- -----------------
$2,509,606 $842,980 $596,057 $2,756,529
The Company's primary business activity is with customers located within its
local trade area. Generally, the Company grants commercial, residential, and
personal loans. The Company also selectively funds and purchases commercial
and residential loans outside of its local trade area provided such loans meet
the Company's credit policy guidelines. Although the Company has a
diversified loan portfolio, at December 31, 1996 and 1995, loans outstanding
to individuals and businesses are dependent upon the local economic
conditions in its immediate trade area.
21
page 52
<PAGE>
NOTE 4 - PREMISES AND EQUIPMENT
- -------------------------------
A summary by asset classification is as follows:
1996 1995
------------- -------------
Land $ 220,114 $ 220,114
Premises and improvements 3,049,073 2,916,304
Furniture and equipment 1,694,698 1,465,047
------------- -------------
Total, at cost 4,963,885 4,601,465
Less accumulated depreciation 1,897,735 1,640,843
------------- -------------
Net premises and equipment $ 3,066,150 $ 2,960,622
============= =============
Depreciation expense was $256,893, $213,485, and $170,981 in 1996, 1995, and
1994.
Occupancy expenses were reduced by rental income received in the amounts of
$19,909, $19,020, and $18,399 for the years ended December 31, 1996, 1995, and
1994.
NOTE 5 - DEPOSITS
- -----------------
Deposits are summarized as follows:
1996 1995
------------- -------------
Demand - noninterest-bearing $ 12,760,278 $ 12,352,292
Demand - interest-bearing 19,589,085 15,264,169
Money market 4,071,311 3,949,366
Savings 32,673,802 27,496,845
Time deposits of $100,000 or more 9,381,996 6,140,412
Other time deposits 47,526,035 44,675,148
------------- -------------
Total $ 126,002,507 $ 109,878,232
============= =============
The following table summarizes the maturity distribution of certificates of
deposit of $100,000 or more:
1996 1995
------------- -------------
Three months or less $ 4,952,719 $ 1,951,678
Four through six months 1,408,318 1,733,239
Seven through twelve months 1,186,123 853,985
Over twelve months 1,834,836 1,601,510
------------- -------------
Total $ 9,381,996 $ 6,140,412
============= =============
22
page 53
<PAGE>
NOTE 6 - SHORT-TERM BORROWINGS
- ------------------------------
The outstanding balances and related information for short-term borrowings are
summarized as follows:
1996 1995
------------------ -------------------
Amount Rate Amount Rate
----------- ------ ----------- ------
Balance at year end $ - - $ 2,050,000 5.80%
Average balance
outstanding during
the year 1,009,221 5.85% 1,759,988 5.79%
Maximum amount outstanding
any month end 2,050,000 2,815,000
Short-term borrowings consist of borrowings from the Federal Home Loan Bank of
Pittsburgh (FHLB) and securities sold under agreements to repurchase. Average
amounts outstanding during the year represent daily average balances and
average interest rates represent interest expense divided by the related
average balance.
The Bank has a Federal Home Loan Bank Flexline with a borrowing limit of
approximately $3.5 million. The credit line is subject to annual renewal and
incurs no service charges. The Bank has pledged as collateral for this credit
line assets with market values in excess of advances received. There were no
advances outstanding on this line as of December 31, 1996 and 1995.
The Bank has pledged, as collateral for the borrowings from the FHLB, all
stock in the Federal Home Loan Bank and certain other qualifying collateral.
Investment securities with amortized costs and estimated market values of
$1,953,022 and $2,423,426, respectively, at December 31, 1995 were pledged as
collateral for the securities sold under agreements to repurchase.
NOTE 7 - DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
- ------------------------------------------------------
The Company maintains a Dividend Reinvestment and Stock Purchase Plan.
Participation is available to all common stockholders. The Plan provides each
participant with a simple and convenient method of purchasing additional
common shares without payment of any brokerage commission or other service
fees.
A participant in the Plan may elect to reinvest dividends on all or part of
their shares to acquire additional common stock. In addition, the Plan
provides for the optional purchase of shares of the Company's common stock up
to a maximum of $5,000 per year. A participant may withdraw from
the Plan at any time. Stockholders purchased 13,465 shares in 1996 and
22,714 shares in 1995 through the Plan.
NOTE 8 - RETIREMENT PLAN
- ------------------------
The Company maintains a section 401(k) employee savings and investment plan
for substantially all employees and officers of the Company. The Company's
contribution to the plan is based on 100% matching of voluntary
contributions up to 3% and 50% matching on the next 2% of
individual compensation. Additionally, the Company may contribute a
discretionary amount each year. For 1996, 1995, and 1994, the Board of
Directors authorized an additional 4%, 2%, and 2%, respectively, of each
eligible employee's compensation. Employee contributions are vested at all
times, and Company contributions are fully vested after five years.
