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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] For the fiscal year ended December 31, 1997
OR
[ ]
For the transition period from to
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Commission file Number:
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DIMECO, INC.
(Exact name of registrant as specified in its charter)
23-2250152
(I.R.S. Employer Identification Number)
820-822 Church Street, Honesdale, Pennsylvania 18431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (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 registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not 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]
The aggregate market value of the voting stock held by
non-affiliates of the registrant based on a closing sale price: $22,768,606
at March 16, 1998.
As of March 16, 1998, the registrant had outstanding 726,987 shares
of its common stock, par value $.50 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1998 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, 1997, are incorporated by reference in Part II of this
Annual Report.
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DIMECO, INC.
FORM 10-KSB
Index
Part I Page
Item 1. Description of the Business. . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property. . . . . . . . . . . . . . . . . . . .14
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . .15
Item 4. Submission of Matters to a Vote of Security Holders. . . . . .N/A
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . 15
Item 6. Management's Discussion and Analysis or Plan
of Operation . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7. Financial Statements and Schedules . . . . . . . . . . . . . 24
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . .N/A
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . 25
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . 25
Item 11. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . . 25
Item 12. Certain Relationships and Related Transactions . . . . . . . 25
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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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, 1997, the Company had total consolidated assets,
deposits and shareholders' equity of approximately $153,421,103, $135,101,386
and $14,520,645, 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
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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. 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.
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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:
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.
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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.
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.
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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.
The Company did not and does not intend to commence or conduct any
of the above-delineated activities during calendar years 1998 and 1997,
respectively.
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Pennsylvania Banking Law
------------------------
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.
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
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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 1989
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("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.
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.
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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.
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
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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.
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.
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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.
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
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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.
Regulatory Capital Requirements
-------------------------------
The following table presents the Company's consolidated capital
ratios at December 31, 1997:
(In Thousands)
Tier I Capital . . . . . . . . . . . . . . . . . . . . . . . . $ 14,532
Tier II Capital. . . . . . . . . . . . . . . . . . . . . . . . $ 1,511
Total Capital. . . . . . . . . . . . . . . . . . . . . . . . . $ 16,043
Adjusted Total Average Assets. . . . . . . . . . . . . . . . . $ 142,614
Total Adjusted Risk-Weighted Assets(1) . . . . . . . . . . . . $ 122,933
Tier I Risk-Based Capital Ratio(2) . . . . . . . . . . . . . . 11.82%
Required Tier I Risk-Based Capital Ratio . . . . . . . . . . . 4.00%
Excess Tier I Risk-Based Capital Ratio . . . . . . . . . . . . 7.82%
Total Risk-Based Capital Ratio(3). . . . . . . . . . . . . . . 13.05%
Required Total Risk-Based Capital Ratio. . . . . . . . . . . . 8.00%
Excess Total Risk-Based Capital Ratio. . . . . . . . . . . . . 5.05%
Tier I Leverage Ratio(4) . . . . . . . . . . . . . . . . . . . 9.59%
Required Tier I Leverage Ratio . . . . . . . . . . . . . . . . 4.00%
Excess Tier I Leverage Ratio . . . . . . . . . . . . . . . . . 5.59%
- -------------------------------
(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.
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.
10
<PAGE>
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, 1997, the Bank had total assets of $153,421,103
total shareholders' equity of $14,520,645 and total deposits and other
liabilities of $138,900,458.
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.
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 headquartered 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.
11
<PAGE>
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.
Multi-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.
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
12
<PAGE>
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 Garn-St Germain 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.
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.
13
<PAGE>
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.
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.
14
<PAGE>
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.
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
15
<PAGE>
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, 1997, there were $12,458,151 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 ) filed at Exhibit 13 hereto is incorporated in its entirety by
reference under this Item 6.
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, 1997 and 1996, the Company had
impaired loans of $1,089,374 and $1,122,196, respectively with related
allowance for loan loss of approximately $169,997 and $173,548, respectively.
There were no impaired loans without a related allowance for loan losses. For
the year ended December 31, 1997 and 1996, average impaired loans were
$1,105,729 and $1,128,161, respectively.
16
<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,
1997 1996
--------- ---------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans $ 589 $ 1,348
Commercial 75 202
Consumer 155 272
--------- ---------
Total 819 1,822
--------- ---------
Accruing loans which are contractually past due 90 days or
more:
Mortgage loans 616 692
Commercial 48 34
Consumer 91 108
--------- ---------
Total 755 834
--------- ---------
Renegotiated loans 1,219 -
--------- ---------
Total nonperforming loans 2,793 2,656
Other real estate owned 626 461
--------- ---------
Total nonperforming assets $ 3,419 $ 3,117
========= =========
Nonperforming loans as a percent of total loans 2.57% 2.66%
Nonperforming assets as a percent of assets 2.23% 2.22%
Amount of interest lost on nonperforming loans $ 129 $ 151
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, 1997.
17
<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, 1997:
December 31,
1997 1996
--------- ---------
(Dollars in thousands)
Loans outstanding at end of period $ 108,815 $ 100,013
========= =========
Average loans outstanding $ 103,637 $ 93,430
========= =========
Reserve for possible losses:
Balance, beginning of the period $ 1,366 $ 1,248
Loans charged off:
Commercial 151 181
Real estate 165 175
Consumer 112 158
--------- ---------
Total loans charged off 428 514
--------- ---------
Recoveries:
Commercial 11 12
Real estate 4 36
Consumer 39 35
--------- ---------
Total recoveries 54 83
--------- ---------
Net loans charged off 374 431
--------- ---------
Provisions charged to expense 519 549
--------- ---------
Balance, end of period $ 1,511 $ 1,366
========= =========
Ratios:
Net charge offs as a percent of average loans
outstanding 0.36% 0.46%
Reserve for loan losses as a percent of average
loans outstanding 1.46% 1.46%
18
<PAGE>
A portion of the allowance is specifically allocated to individual loans or
group of loans. As of December 31, 1997 and 1996 the allowance for loan
losses is allocated as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Amount of Percent of loans Amount of Percent of loans
allowance for in each allowance for in each
loan loss category to loan loss category to
allocated total loans allocated total loans
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 169 13.5% $ 179 14.2%
Real estate-construction 6 0.9% 4 0.7%
Real estate-mortgage 927 67.4% 890 68.4%
Installment loans to individuals 276 18.2% 272 16.7%
Unallocated 133 - 21 -
--------- --------- --------- ---------
$ 1,511 100.0% $ 1,366 100.0%
========= ========= ========= =========
</TABLE>
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.
19
<PAGE>
Loan Maturity Schedule
Following is a maturity schedule of all accruing loans at December 31, 1997:
Due 1 year Due 1-5 Due after 5
or less years years
--------- --------- ---------
Fixed rate:
Commercial $ 672 $ 4,699 $ 564
Real estate 702 4,823 10,934
Other 1,202 16,192 992
--------- --------- ---------
Total fixed rate loans $ 2,576 $ 25,714 $ 12,490
========= ========= =========
Reprice Reprice
within 1 within 1-5
year years
--------- ---------
Variable rate:
Commercial $ 8,203 $ -
Real estate 51,182 5,874
Other 1,936 63
--------- ---------
Total variable rate loans $ 61,321 $ 5,937
========= =========
20
<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, 1997 the market
value of the Company's held to maturity investment securities was $4,602,088.
Available for Sale 1997 1996
- ------------------ --------- ---------
(Dollars in thousands)
U.S. Treasury securities $ 999 $ 2,999
U.S. Government agency securities 7,260 2,848
Mortgage-backed securities 438 507
Commercial paper 21,154 6,501
Equity securities 851 860
Total $ 30,702 $ 13,715
Held to Maturity 1997 1996
- ---------------- --------- ---------
Obligations of states and political subdivisions $ 4,292 $ 5,951
Corporate securities 250 8,841
Total $ 4,542 $ 14,792
There were no securities held for any issuer that were greater than ten
percent of stockholders' equity as of December 31, 1997.
Proceeds from the sale of investment securities available for sale were
$72,650 in 1997. The Company realized gross losses of $5,650 for the year
ended December 31, 1997. There were no sales of investment securities during
1997.
21
<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, 1997.
<PAGE>
<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 $ 999 6.15% $ - - $ - - $ - - $ 999 6.15%
U.S. Government Agency
Securities $ 2,593 6.92% $ 4,667 6.06% $ - - $ - - $ 7,260 6.37%
Mortgage-backed securities $ 438 6.00% $ - - $ - - $ - - $ 438 6.00%
Commercial Paper $21,154 6.09% $ - - $ - - $ - - $21,154 6.09%
Equity securities $ - - $ - - $ - - $ 851 6.06% $ 851 6.06%
-------------------------------------------------------------------------------------------------
Total $25,184 5.58% $ 4,667 6.37% $ - 7.85% $ 851 6.29% $30,702 6.15%
=================================================================================================
</TABLE>
(1) Weighted average yields have been computed on a taxable equivalent basis
assuming a federal income tax rate of 34%
22
<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, 1997.