Contributions for 1996, 1995, and 1994 to this plan amounted to $97,711,
$76,074, $38,881, respectively.
23
page 54
<PAGE>
NOTE 9 - INCOME TAXES
- ---------------------
Federal income tax expense consists of the following:
1996 1995 1994
------------ ------------ ------------
Currently payable $ 659,662 $ 590,825 $ 418,984
Deferred taxes 39,338 86,175 170,016
------------ ------------ ------------
Total provision $ 699,000 $ 677,000 $ 589,000
============ ============ ============
The components of the net deferred tax assets at December 31, 1996 and 1995
are as follows:
1996 1995
------------- -------------
Deferred Tax Assets:
Allowance for loan losses $ 336,034 $ 303,773
Deferred loan origination fees, net 60,788 89,722
Deferred compensation 39,707 44,019
Allowance for loss on securities 31,605 31,605
Unrealized loss on investment securities 14,878 -
Other, net 86 86
------------- -------------
Total 483,098 469,205
------------- -------------
Deferred Tax Liabilities:
Premises and equipment 186,887 146,673
Unrealized gain on investment securities 1,862 4,753
Other, net - 3,723
------------- -------------
Total 188,749 155,149
------------- -------------
Net deferred tax assets $ 294,349 $ 314,056
============= =============
A reconciliation between the expected statutory income tax rate and the
effective income tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate $ 785,856 34.0% $ 762,987 34.0% $ 642,347 34.0%
Tax-exempt income (108,611) (4.7) (119,157) (5.3) (96,211) (5.1)
Non-deductible interest 34,996 1.5 28,787 1.3 20,822 1.1
Other, net (13,241) (0.6) 4,383 0.2 22,042 1.2
---------- -------- ---------- -------- ---------- --------
Effective income tax $ 699,000 30.2% $ 677,000 30.2% $ 589,000 31.2%
========== ========= ========== ======== ========== ========
</TABLE>
24
page 55
<PAGE>
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------
Commitments
- -----------
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, financial
guarantees, and letters of credit, which are not reflected in the accompanying
financial statements. The Company does not anticipate any losses as a result
of these transactions. These instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
statements of financial position. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in the
particular classes of financial instruments.
Financial instruments whose contract amounts represent credit risk are as
follows:
1996 1995
------------- -------------
Commitments to extend credit $ 10,596,206 $ 9,729,257
Financial guarantees (credit card limits) 41,500 57,500
Standby letters of credit 354,898 723,570
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Standby letters of credit and financial guarantees are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. The credit risk involved in issuing these instruments is essentially
the same as that involved in extending loan facilities to customers.
Contingent Liabilities
- ----------------------
The Company and its subsidiary are involved in various legal actions
from the normal course of business activities. Management believes that the
liability, if any, arising from such actions will not have a material adverse
effect on the Company's financial position.
NOTE 11 - REGULATORY RESTRICTIONS
- ---------------------------------
Cash and Due from Banks
- -----------------------
Included in cash and due from banks are required federal reserves of $815,000
and $683,000 at December 31, 1996 and 1995, respectively, for facilitating the
implementation of monetary policy by the Federal Reserve System. The required
reserves are computed by applying prescribed ratios to the classes of average
deposit balances. These are held in the form of cash on hand and/or balances
maintained directly with a correspondent bank.
Dividends
- ---------
The Pennsylvania Banking Code restricts the availability of capital funds for
payment of dividends by all chartered banks to the surplus of the Bank.
Accordingly, at December 31, 1996, the balances in the capital surplus account
totaling $1,756,216 are unavailable for dividends.
25
page 56
<PAGE>
NOTE 12 - REGULATORY CAPITAL REQUIREMENTS
- -----------------------------------------
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the their assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Company's and the Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by the regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
Total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital to average assets (as defined).
Management believes, as of December 31, 1996, that the Company and the Bank
meets all capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Federal Reserve
Board and the Federal Deposit Insurance Corporation has categorized the
Company and the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized they must
maintain minimum Total risk-based, Tier I risk-based and Tier I leverage
ratios at least 100 to 200 basis points above those ratios set forth in the
table. There have been no conditions or events since that notification that
management believes have changed the Company's and the Bank's category.