<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 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 and
political subdivisions $ 2,215 6.39% $ 800 7.65% $ 1,071 8.85% $ 206 9.53% $ 4,292 7.38% $ 4,352
Other securities $ 250 5.94% $ - - - - - - $ 250 5.94% $ 250
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total $ 2,465 6.19% $ 800 7.66% $ 1,071 8.85% $ 206 12.50% $ 4,542 7.30% $ 4,602
=================================================================================================
</TABLE>
(1) Weighted average yields have been computed on a taxable equivalent basis
assuming a federal income tax rate of 34%
23
<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.
24
<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, 10, and 4 respectively)
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 & 9)
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 page 3) hereto is
incorporated in its entirety by reference under this Item 11.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Relationships and Related
Certain Transactions" contained in the Company's Proxy Statement (at page 9)
hereto is incorporated in its entirety by reference under this Item 12.
25
<PAGE>
Item 13. 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, 1997.
16 None.
18 None.
21 None.
22 List of Subsidiaries of the Company.
23 None.
24 None.
27 Financial Data Schedule.
28 None.
(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, 1997.
26
<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, 1998
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/ Maureen H. Beilman
-----------------------------
Maureen H. Beilman
Treasurer
(Principal Financial and
Accounting Officer)
Date: March 26, 1998
By: /s/ John S. Kiesendahl
-----------------------------
John S. Kiesendahl
Director
Date: March 27, 1998
27
<PAGE>
By: /s/ Joseph J. Murray
-----------------------------
Joseph J. Murray
President, Chief Executive
Officer and Director
(Chief Executive Officer)
Date: March 26, 1998
By: /s/ Thomas A. Peifer
-----------------------------
Thomas A. Peifer
Director
Date: March 27, 1998
By: /s/ William E. Schwarz
-----------------------------
William E. Schwarz
Chairman of the Board
and Director
Date: March 27, 1998
By: /s/ Henry M. Skier
-----------------------------
Henry M. Skier
Director
Date: March 28, 1998
By: /s/ Gerald J. Weniger
-----------------------------
Gerald J. Weniger
Secretary and Director
Date: March 28, 1998
28
<PAGE>
INDEX TO EXHIBITS
Item Number Description
- ----------- -----------
13 Annual Report to Shareholders for
Fiscal Year Ended December 31, 1997
22 List of Subsidiaries of the
Company
27 Financial Data Schedule
29
<PAGE>
The mission of Dimeco, Inc. is to operate, through its subsidiary The Dime
Bank, a commercial bank in the communities it serves, providing to the public
traditional banking and related services consistent with sound, prudent
banking principles and fulfilling the social, economic, moral, and political
considerations ordinarily associated with a responsible, well-run banking
corporation.
CONSOLIDATED FINANCIAL HIGHLIGHTS
%Increase
1997 1996 (decrease)
----------------------------------
(amounts in thousands, except per share)
PERFORMANCE
Net income $ 1,825 $ 1,612 13.2%
Return on average assets 1.28% 1.22% 4.9%
Return on average equity 13.86% 12.92% 7.3%
SHAREHOLDERS' VALUE (PER SHARE)
Net income $ 2.52 $ 2.24 12.6%
Dividends $ 0.74 $ 0.60 23.3%
Book value $ 20.04 $ 18.21 10.0%
Market value $ 31.00 $ 23.75 30.5%
Market value/book value ratio 154.71% 130.80% 18.3%
Price/earnings multiple 12.3x 10.6x 15.9%
Dividend yield 2.39% 2.53% (5.6%)
SAFETY AND SOUNDNESS
Shareholders' equity/asset ratio 9.46% 9.37% 1.0%
Dividend payout ratio 29.33% 26.79% 9.5%
Nonperforming assets/total assets 2.23% 2.22% 0.4%
Allowance for loan loss as a % of loans 1.39% 1.36% 2.2%
Net charge-offs/average loans 0.35% 0.46% (23.9%)
Allowance for loan loss/
nonaccrual loans 74.15% 74.98% (1.1%)
Allowance for loan loss/
non-performing loans 44.20% 43.90% 0.7%
Risk-based capital 13.05% 13.74% (5.0%)
BALANCE SHEET HIGHLIGHTS
Total assets $153,421 $140,284 9.4%
Investment securities $ 35,245 $ 28,507 23.6%
Loans, net unearned discount $108,815 $100,013 8.8%
Allowance for loan losses $ 1,511 $ 1,366 10.6%
Deposits $135,101 $126,003 7.2%
Stockholders' equity $ 14,521 $ 13,147 10.4%
Trust assets under management $ 11,465 $ 10,750 6.7%
1
<PAGE>
(BAR GRAPH ON THIS PAGE)
Dimeco, Inc.
Market Value
12/31/97
Market Value $11.25 $13.00 $17.38 $23.75 $31.00
--------------------------------------------------
1993 1994 1995 1996 1997
<PAGE>
CONTENTS
------------------------------------------------------
Consolidated Financial Highlights....................1
Letter to the Shareholders...........................3
Director Memorial....................................4
Dimeco, Inc. And The Dime Bank Board of Directors....5
The Dime Bank Officers...............................5
Management's Discussion and Analysis of Financial
Condition and Results of Operation.................6
Selected Financial Data.............................15
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet.......................................16
Statement of Income.................................17
Statement of Changes in Stockholder's Equity........18
Statement of Cash Flows.............................19
Notes to the Consolidated Financial Statements......20
Independent Auditor's Report........................34
Promotions and Appointments.........................35
------------------------------------------------------
2
<PAGE>
April, 1998
Dear Shareholders:
From a shareholder perspective, 1997 was a great year. Yes, there were
sound fundamentals such as a 13% increase in earnings and over a 9% advance in
assets, which significantly contributed to the overall performance. Most
striking, however, is the over 30% increase in the market value of your stock.
When one considers this increase in combination with the nearly 37% advance in
1996, it is reason enough to believe that sound fundamental performance over a
longer period of time will eventually produce its deserved reward. It is also
a positioning to assure those rewards will continue.
The year was not without its low point. David M. Boyd, a Director since
1975, passed away in November. Dave was special. Yes, he was an attorney of
considerable note, but was a lot more. His wisdom and counsel were pillars
that provided strength to our decision making process. His wit and humorous
interludes gave us balance. His presence is sorely missed. Our condolences
continue to go out to his wife, Jeanne, and son, Bob. Dave's legacy can only
mean that we who remain are challenged to keep his vision for Dimeco, Inc. and
The Dime Bank alive and growing. Rest assured, Dave, that challenge is being
met.
Despite the record breaking performance of our bank, the banking industry
seems to be at a cross roads. FISI Madison Financial reports on the Federal
Reserve's Flow of Funds "that the market share of loans and securities held by
financial institutions has plummeted more than 50 percent in the past two
decades." On the liability side, there is a corresponding 44% loss. Yes,
profits are generally good if not great for those in our industry, but it is
my view that markets must be examined for needs and given a response to fill
those needs. Overall, consolidation to become more efficient has value, but
if the customer's needs are not being met, that value is short lived. Our
challenge in the smaller market is to stay close to our customers, introduce
efficiencies as we are able to afford them, and make changes in the way we
deliver services in response to a market that wants those changes. It's a
delicate balance, but it is the only reasonable way we can continue to grow
and prosper. It has been our way and thus far has borne significant fruit.
As we move into 1998, we are focusing on building those services already
in place, such as investment services, mortgage origination and sale,
commercial loans and participations, and development of deposit relationships
through our branch network. We intend to lease an off-premise facility to
house our "back office" operation. We will continue our team building effort
to keep our energy level up and the new ideas flowing. Already in 1998, we
have hired Jeff Ketcham, whose vast background in securities will help us with
the investment services side. Also, Jerry Theobald has come on board and
brings with him more than 20 years of community banking experience, and will
be serving in our lending and business development areas. In all, 1998 is
shaping up as a very good year.
Finally, let me once again go back to our constant theme of gratitude to
you, our shareholders. Without you, we cannot exist. Hopefully with what we
have done for you, we have your trust. The aforementioned increase in market
value as well as the 23% increase in your dividend is the best way we know to
say, "Thanks!".
Very truly yours,
JOSEPH J. MURRAY
President & Chief Executive Officer
3
<PAGE>
- ------------------------------------------------------------------------------
For more than 20 years, David M. Boyd, Esquire was a loyal and valued
member of The Dime Bank family. He provided leadership and vision which not
only helped the Bank to a position of trust and partnership with the
communities served but also helped shape the Bank's commitment to caring for
the customer, the employee, and the shareholder.
Born April 19, 1922 in Honesdale, he was a 1940 graduate of Honesdale High
School and a 1944 graduate of Dickinson College. He was a U.S. Army veteran
of World War II, serving in the Pacific Theatre of Action. Following the war,
he received his law degree from the Dickinson Law School in 1948. Hew was
admitted to the bar in 1949 and practiced law in Honesdale for the next 48
years. He served as Wayne County District Attorney for 10 years, was a former
member and Vice President of the PA District Attorney's Association and a
member of the Wayne County Bar Association.
Dave was a member of the Grace Episcopal Parish, Honesdale, and a form
Vestryman of the church. He was a member of the Honesdale Masonic Lodge #218,
the Anthony Wayne Royal Arch Chapter #204, the Savona Commandry #89, and Irem
Temple Shrine. Dave was an avid golfer and was a life member of the Honesdale
Golf Club. He also was a member of the American Contract Bridge League.
Dave was a person of high moral character and integrity, as well as a
source of pride and an example to us all. His legacy of service and heartfelt
concern for our customers will continue to inspire the entire Dime Bank
family.
- ------------------------------------------------------------------------------
4
<PAGE>
Dimeco, Inc. And The Dime Bank
Board of Directors
William E. Schwarz Joseph J. Murray Gerald J. Weniger
Chairman of the Board President and Chief Secretary, Dimeco Inc.
Dimeco, Inc. and Executive Officer Assistant Secretary,
The Dime Bank Dimeco Inc. and The Dime Bank
President, Edward J. The Dime Bank President, Weniger
Schwarz, Inc. Electronics, Inc.
John S. Kiesendahl Thomas A. Peifer Henry M. Skier
President, Woodloch Superintendent, Wallenpaupack President, A.M. Skier
Pines, Inc. Area School District Agency, Inc.
- ------------------------------------------------------------------------------
Officers of The Dime Bank
Joseph J. Murray
President and Chief Executive Officer
Gary C. Beilman Maryann Ellefsen Linda S. Tallman Ruth E. Daniels
Vice President Assistant Cashier Assistant Secretary Assistant Cashier
Maureen H. Beilman Mary E. Rutledge Cynthia D. Theobald John R. Branston
Secretary and Assistant Cashier Assistant Cashier Assistant Cashier
Treasurer Controller
L. Jill George Nancy M. Lavenduski Cheryl A. Smith Melanie E. Rutledge
Assistant Vice Assistant Cashier Assistant Cashier Assistant Cashier
President
Dana L. Vanderhook
Assistant Cashier
5
<PAGE>
1997 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(BAR GRAPH IN CENTER OF PAGE)
Total Assets
(in thousands)
$110,662 $115,080 $124,808 $140,284 $153,421
- --------------------------------------------------------
1993 1994 1995 1996 1997
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, 1997 and 1996. This information should be read
in conjunction with the consolidated financial statements and accompanying
notes to the financial statements.
Dimeco, Inc. is a one-bank holding company with The Dime Bank ("the Bank") as
the wholly-owned subsidiary. The Company and 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. The bank operates four full-
service branches in Honesdale, Hawley, Damascus and Greentown, Pennsylvania.
The principal market areas are Wayne and Pike counties, Pennsylvania and
Sullivan County, New York. At December 31, 1997, the bank had 57 full-time
and 21 part-time employees.
STATEMENT OF CONDITION
Total assets increased $13,137,000 or 9.4% from December 31, 1996 to
December 31, 1997 with $153,421,000 at year end. The increase in assets is
mainly attributable to $8,801,000 growth in loans. Also contributing to this
growth was a $6,737,000 growth in investment securities, offset by a decline
in cash and cash equivalents of $2,033,000.
The decline in cash and cash equivalents is due mainly to investment of excess
cash funds in short-term commercial paper as opportunities arose during 1997.
This strategy maintained liquidity while gaining a greater spread over
interest rates offered on federal funds sold.
The Company uses the investment portfolio as a complement to the loan function
in order to maintain liquidity while receiving a greater rate of return than
if the funds were held in cash or cash equivalent funds. With a nearly flat
yield curve during the past few years, management has chosen to invest in
shorter term securities in order to have the ability to reinvest if interest
rates rise. Investment securities available for sale increased $16,987,000 or
123.9% during 1997. Purchases of commercial paper increased this type
investment by $14,653,000 or 225.4% over holdings at December 31, 1996. The
maximum maturity of commercial paper is two hundred and seventy days with the
majority of investments of this type being less than sixty days. Management
only purchases commercial paper of an investment grade. The portfolio of U.S.
Government agency securities increased $4,417,000 or 155.0% more than 1996
amounts. These securities typically had maturity dates of less than five
years. This type of investment offers increased interest income over other
liquid funds while being available to pledge at 100% of their value for
municipal deposits. Investments in U.S. Treasury securities decreased
$1,999,000 or 66.7% as compared to 1996. This type of investment did not
offer the same interest rate opportunities as the above-mentioned commercial
paper or U.S. Government agency bonds during 1997. Investment securities
held to maturity decreased $10,250,000 or 69.3% during 1997. Corporate bonds
which were held on December 31, 1996 matured during 1997 and the funds were
reinvested in short-term commercial paper, included in the available for sale
portfolio, which offered more attractive interest rates for similar
maturities.
Loan demand was strong during 1997. The loan portfolio grew by $8,801,000 or
8.8%, bringing the total to $108,814,000 from $100,013,000 at December 31,
1996. Actual loan activity was even stronger than these figures suggest, as
evidenced by the fact that $9,838,000 of residential mortgages and $1,843,000
of commercial loans were sold to secondary market investors during 1997. The
largest net loan increases were in the commercial and consumer loan areas.
Commercial
6
<PAGE>
(BAR GRAPH IN CENTER OF PAGE)
Deposits
(in thousands)
$98,119 $102,571 $109,878 $126,003 $135,101
- -------------------------------------------------------
1993 1994 1995 1996 1997
mortgages rose $6,636,000 or 27.2% from $24,432,000 to $31,068,000. These
loans were granted to both existing and new business clienteles and were
directed toward expansion and acquisition. This activity was spread across
numerous borrowers of various industry types including camps, grocery stores,
restaurants, nursing and personal care facilities, resorts and retail stores.
Consumer installment loans increased 17.2% from $16,085,000 to $18,853,000
during 1997. Loans generated from a seasonal automobile financing promotion
comprised the majority of this gain. Overall, the loan portfolio expanded as
the result of a growing local community, a stronger local economy and
heightened sales call activity by officers.
Deposits increased $9,099,000 or 7.2% during 1997. This growth is
attributable to increases in time deposits, of which those greater than
$100,000 increased $6,998,000 or 74.6%. Management has been more aggressive
in pricing all certificates of deposit, in particular "jumbo" certificates,
and believes that this policy has had the effect of increasing the Company's
market share of this type of deposit.
LIQUIDITY
The Company's liquidity is reflected in its capacity to have sufficient
amounts of cash to deal with customers deposit withdrawal requests,
accommodate loan demand, maintain reserve requirements, take advantage of
investment opportunities and fund operating expenses. Liquidity needs are
primarily accomplished through core deposits gathered through our branches.
In addition, the Company has the ability to increase liquidity on the asset
side through payments received on existing loans, by the sale of assets such
as mortgage loans held for sale or investments available for sale or by
decreasing federal funds sold. Liquidity can also be achieved by increasing
other liabilities such as securities sold under agreements to repurchase,
borrowing from the Federal Reserve Bank or the Federal Home Loan Bank.
Income from operations is yet another important source of meeting our
liquidity needs.
Management monitors liquidity regularly while attempting to match maturities
of assets with liabilities. An important aspect of this measurement is the
maintenance of sufficient net assets that mature within one year. The total
of these assets at December 31, 1997 was $31,849,000 less short-term
borrowings of $2,390,000 to net $29,459,000. This compares with a net of
27,104,000 at December 31, 1996. These liquidity levels are well within
internal guidelines.
As addressed in the deposit discussion, management feels that through
continuing to offer competitive interest rates and a greater array of products
we can continue to attract new funds. In addition, through the Bank's
affiliation with the Federal Home Loan Bank of Pittsburgh, a line of credit
in the amount of approximately $3,500,000 is available along with the ability
to use term financing for any longer term requirements as deemed necessary.
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the relationship between market interest
rates and the earnings volatility of the Company due to the repricing
characteristics of assets and liabilities. In order to maintain consistent
earnings, management, through the Asset /Liability Committee, is responsible
for implementing policy and monitoring the status of interest rate
sensitivity. This is accomplished through various means including daily
monitoring of the interest margin and interest rate spread, or the difference
between interest rates received on assets and interest rates paid on
liabilities. The Asset/Liability Committee also uses interest rate shock
analysis to monitor interest rate sensitivity. A model is used which assumes
a positive and a negative 200 basis point movement of interest rates. Models
used in 1997 and 1996 show that the level of net interest income at risk due
to these variations is plus 11.42% and minus 11.93%. The effect on total
equity of these movements would be minus 1.69% and minus 1.67% according to
the model. All measurements are within internal risk tolerance guidelines.