The following table reflects the Company's capital ratio and minimum
requirements at December 31. The Bank's capital ratios are substantially the
same as the Company's.
<TABLE>
<CAPTION>
1996 1995
----------------------- ----------------------
Amount Ratio Amount Ratio
------------- -------- ------------ --------
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
- ---------------------------------------
Actual $ 14,495,131 13.74% $ 12,981,445 15.43%
For Capital Adequacy Purposes 8,439,669 8.00% 6,730,496 8.00%
Tier I Capital (to Risk Weighted Assets)
- ----------------------------------------
Actual $ 13,176,156 12.49% $ 11,733,816 13.95%
For Capital Adequacy Purposes 4,219,746 4.00% 3,364,535 4.00%
Tier I Capital (to Average Assets)
- ----------------------------------
Actual $ 13,176,156 9.97% $ 11,733,816 9.82%
For Capital Adequacy Purposes 5,286,321 4.00% 4,779,558 4.00%
</TABLE>
26
page 57
<PAGE>
NOTE 13 - FAIR VALUE DISCLOSURE
- -------------------------------
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 1,600,524 $ 1,600,524 $ 1,231,674 $ 1,231,674
Interest-bearing deposits
in other banks 3,718,168 3,718,168 1,970,017 1,970,017
Federal funds sold 1,195,000 1,195,000 5,920,000 5,920,000
Mortgage loans held for sale 206,813 206,813 464,588 464,588
Investment securities available
for sale 13,714,782 13,714,782 11,453,419 11,453,419
Investment securities 14,792,495 14,907,048 9,267,390 9,357,890
Net loans 98,647,318 100,080,713 88,408,635 90,407,412
Accrued interest receivable 1,003,565 1,003,565 943,319 943,319
-------------- -------------- -------------- --------------
Total $ 134,878,665 $ 136,426,613 $ 119,659,042 $ 121,748,319
============== ============== ============== ==============
Financial liabilities:
Deposits $ 126,002,507 $ 125,976,000 $ 109,878,232 $ 110,249,000
Short-term borrowings - - 2,050,000 2,050,000
Accrued interest payable 521,229 521,229 568,413 568,413
-------------- -------------- -------------- --------------
Total $ 126,523,736 $ 126,497,229 $ 112,496,645 $ 112,867,413
============== ============== ============== ==============
</TABLE>
Financial instruments are defined as cash, evidence of ownership interest in
an entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments should be based upon management's judgment regarding current
economic conditions, interest rate risk, expected cash flows, future estimated
losses, and other factors as determined through various option pricing
formulas or simulation modeling. As many of these assumptions result from
judgments made by management based upon estimates which are inherently
uncertain, the resulting estimated fair values may not be indicative of the
amount realizable in the sale of a particular financial instrument. In
addition, changes in assumptions on which the estimated fair values are based
may have a significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets, and premises and equipment are
not considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not
available based upon the following assumptions:
Cash and Due From Banks, Interest-Bearing Deposits in Other Banks, Federal
Funds Sold, Accrued Interest Receivable, Short-Term Borrowings, and Accrued
Interest Payable
- ---------------------------------------------------------------------------
The fair value is equal to the current carrying value.
27
page 58
<PAGE>
NOTE 13 - FAIR VALUE DISCLOSURE (Continued)
- -------------------------------------------
Mortgage Loans Held For Sale
- ----------------------------
The fair value of mortgage loans held for sale is equal to the available
quoted market price. If no quoted market price is available, fair value is
estimated using the quoted market price for similar securities.
Investment Securities
- ---------------------
The fair value of investment securities available for sale and held to
maturity is equal to the available quoted market price. If no quoted market
price is available, fair value is estimated using the quoted market price for
similar securities.
Loans and Deposits
- ------------------
The estimated fair values for loans are estimated by discounting contractual
cash flows and adjusting for prepayment estimates. Discount rates are based
upon rates generally charged for such loans with similar characteristics.
Demand, savings, and money market deposit accounts are valued at the amount
payable on demand as of year end. Fair values for time deposits are estimated
using a discounted cash flow calculation that applies contractual costs
currently being offered in the existing portfolio to current market rates
being offered for deposits of similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
- ----------------------------------------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment or letter of credit,
and the fair value, determined by discounting the remaining contractual fee
over the term of the commitment using fees currently charged to enter into
similar agreements with similar credit risk, are not considered material for
disclosure. The contractual amounts of unfunded commitments and letters of
credit are presented in Note 10.