Another tool that is used to assess sensitivity to interest rate risk is the
static gap analysis. This analysis groups assets and liabilities by repricing
opportunities in order to monitor gaps between interest-earning assets and
interest-costing liabilities. These analyses are very useful but do have
inherent shortcomings. Even though certain assets and liabilities have
similar repricing opportunities or maturities, they may react in different
ways to fluctuations in interest
7
<PAGE>
rates with some reacting in advance of actual changes and some lagging actual
changes in rates. In addition, certain assets or liabilities, such as
adjustable rate mortgages with interest rate caps and ceilings, have
features that restrict changes in interest rates. In the event of interest
rate changes, prepayment and early withdrawal levels may deviate significantly
from those assumed in the analysis.
<TABLE>
<CAPTION>
STATEMENT OF INTEREST SENSITIVITY GAP
---------------------------------------------------------
(amounts in thousands)
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 $ 0 $ - $ - $ - $ -
Interest-bearing deposits 3,122 - - - 3,122
Mortgage loans held for sale 157 - - - 157
Investment securities
available-for-sale (1) 21,930 2,817 4,667 1,288 30,702
Investment securities
held-to-maturity (1) - 2,465 1,078 999 4,542
Loans (1) 11,468 52,429 31,650 12,490 108,037
--------- --------- --------- --------- ---------
Rate sensitive assets $ 36,677 $ 57,711 $ 37,395 $ 14,777 $ 146,560
========= ========= ========= ========= =========
Liabilities:
Interest-bearing deposits:
Interest-bearing demand (2) $ 20,856 $ - $ - $ - $ 20,856
Money market 3,740 - - 3,740 -
Savings (3) 19,947 10,926 - 30,873 -
Time deposits 17,743 33,056 15,869 66,668 -
Short-term borrowings 2,390 - - 2,390 -
--------- --------- --------- --------- ---------
Rate sensitive liabilities $ 64,676 $ 43,982 $ 15,869 $ - $ 124,527
========= ========= ========= ========= =========
Interest sensitivity gap $ (27,999) $ 13,729 $ 21,526 $ 14,777 $ 22,033
Cumulative gap $ (27,999) $ (14,270) $ 7,256 $ 22,033
Cumulative gap to total assets (18.25%) (9.30%) 4.73% 14.36%
</TABLE>
(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
adjustments have 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.
8
<PAGE>
(BAR GRAPH IN CENTER OF PAGE)
Net Interest Income
(in thousands)
$4,194 $4,699 $5,375 $5,820 $6,353
- ------------------------------------------------
1993 1994 1995 1996 1997
CAPITAL RESOURCES
Total Stockholders' Equity increased $1,373,000 or 10.4% in 1997 as compared
to an increase of $1,404,000 or 12.0% during 1996. Net income, the primary
source of growth in each year, was $1,825,000 in 1997 and $1,612,000 in 1996.
Dividends paid to stockholders were $535,000 in 1997 and $432,000 in 1996.
During 1997 the Company took advantage of an opportunity to purchase a block
of 5,600 shares of common stock for $148,000. This stock has been used in the
dividend reinvestment plan with 1,525 remaining at December 31, 1997.
Management evaluates capital position attempting to maintain an optimum
capital to asset ratio of between 9% and 10%. This ratio was 9.5% on
December 31, 1997 and was 9.4% on December 31, 1996.
The Company is required by regulatory agencies to maintain certain ratios of
capital adequacy. Total risk-based capital ratio requirements mandate a
minimum of 8% to be adequately capitalized. At December 31, 1997, the
Company's ratio was 13.05% with 11.82% being in the form of Tier I risk-based
capital. At December 31, 1996, these ratios were 13.74% and 12.49%,
respectively. In addition, the regulatory agencies have set a minimum of 4%
for Tier I leverage capital; the Company's ratio at December 31, 1997 was
9.59% and at December 31, 1996 was 9.97%.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the main source of the company's income, is the
difference between interest earned on assets and interest paid on liabilities.
This discussion of net interest income should be read in conjunction with the
tables "Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential" and "Volume/Rate Analysis of Changes in Net
Interest Income."
Interest income increased $910,000 from 1996 to 1997. The primary source of
interest income is from loans which showed a decrease of 11 basis points in
interest rate but an increase of $10,970,000 in average volume. Therefore the
increase in income for this category is due to an increase in the size of the
loan portfolio which was offset slightly by decreased interest rates received
on the portfolio. With approximately 63% of the portfolio in variable rate
loans, the prime rate decrease seen in 1996 was still affecting loans with
longer-term repricing opportunities during 1997. Interest earned on taxable
investment securities increased $324,000 in 1997 due to a combination of
increased rates earned of 21 basis points on average combined with an average
increase of $4,705,000 in this type of investment. The overall rate of return
on interest-earning assets remained constant during 1996 and 1997 as interest
rates remained relatively flat.
Interest expense increased $413,000 from 1996 to 1997 due mainly to growth in
the deposit base during 1997. The average interest rate paid on these
liabilities remained fairly constant from 1996 to 1997 with a moderate
increase of two basis points due mainly to deposits with higher balances in
tiered interest rate accounts.
As exhibited in the Volume/Rate Analysis, net interest income, on a tax
equivalent basis, increased $497,000 from 1996 to 1997. This increase is due
mainly to growth of both interest-earning assets and interest-costing
liabilities. Increases in net interest income of $585,000 relating to this
growth in volume were offset by slight rate differences amounting to $88,000
less in net interest income for the period.
Net interest income increased $427,000 or 7.7% from 1995 to 1996. Interest
income increased $759,000 or 7.8% based mainly on increased loan volume.
Interest yields received on the loan portfolio declined, mainly due to a
decrease in the prime rate, on which a large portion of loan rates are
dependent. Interest rates paid on deposits decreased .08% from 1995 to 1996;
this combined with an increase in the size of the deposit base resulted in a
$332,000 increase in interest expense.
On a daily basis, management monitors interest rate margins and spreads in
order to be able to react in a timely fashion to variances as they affect net
interest income.
9
<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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
(amounts in thousands) 1997 1996 1995
----------------------------- ----------------------------- -----------------------------
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) $ 103,637 $ 9,471 9.14% $ 92,667 $ 8,568 9.25% $ 83,952 $ 7,940 9.46%
Investment securities:
Taxable 21,009 1,298 6.18% 16,304 974 5.97% 16,758 971 5.79%
Exempt from federal income tax(2) 5,130 373 7.27% 6,323 482 7.62% 6,645 528 7.95%
Interest-bearing deposits 2,336 22 0.94% 2,063 23 1.11% 1,625 13 0.80%
Federal funds sold and securities
purchased under agreements to
resell 3,168 176 5.56% 7,119 383 5.38% 3,768 219 5.81%
--------- --------- --------- --------- --------- ---------
Total interest-earning assets/
interest income 135,280 11,340 8.38% 124,476 10,430 8.38% 112,748 9,671 8.58%
Cash and due from banks 1,244 1,262 1,082
Premises and equipment, net 3,000 2,963 2,794
Other assets, less allowance
for loan losses 3,090 3,445 2,920
--------- --------- ---------
Total assets $ 142,614 $ 132,146 $ 119,544
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings $ 32,706 $ 1,030 3.15% $ 31,183 $ 989 3.17% $ 28,127 $ 913 3.25%
Interest-bearing checking 22,482 583 2.59% 20,413 514 2.52% 18,574 512 2.76%
Time deposits 59,539 3,225 5.42% 53,213 2,885 5.42% 47,772 2,588 5.42%
Securities sold under agreements to
repurchase 430 15 3.49% 1,003 59 5.88% 1,524 87 5.71%
Federal Home Loan Bank advances 112 7 6.25% 7 - - 236 15 6.36%
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities/
interest expense 115,269 4,860 4.22% 105,819 4,447 4.20% 96,233 4,115 4.28%
Noninterest-bearing deposits 13,149 12,697 11,319
Other liabilities 1,031 1,151 1,084
--------- --------- ---------
Total liabilities 129,449 119,667 108,636
Stockholders' Equity 13,165 12,479 10,908
--------- --------- ---------
Total Liabilities and
Stockholders' Equity $ 142,614 $ 132,146 $ 119,544
========= ========= =========
Net interest income/interest spread $ 6,480 4.16% $ 5,983 4.18% $ 5,556 4.30%
========= ====== ========= ====== ========= ======
Net interest income/earning assets 4.79% 4.81% 4.93%
====== ====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 117.36% 117.63% 117.16%
====== ====== ======
</TABLE>
(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
10
<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 rate (changes in rate multiplied
by old volume).
<TABLE>
<CAPTION>
VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST INCOME
----------------------------------------------------------
1997 Compared to 1996 1996 Compared to 1995
---------------------------- ----------------------------
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) $ 903 $ (111) $ 1,014 $ 628 $ (196) $ 824
Investment securities:
Taxable 324 43 281 3 29 (26)
Exempt from federal income tax (109) (18) (91) (46) (20) (26)
Interest-bearing deposits (1) (4) 3 10 6 4
Federal funds sold and securities
purchased under agreements to resell (207) 6 (213) 164 (31) 195
-------- -------- -------- -------- -------- --------
Total interest-earning assets 910 (84) 994 759 (212) 971
======== ======== ======== ======== ======== ========
Interest expense:
Savings 41 (7) 48 76 (23) 99
Interest-bearing checking 69 17 52 2 (49) 51
Time deposits 340 (3) 343 297 2 295
Securities sold under agreements
to repurchase (44) (10) (34) (28) 2 (30)
Federal Home Loan Bank advances 7 7 0 (15) 0 (15)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 413 4 409 332 (68) 400
-------- -------- -------- -------- -------- --------
Net change in net interest income $ 497 $ (88) $ 585 $ 427 $ (144) $ 571
======== ======== ======== ======== ======== ========
</TABLE>
(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.
PROVISION FOR LOAN LOSSES
The provision for loan losses is based upon management's evaluation of the
inherent credit risk in the loan portfolio. This evaluation is performed
through a formal model which examines the loan portfolio using an internal
grading system analyzing historical performance of loans in each grade along
with comparison to peer groups. In addition, subjective evaluations of
individual loans and homogeneous groups based upon delinquency, economic
conditions in the geographical area and conclusions drawn by regulatory
agencies concerning specific loans are considered in estimating the proper
allowance for loan loss.
The provision in 1997 was $520,000, representing a decrease of $29,000 from
the 1996 amount of $549,000. Based on management's periodic evaluation of the
allowance for loan loss which includes a review of the current loan portfolio,
economic factors, past loan experience, changes in the portfolio and other
relevant factors, management believes that the level of the allowance for loan
loss is adequate. Management has taken a more aggressive approach in
charging off loans in compliance with stricter guidelines adopted in 1996
thereby strengthening the remaining portfolio. The allowance for loan loss
was 1.39% of total loans at December 31, 1997 and 1.36% at December 31, 1996.
11
<PAGE>
(BAR GRAPH IN CENTER OF PAGE)
Net Income
(in thousands)
$1,075 $1,300 $1,567 $1,612 $1,825
- --------------------------------------------------
1993 1994 1995 1996 1997
NONINTEREST INCOME
Noninterest income consists of revenue from many sources including: fees for
servicing loans which have been sold in the secondary market, fees based upon
sales of mutual funds through our affiliation with Wright Investors' Service,
fees generated through our placement of ATM cards and use of the Bank's ATM
machines, placement of credit cards with retail customers along with merchant
credit card programs for commercial customers, rentals of safe deposit boxes
and commissions on sales of credit life insurance.
Gains on the sale of mortgage loans held for sale increased $179,000 from 1996
to 1997. Residential mortgages of $9,838,000 were sold during 1997 as
compared to $3,554,000 in 1996. This increase in volume, coupled with more
efficient processing of mortgages which allows for quicker sale and decreases
the potential for price volatility, accounted for the increased income in
this category. During 1996 there were market value declines between
origination dates and sales transactions, ultimately reducing the gains on
sale to $16,000 from $53,000 in 1995. In 1995, market values had recovered
from losses recorded the previous year.
Gains (losses) on sales of investment securities decreased $65,000 from 1996
to 1997. In 1996 a municipal bond which had been in nonaccrual status was
refunded and sold realizing a gain of $52,000. A sale of a group of mortgage-
backed securities with a low balance was also sold in 1996 realizing a gain of
$7,000. During 1997, management sold a mutual fund which had an increase in
current market value but had been below market value for some time resulting
in a loss of $6,000. There were no sales of investment securities in 1995.
NONINTEREST EXPENSE
Noninterest expense includes all other operating expenses of the Company.
Compensation and the related benefits to employees are the largest expense in
this category. This category includes not only payroll expense but also the
cost of federally mandated employment taxes, workman's compensation insurance,
medical insurance, disability and life insurance for staff, education expenses
and other employment benefits. Salaries and employee benefits increased
$62,000 or 3.2% from 1996 to 1997. Payroll expense, net of the direct cost
deferral of loan origination expenses, increased $13,000. With a greater
number of loans originated during 1997, the deferral of payroll expenses,
which is a contra account to payroll, increased $106,000 while actual payroll
expense increased $119,000. This payroll increase represents normal salary
increases which were approximately 5.3% for the majority of employees combined
with other merit increases. Other employee benefits increased $49,000 or 9.7%
from 1996 to 1997 in line with salary increases and for benefits to employees
who were not previously eligible due to length of service or age.
Salaries and employee benefits increased $160,000 or 9.0% from 1995 to 1996.
Normal salary adjustments, the opening of branches in August 1995 and October
1996 and overtime pay incurred in connection with the computer conversion in
May 1996 were the main reasons for this increase.
Included in occupancy expense are the costs to operate facilities including
depreciation, leases, utilities, real estate taxes and property insurance.
Occupancy expenses increased $56,000 mainly due to a full year of operation in
the Greentown office in 1997 versus three months in 1996. In addition, rental
income, an offset to expense, in the Hawley location was down in 1997 with
the property unoccupied for several months. The main retail space is now
leased. Occupancy expenses increased $45,000 or 18.9% from 1995 to 1996 due
to costs associated with the new branches.
Furniture and equipment expense increased $44,000 or 16.4% due to lease
payments on computer hardware placed in service in 1996 combined with
depreciation on furniture and fixtures in the Greentown office. From 1995 to
1996 this expense increased $51,000 or 23.3% including expenses of the two
newest branches and depreciation on platform automation systems placed in
service in 1995.
Operations of other real estate continue to be an area of concern for the
Company. During 1997 expenses increased $13,000 over those recorded in 1996.
In 1997 management recorded a devaluation of $57,000 in the recorded market
value of several properties which had not yet been sold. There was no similar
expense in 1996 but
12
<PAGE>
(BAR GRAPH IN CENTER OF PAGE)
Stockholder's Equity
(in thousands)
$9,060 $10,011 $11,743 $13,147 $14,521
- ------------------------------------------------------
1993 1994 1995 1996 1997
the Company recorded a devaluation of $7,000 in 1995. The cost of
maintaining these properties was $44,000 in 1997, $38,000 in 1996 and $30,000
in 1995. In 1997, the Company recorded losses of $3,000 on sales of other
real estate properties compared to $54,000 in 1996 and $31,000 in 1995.
Professional fees paid in 1997 increased $81,000 from 1996 to 1997 due to the
use of several outside consultants. Management employed the services of an
outside consulting firm for $22,000 to prepare a profitability analysis on
the operation of the Bank in order to detect opportunities for operating
efficiencies. In addition, the electronic data processing manager resigned in
1997 and management hired an outside vendor for $14,000 to evaluate the
department in order to restructure the operation more effectively. Legal
expenses increased $21,000 or 83.5% due to an increase in legal opinions on
corporate matters and increased efforts in collection and foreclosure. An
outside consultant was also employed to assist in strategic planning sessions
with the directors and to help form a stronger management team. Since 1995
the Bank has used the services of an accounting firm to perform the internal
audit function. This expense increased $4,000 or 12.2% from 1996 to 1997.
Professional fees also include external audit fees and tax preparation
expenses which increased $4,000 or 8.9% from 1996 to 1997.
The caption "other expense" includes a variety of expenses incurred in order
to operate a commercial bank. Several expenses are specifically discussed
here. In addition to these items, material expenses included are directors'
fees, correspondent bank fees, the cost of bank liability and directors and
officer's insurance, bank supplies, postage and many other day-to-day
operating expenses.
Other expenses increased $113,000 from 1996 to 1997. Expenses connected with
the operation of ATM's increased $17,000 or 28.3% due to the addition of a new
machine in Greentown in 1996 and a new machine at an off-site location in
1997. Deposit insurance premiums increased $14,000 from 1996 to 1997 based
upon increased deposits coupled with Financing Corporation assessments to all
Federal Deposit Insurance Corporation members. Advertising expenses increased
$12,000 or 9.5% in an effort to increase visibility in new and existing market
areas. The Pennsylvania shares tax increased $12,000 or 11.9% due to the
growth experienced by the Bank. Computer software amortization increased
$11,000 or 16.4% including a full year of amortization on $256,000 of
software purchased in 1996. Changes in various other categories accounted for
the remaining increase with no one category being a significant dollar amount.
From 1995 to 1996 this expense was fairly stable with a net increase of
$2,000. Of particular note in 1996, amortization of computer software
associated with the 1995 platform automation and 1996 computer software
purchases increased $32,000. Advertising was boosted $22,000 during 1996 with
market penetration into new areas and the 90th anniversary celebration of the
Bank. Postage expenses increased $15,000 due to increased postal rates.
These increases were offset by a decrease of $117,000 in deposit insurance
premiums.
Federal income taxes increased $122,000 or 17.4% to make the effective tax
rate 31.0% for 1997 as compared to 30.2% for 1996 and 30.2% in 1995. The
effective tax rate has increased due to insufficient availability of tax-free
investments at rates comparable to taxable investments with similar
maturities.