NOTE 14 - HOLDING COMPANY
- -------------------------
Following are condensed financial statements for the parent company:
CONDENSED BALANCE SHEET
December 31,
1996 1995
--------------- ---------------
ASSETS
Cash and due from banks $ 15,381 $ 42,885
Investment in bank subsidiary 13,146,691 11,766,873
Other assets 115,145 39,480
--------------- ---------------
Total assets $ 13,277,217 $ 11,849,238
=============== ===============
LIABILITIES
Dividends payable $ 129,943 $ 106,194
STOCKHOLDERS' EQUITY 13,147,274 11,743,044
--------------- ---------------
Total liabilities and
stockholders' equity $ 13,277,217 $ 11,849,238
=============== ===============
28
page 59
<PAGE>
NOTE 14 - HOLDING COMPANY (Continued)
- -------------------------------------
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Dividends from bank subsidiary $ 222,000 $ - $ 80,000
Other noninterest expense 41,340 37,059 30,627
------------ ------------ ------------
Net income (loss) before undistributed
earnings of bank subsidiary and income taxes 180,660 (37,059) 49,373
Undistributed earnings of bank subsidiary 1,417,930 1,591,535 1,240,469
Income tax benefit (13,750) (12,600) (10,413)
------------ ------------ ------------
Net income $ 1,612,340 $ 1,567,076 $ 1,300,255
============ ============ ============
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,612,340 $ 1,567,076 $ 1,300,255
Adjustments to net income to
net cash provided by operating activities:
Undistributed earnings of bank subsidiary (1,417,930) (1,591,535) (1,240,469)
Other, net (75,590) 8,221 3,426
------------ ------------ ------------
Net cash provided by (used for)
operating activities 118,820 (16,238) 63,212
------------ ------------ ------------
FINANCING ACTIVITIES
Dividends paid (407,961) (368,125) (196,321)
Proceeds from dividend reinvestment plan 261,637 333,577 143,697
------------ ------------ ------------
Net cash used for financing activities (146,324) (34,548) (52,624)
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents (27,504) (50,786) 10,588
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 42,885 93,671 83,083
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 15,381 $ 42,885 $ 93,671
============= =========== ===========
</TABLE>
29
page 60
<PAGE>
SNODGRASS
Certified Public Accountants
REPORT OF INDEPENDENT AUDITORS
- ------------------------------
Board of Directors and Stockholders
Dimeco, Inc.
We have audited the accompanying consolidated balance sheet of Dimeco, Inc.
and subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dimeco,
Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As explained in the notes to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for impaired
loans and related allowance for loan losses and effective January 1, 1994,
also changed its method of accounting for investment securities.
/s/ S. R. Snodgrass, A.C.
Wexford, PA
February 14, 1997
S.R. Snodgrass, A.C.
101 Bradford Road Wexford, PA 15090-6909 Phone: 412-934-0344
Facsimile: 412-934-3445
30
page 61
<PAGE>
LIST OF SUBSIDIARIES OF THE COMPANY
The Dime Bank, 820-822 Church Street, Honesdale, Pennsylvania
18431, a Pennsylvania state-chartered banking institution.
page 62
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1996
<CASH> 1,601
<INT-BEARING-DEPOSITS> 3,718
<FED-FUNDS-SOLD> 1,195
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,715
<INVESTMENTS-CARRYING> 14,792
<INVESTMENTS-MARKET> 14,907
<LOANS> 100,013
<ALLOWANCE> 1,366
<TOTAL-ASSETS> 140,284
<DEPOSITS> 126,003
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,134
<LONG-TERM> 0
0
0
<COMMON> 361
<OTHER-SE> 12,786
<TOTAL-LIABILITIES-AND-EQUITY> 140,284
<INTEREST-LOAN> 8,568
<INTEREST-INVEST> 1,292
<INTEREST-OTHER> 407
<INTEREST-TOTAL> 10,267
<INTEREST-DEPOSIT> 4,388
<INTEREST-EXPENSE> 4,447
<INTEREST-INCOME-NET> 5,820
<LOAN-LOSSES> 549
<SECURITIES-GAINS> 59
<EXPENSE-OTHER> 3,695
<INCOME-PRETAX> 2,311
<INCOME-PRE-EXTRAORDINARY> 1,612
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,612
<EPS-PRIMARY> 2.24
<EPS-DILUTED> 2.24
<YIELD-ACTUAL> 7.79
<LOANS-NON> 1,822
<LOANS-PAST> 834
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,248
<CHARGE-OFFS> 514
<RECOVERIES> 83
<ALLOWANCE-CLOSE> 1,366
<ALLOWANCE-DOMESTIC> 1,345
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 21
</TABLE>