Year 2000
The Company's primary business activities are heavily dependent upon the use
of sophisticated computer systems. As the millennium ("Year 2000" or "Y2K")
approaches, many computer systems worldwide do not have the capability of
recognizing the year 2000 or years thereafter. To date, the Bank has received
confirmations from its primary computer vendors, both hardware and software,
that their systems are already compliant with these issues or that plans have
been developed by them to address and correct the issues associated with the
year 2000 problem. The Bank has established a management committee to
identify all of its functions potentially affected by the year 2000 and to
ensure that re-programming of the affected systems will be completed by
December 31, 1998, with testing beginning in 1998, thus allowing adequate
time for any further enhancements that may be necessary. The Company does not
anticipate that the year 2000 issue will pose any significant operational
problems or will have any material impact on its results of operations.
13
<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, 1997 and 1996:
(amounts in thousands) 1997 1996
--------- ---------
Balance January 1, $ 1,366 $ 1,248
Charge-offs:
Commercial 150 181
Real Estate 165 175
Installment 113 158
--------- ---------
Total charge-offs 428 514
--------- ---------
Recoveries:
Commercial 11 12
Real Estate 4 36
Installment 39 35
--------- ---------
Total recoveries 54 83
--------- ---------
Net charge-offs 374 431
Additions charged to operations 519 549
--------- ---------
Balance December 31, $ 1,511 $ 1,366
========= =========
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.35% 0.46%
Allowance for loan loss as a % of average
loans outstanding 1.43% 1.45%
In determining the amount of loan loss expense to charge 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 that have been
completed during regular examinations by representatives or 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 40
years. It is the intention of the Company's Board of Directors to continue to
pay dividends in the future; however, future 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:
1997 1996
------------------------ --------------------------
Dividend Dividend
High Low Declared High Low Declared
------ ------ ----- ------ ------ -----
First Quarter $25.00 $23.50 $0.18 $21.38 $19.00 $0.14
Second Quarter $30.00 $24.25 $0.18 $23.25 $19.75 $0.14
Third Quarter $29.00 $26.25 $0.18 $22.75 $21.13 $0.14
Fourth Quarter $31.00 $27.38 $0.20 $24.00 $22.13 $0.18
This price information was obtained from daily prices published in local
newspapers. 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, 1997 there were approximately 671 holders of record of
the Company's stock.
14
<PAGE>
SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
(amounts in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 11,213 $ 10,267 $ 9,491 $ 8,007 $ 7,587
Interest expense $ 4,860 $ 4,447 $ 4,115 $ 3,308 $ 3,392
Net interest income $ 6,353 $ 5,820 $ 5,375 $ 4,699 $ 4,194
Provision for possible loan losses $ 520 $ 549 $ 382 $ 162 $ 345
Net interest income after provision
for possible loan losses $ 5,833 $ 5,271 $ 4,993 $ 4,537 $ 3,849
Other income $ 878 $ 735 $ 639 $ 506 $ 474
Other expenses $ 4,065 $ 3,695 $ 3,388 $ 3,154 $ 3,139
Income before income taxes and
cumulative effect of
accounting change $ 2,646 $ 2,311 $ 2,244 $ 1,889 $ 1,184
Income taxes $ 821 $ 699 $ 677 $ 589 $ 345
Income before cumulative effect
of accounting change $ 1,825 $ 1,612 $ 1,567 $ 1,300 $ 839
Cumulative effect of accounting
change for income taxes $ - $ - $ - $ - $ 236
Net income $ 1,825 $ 1,612 $ 1,567 $ 1,300 $ 1,075
PER COMMON SHARE
Net income before cumulative
effect of accounting change $ 2.52 $ 2.24 $ 2.24 $ 1.91 $ 1.26
Cumulative effect of accounting
change for income taxes $ - $ - $ - $ 0.36 $ -
Net income $ 2.52 $ 2.24 $ 2.24 $ 1.91 $ 1.62
Cash dividends $ 0.74 $ 0.60 $ 0.54 $ 0.43 $ 0.37
Book value $ 20.04 $ 18.21 $ 16.58 $ 14.60 $ 13.43
Shares outstanding at year end 727 722 708 686 674
BALANCE SHEET DATA - END OF YEAR
Total assets $ 153,421 $ 140,284 $ 124,808 $ 115,080 $ 110,662
Deposits $ 135,101 $ 126,003 $ 109,878 $ 102,571 $ 98,119
Loans, net $ 107,303 $ 98,647 $ 88,409 $ 80,838 $ 73,642
Loans held for sale $ 157 $ 207 $ 465 $ 829 $ 4,371
Investment securities available for sale $ $30,702 $ 13,715 $ 11,453 $ 11,236 $ -
Investment securities held to maturity $ 4,542 $ 14,792 $ 9,267 $ 14,576 $ 20,993
Shareholders' equity $ 14,521 $ 13,147 $ 11,743 $ 10,011 $ 9,060
PERFORMANCE YARDSTICK
Return on average assets 1.28% 1.22% 1.31% 1.15% 1.00%
Return on average equity 13.86% 12.92% 14.37% 13.60% 12.44%
Dividend payout ratio 29.33% 26.79% 24.11% 22.51% 22.84%
Average equity to average
assets ratio 9.23% 9.44% 9.12% 8.69% 8.02%
</TABLE>
15
<PAGE>
DIMECO, INC.
CONSOLIDATED BALANCE SHEET
December 31,
1997 1996
- -----------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,358,842 $ 1,600,524
Interest-bearing deposits in other banks 3,121,708 3,718,168
Federal funds sold - 1,195,000
------------- -------------
Total cash and cash equivalents 4,480,550 6,513,692
Mortgage loans held for sale (market value of
$160,521 and $211,481) 156,871 206,813
Investment securities available for sale 30,702,190 13,714,782
Investment securities held to maturity
(market value of $4,602,088 and $14,907,048) 4,542,486 14,792,495
Loans (net of unearned income of $1,078,581 and
$1,473,603) 108,814,535 100,013,324
Less allowance for loan losses 1,511,123 1,366,006
------------- -------------
Net loans 107,303,412 98,647,318
Premises and equipment 2,945,303 3,066,150
Other real estate 625,619 460,619
Accrued interest receivable 859,177 1,003,565
Other assets 1,805,495 1,878,770
------------- -------------
TOTAL ASSETS $ 153,421,103 $ 140,284,204
============= =============
LIABILITIES
Deposits:
Noninterest-bearing $ 12,965,190 $ 12,760,278
Interest-bearing 122,136,196 113,242,229
------------- -------------
Total deposits 135,101,386 126,002,507
------------- -------------
Short-term borrowings 2,390,044 -
Accrued interest payable 701,099 521,229
Other liabilities 707,929 613,193
------------- -------------
TOTAL LIABILITIES 138,900,458 127,136,929
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, $.50 par value; 3,000,000 shares
authorized, 726,216 and 721,904 shares issued 363,108 360,952
Capital surplus 2,662,333 2,558,151
Retained earnings 11,547,197 10,257,053
Net unrealized loss on securities (11,586) (28,881)
Treasury stock, at cost; 1,525 shares (40,407) -
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 14,520,645 13,147,275
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 153,421,103 $ 140,284,204
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
DIMECO, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 9,471,235 $ 8,568,178 $ 7,939,785
Interest-bearing deposits in other 22,198 23,218 12,702
Federal funds sold 176,020 383,487 218,805
Investment securities:
Taxable 1,297,590 973,948 970,873
Exempt from federal income tax 245,779 318,281 348,809
------------- ------------- -------------
Total interest income 11,212,822 10,267,112 9,490,974
------------- ------------- -------------
INTEREST EXPENSE
Deposits 4,838,505 4,388,073 4,013,572
Short-term borrowings 21,820 59,011 101,906
------------- ------------- -------------
Total interest expense 4,860,325 4,447,084 4,115,478
------------- ------------- -------------
NET INTEREST INCOME 6,352,497 5,820,028 5,375,496
Provision for loan losses 519,500 549,000 382,000
------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 5,832,997 5,271,028 4,993,496
------------- ------------- -------------
NONINTEREST INCOME
Service charges on deposit accounts 223,975 213,222 183,316
Mortgage loans held for sale gains, net 195,794 16,453 52,702
Investment securities gains (losses), net (5,650) 59,257 -
Other income 464,340 446,539 402,878
Total noninterest income 878,459 735,471 638,896
NONINTEREST EXPENSE
Salaries and employee benefits 2,003,280 1,940,853 1,780,927
Occupancy expense, net 337,159 280,754 236,166
Furniture and equipment expense 314,419 270,074 219,072
Operations of other real estate 104,662 91,183 67,501
Professional fees 211,099 130,538 105,274
Other expense 1,094,866 981,757 979,376
------------- ------------- -------------
Total noninterest expense 4,065,485 3,695,159 3,388,316
------------- ------------- -------------
Income before income taxes 2,645,971 2,311,340 2,244,076
Income taxes 820,759 699,000 677,000
------------- ------------- -------------
NET INCOME $ 1,825,212 $ 1,612,340 $ 1,567,076
============= ============= =============
EARNINGS PER SHARE $ 2.52 $ 2.24 $ 2.24
============= ============= =============
AVERAGE SHARES OUTSTANDING 723,518 718,531 699,055
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
<TABLE>
<CAPTION>
DIMECO, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Net
Unrealized
Common Capital Retained Gain (Loss) Treasury
Stock Surplus Earnings on Securities Stock Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 ($.60 per share) (431,637) (431,637)
Net unrealized loss on securities (38,107) (38,107)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 360,952 2,558,151 10,257,053 (28,881) - 13,147,275
Net income 1,825,212 1,825,212
Dividend reinvestment plan 2,156 104,182 107,993 214,331
Purchase treasury stock (148,400) (148,400)
Cash dividends ($.74 per share) (535,068) (535,068)
Net unrealized gain on securities 17,295 17,295
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 $ 363,108 $ 2,662,333 $11,547,197 $ (11,586) $ (40,407) $14,520,645
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
DIMECO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,825,212 $ 1,612,340 $ 1,567,076
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 519,500 549,000 382,000
Depreciation 329,526 256,893 213,485
Amortization and accretion of investment securities, net (330,791) 107,486 144,651
Amortization of net deferred loan origination fees (67,653) (85,396) (65,567)
Deferred tax provision 73,620 39,338 86,175
Investment securities (gains) losses, net 5,650 (59,257) -
Net decrease in loans held for sale 49,942 259,231 364,266
Decrease (increase) in accrued interest receivable 144,388 (60,246) (56,192)
Increase (decrease) in accrued interest payable 179,870 (47,184) 179,436
Other, net 128,486 (35,456) (39,748)
------------- ------------- -------------
Net cash provided by operating activities 2,857,750 2,536,749 2,775,582
------------- ------------- -------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales 72,650 354,248 -
Proceeds from the maturities or paydown 36,071,760 13,304,451 3,631,038
Purchases (52,741,229) (15,938,665) (3,013,280)
Investment securities held to maturity:
Proceeds from the maturities or paydown 12,711,001 6,430,001 6,753,718
Purchases (2,500,235) (12,042,470) (2,107,036)
Net increase in loans (9,330,941) (11,025,956) (7,996,340)
Purchase of premises and equipment (208,679) (362,421) (513,606)
Purchase of life insurance - - (885,000)
Proceeds from the sale of other real estate owned - 208,113 110,208
------------- ------------- -------------
Net cash used for investing activities (15,925,673) (19,072,699) (4,020,298)
------------- ------------- -------------
FINANCING ACTIVITIES
Increase in deposits, net 9,098,879 16,124,275 7,306,768
Increase (decrease) in short-term borrowings 2,390,044 (2,050,000) 400,000
Proceeds from dividend reinvestment and
stock purchase plan 214,331 261,637 333,577
Purchase of treasury stock (148,400) - -
Cash dividends paid (520,073) (407,961) (368,125)
------------- ------------- -------------
Net cash provided by financing activities 11,034,781 13,927,951 7,672,220
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (2,033,142) (2,607,999) 6,427,504
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 6,513,692 9,121,691 2,694,187
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 4,480,550 $ 6,513,692 $ 9,121,691
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Dimeco, Inc. (the "Company") is a Pennsylvania company organized as the
holding company of The Dime Bank (the "Bank"). The Bank is a state-chartered
bank located in Pennsylvania. The Company and its subsidiary derive
substantially all of their income from 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 four
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 the Pennsylvania Department of Banking.
The consolidated financial statements of the Company include its wholly-owned
subsidiary, the Bank. All 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.
INVESTMENT SECURITIES
Investment securities are classified, at the time of purchase, based on
managements' intention and ability, as securities held to maturity or
securities available for sale. 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.
Common stock of the Federal Home Loan Bank and the Atlantic Central Bankers
Bank represent ownership in institutions which are wholly-owned by other
financial institutions. These securities are accounted for at cost and are
classified with equity securities available for sale.
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.
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.
20
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 credited 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 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 the Bank file a consolidated federal income tax return.
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 share computations are based upon the weighted number of shares
outstanding for each of the reported periods.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Statement No. 128 replaced the previous reporting requirement of primary and
fully diluted earnings per share with basic and diluted earnings per share.
The Company currently maintains a simple capital structure, therefore, there
are no dilutive effects on earnings per share.
21
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH FLOWS
The Company has defined cash and cash equivalents as cash and due from banks,
interest-bearing deposits in other banks and federal funds sold.
Amounts paid for interest and income taxes are as follows:
Interest Federal Income
Year ended December 31, Paid Taxes Paid
- ------------------------------------------------------------------------------
1997 $ 4,680,455 $ 700,000
1996 4,494,268 592,000
1995 3,936,042 593,000
PENDING ACCOUNTING PRONOUNCEMENT
In June 1996, the 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 Statement No. 125, an amendment of Statement No.
125." The adoption of the provisions of Statement No. 127 is not expected to
have a material impact on financial position or results of operations.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and presentation
of comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general purpose financial statements. It requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is presented with the same prominence as other financial statements. The
provisions of the statement are effective for all fiscal years beginning after
December 15, 1997. The adoption of this statement 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.
22
<PAGE>
NOTE 2 - INVESTMENT SECURITIES
The amortized costs and estimated market value of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Costs Gains Losses Values
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury securities $ 999,202 $ 173 $ - $ 999,375
U.S. Government agency
securities 7,265,836 2,445 (7,722) 7,260,559
Mortgage-backed securities 448,813 - (11,167) 437,646
Commercial paper 21,157,794 - (3,984) 21,153,810
------------- ------------- ------------- -------------
Total debt securities 29,871,645 2,618 (22,873) 29,851,390
Equity securities 848,100 13,100 (10,400) 850,800
------------- ------------- ------------- -------------
Total $ 30,719,745 $ 15,718 $ (33,273) $ 30,702,190
============= ============= ============= =============
</TABLE>
<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 agency
securities 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>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
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 $ 4,292,144 $ 60,740 $ (796) $ 4,352,088
Corporate securities 250,342 - (342) 250,000
------------- ------------- ------------- -------------
Total $ 4,542,486 $ 60,740 $ (1,138) $ 4,602,088
============= ============= ============= =============
</TABLE>
23
<PAGE>
NOTE 2 - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
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>
The amortized cost and estimated market values of debt securities at
December 31, 1997 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 $ 24,755,459 $ 24,746,607 $ 2,465,396 $ 2,465,000
Due after one year through
five years 4,667,373 4,667,137 799,917 804,640
Due after five through ten years - - 1,071,363 1,124,917
Due after ten years 448,813 437,646 205,810 207,531
------------- ------------- ------------- -------------
Total debt securities $ 29,871,645 $ 29,851,390 $ 4,542,486 $ 4,602,088
============= ============= ============= =============
</TABLE>
The following is a summary of proceeds received, gross gains and gross
losses realized on the sale of investment securities:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Proceeds from sales $ 72,650 $ 354,248 $ -
Gross gains $ - $ 59,257 $ -
Gross losses $ 5,650 $ - $ -
<PAGE>
Investment securities with an amortized cost of $13,326,088 and $4,038,185 and
estimated market values of $13,377,748 and $4,125,000 at December 31, 1997 and
1996, respectively, were pledged to secure deposits, short-term borrowings,
and for other purposes as required by law.
24
<PAGE>
NOTE 3 - LOANS
</TABLE>
<TABLE>
<CAPTION>
Major classifications of loans are as follows:
1997 1996
------------- -------------
<S> <C> <C>
Loans secured by real estate:
Construction and development $ 958,425 $ 674,031
Secured by farmland 2,135,231 1,340,841
Secured by 1-4 family residential properties:
Revolving, open-end loans secured by 1-4 family
residential properties 1,651,949 1,909,434
All other loans secured by 1-4 family residential properties 39,233,416 41,760,279
Secured by non-farm, non-residential properties 31,067,911 24,432,128
Commercial and industrial loans 14,274,503 13,823,210
Loans to individuals for household, family, and other personal expenditures:
Ready credit loans 95,203 135,054
Installment loans 18,852,767 16,085,111
Other loans:
Agricultural loans 612,068 632,776
All other loans 1,011,643 694,063
------------- -------------
Total loans 109,893,116 101,486,927
Less unearned income 1,078,581 1,473,603
------------- -------------
Loans, net of unearned income $ 108,814,535 $ 100,013,324
============= =============
</TABLE>
<PAGE>
Real estate loans, serviced for others, which are not included in the
consolidated balance sheet totaled $37,058,674 and $28,756,841 at December 31,
1997 and 1996, respectively.
Nonperforming loans are comprised of commercial, mortgage, and consumer loans
which are on a nonaccrual basis or contractually past due 90 days or more as
to interest or principal payment but are on nonaccrual status because they are
well secured or in process of collection. The following table presents
information concerning nonperforming loans:
1997 1996
----------- -----------
Ninety days or more past due and accruing interest $ 755,516 $ 834,052
Nonaccrual 1,061,182 822,470
Impaired loans 1,089,374 1,122,196
----------- -----------
Total nonperforming $ 2,906,072 $ 2,778,718
=========== ===========
The Company had impaired loans of $1,089,374 and $1,122,196 as of December
31, 1997 and 1996, respectively, with related allowance for loan losses of
$169,997 and $173,548, respectively. There were no impaired loans without a
related allowance for loan losses. For the years ended December 31, 1997 and
1996, average impaired loans were $1,105,729 and $1,128,161, respectively.
Interest recognized on impaired loans for the years ended December 31, 1997
and 1996, was $12,927 and $13,826.
25
<PAGE>
NOTE 3 - LOANS (Continued)
Changes in the allowance for loan losses are as follows:
1997 1996 1995
------------ ------------ ------------
Balance, beginning of year $ 1,366,006 $ 1,247,629 $ 1,132,982
Provision charged to operations 519,500 549,000 382,000
Recoveries credited to allowance 54,110 83,393 61,193
Losses charged to allowance (428,493) (514,016) (328,546)
------------ ------------ ------------
Balance, end of year $ 1,511,123 $ 1,366,006 $ 1,247,629
============ ============ ============
Loans of $60,000 or more extended to officers, directors, and corporations in
which they are beneficially interested as stockholders, officers, or directors
were $2,994,773 at December 31, 1997. 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 1997 follows:
Balance Balance
December 31, Amounts December 31,
1996 Additions Collected 1997
------------ ------------ ------------ ------------
$2,756,529 $760,262 $522,018 $2,994,773
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, 1997 and 1996, loans outstanding to
individuals and businesses are dependent upon the local economic conditions in
its immediate trade area.
NOTE 4 - PREMISES AND EQUIPMENT
A summary by asset classification is as follows:
1997 1996
------------- -------------
Land $ 277,044 $ 220,114
Premises and improvements 3,016,742 3,049,073
Furniture and equipment 1,866,116 1,694,698
------------- -------------
Total, at cost 5,159,902 4,963,885
Less accumulated depreciation 2,214,599 1,897,735
------------- -------------
Net premises and equipment $ 2,945,303 $ 3,066,150
============= =============
Depreciation expense was $329,526, $256,893 and $213,485 in 1997, 1996 and
1995.
Occupancy expenses were reduced by rental income received in the amounts of
$11,267, $19,909, and $19,020 for the years ended December 31, 1997, 1996 and
1995.
26
<PAGE>
NOTE 5 - DEPOSITS
Deposits are summarized as follows:
1997 1996
------------- -------------
Demand - noninterest-bearing $ 12,965,190 $ 12,760,278
Demand - interest-bearing 20,856,090 19,589,085
Money market 3,739,896 4,071,311
Savings 30,872,690 32,673,802
Time deposits of $100,000 or more 16,379,787 9,381,996
Other time deposits 50,287,733 47,526,035
------------- -------------
Total $ 135,101,386 $ 126,002,507
============= =============
The following table summarizes the maturity distribution of certificates of
deposit of $100,000 or more:
1997
-------------
Three months or less $ 5,184,334
Four through six months 6,199,153
Seven through twelve months 2,447,505
Over twelve months 2,548,795
-------------
Total $ 16,379,787
=============
Interest expense on certificates of deposit $100,000 or more amounted to
$633,138, $392,564 and $327,689 for the years ended December 31, 1997, 1996
and 1995.
NOTE 6 - SHORT-TERM BORROWINGS
The outstanding balances and related information for short-term borrowings are
summarized as follows:
1997 1996
-------------------- --------------------
Amount Rate Amount Rate
----------- ------- ----------- -------
Balance at year end $ 2,390,044 4.50% $ - -%
Average balance outstanding
during the year $ 544,209 4.01% 1,009,221 5.85%
Maximum amount outstanding
at any month end $ 2,390,044 $ 2,050,000
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. The
outstanding balance as of December 31, 1997 amounted to $785,000. There were
no advances outstanding on this line as of December 31, 1996.
The Bank has pledged, as collateral for the borrowings from the FHLB, all
stock in the FHLB and certain other qualifying collateral. Investment
securities with amortized costs and estimated market values of $4,950,928 and
$4,949,210, respectively, at December 31, 1997 were pledged as collateral for
the securities sold under agreements to repurchase.
27
<PAGE>
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, however, the Board of Directors have
curtailed these provisions since January 1996. A participant may withdraw
from the Plan at any time. Stockholders purchased 8,392 shares in 1997 and
13,465 shares in 1996 through the Plan.
NOTE 8 - RETIREMENT PLAN
The Bank maintains a section 401(k) employee savings and investment plan for
substantially all employees and officers of the Bank. The Bank'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
Bank may contribute a discretionary amount each year. For 1997, 1996 and
1995, the Board of Directors authorized an additional 4%, 4% and 5%,
respectively, of each eligible employee's compensation. Employee
contributions are vested at all times, and Bank contributions are fully vested
after five years. Contributions for 1997, 1996 and 1995 to this plan amounted
to $110,838, $97,711 and $76,074, respectively.
NOTE 9 - INCOME TAXES
Federal income tax expense consists of the following:
1997 1996 1995
------------- ------------- -------------
Currently payable $ 747,139 $ 659,662 $ 590,825
Deferred taxes 73,620 39,338 86,175
------------- ------------- -------------
Total provision $ 820,759 $ 699,000 $ 677,000
============= ============= =============
Income taxes applicable to investment securities gain (losses), net amounted
to ($1,921) and $20,147, for the years ended 1997 and 1996, respectively.
The components of the net deferred tax assets at December 31, 1997 and 1996
are as follows
1997 1996
--------- ---------
Deferred Tax Assets:
Allowance for loan losses $ 387,438 $ 336,034
Deferred loan origination fees, net - 60,788
Deferred compensation 35,323 39,707
Allowance for loss on securities 12,886 31,605
Unrealized loss on investment securities 4,614 14,878
Other, net 86 86
--------- ---------
Total 440,347 483,098
--------- ---------
Deferred Tax Liabilities:
Premises and equipment 210,745 186,887
Deferred loan origination fees, net 19,137 -
Unrealized gain on investment securities - 1,862
--------- ---------
Total 229,882 188,749
--------- ---------
Net deferred tax assets $ 210,465 $ 294,349
========= =========
28
<PAGE>
NOTE 9 - INCOME TAXES (Continued)
No valuation allowance was established at December 31, 1997, in view of the
Company's ability to carryback taxes paid in paid in previous years and
certain tax strategies and anticipated future taxable income as evidenced by
the Company's earnings potential.
A reconciliation between the expected statutory income tax rate and the
effective income tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
% 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 $ 899,630 34.0% $ 785,856 34.0% $ 762,987 34.0%
Tax-exempt income (83,904) (3.2) (108,611) (4.7) (119,157) (5.3)
Non-deductible interest 39,869 1.5 34,996 1.5 28,787 1.3
Other, net (34,836) (1.3) (13,241) (0.6) 4,383 0.2
--------- ----- --------- ----- --------- -----
Effective income tax and rate $ 820,759 31.0% $ 699,000 30.2% $ 677,000 30.2%
--------- ----- --------- ----- --------- -----
</TABLE>
<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:
1997 1996
------------- -------------
Commitments to extend credit $ 14,473,996 $ 10,596,206
Financial guarantees (credit card limits) $ 41,500 $ 41,500
Standby letters of credit $ 390,419 $ 354,898
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.
At December 31, 1997, the minimum rental commitments for all non-cancelable
leases are as follows:
1998 $ 102,278
1999 100,586
2000 88,934
2001 63,246
2002 48,179
2003 and thereafter 562,087
-------------
Total $ 965,310
=============
29
<PAGE>
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
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 $849,000
and $815,000 at December 31, 1997 and 1996, 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, 1997, the balance in the capital surplus account
totaling $1,756,216 is unavailable for dividends.
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 to risk-weighted assets, and of Tier I capital to
average assets. Management believes, as of December 31, 1997, that the
Company and the Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 1997, 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.
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Amount Ratio Amount Ratio
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS)
Actual $ 16,043,354 13.05% $ 14,495,131 13.74%
For Capital Adequacy Purposes 9,834,640 8.00% 8,437,678 8.00%
To be well capitalized 12,293,300 10.00% 10,547,097 10.00%
TIER I CAPITAL (TO RISK-WEIGHTED ASSETS)
Actual $ 14,532,231 11.82% $ 13,176,156 12.49%
For Capital Adequacy Purposes 4,917,320 4.00% 4,218,839 4.00%
To be well capitalized 7,375,980 6.00% 6,328,258 6.00%
TIER I CAPITAL (TO AVERAGE ASSETS)
Actual $ 14,532,231 9.59% $ 13,176,156 9.97%
For Capital Adequacy Purposes 6,059,440 4.00% 5,284,982 4.00%
To be well capitalized 7,574,300 5.00% 6,606,228 5.00%
</TABLE>
30
<PAGE>
NOTE 13 - FAIR VALUE DISCLOSURE
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 1,358,842 $ 1,358,842 $ 1,600,524 $ 1,600,524
Interest-bearing deposits in other 3,121,708 3,121,708 3,718,168 3,718,168
banks
Federal funds sold - - 1,195,000 1,195,000
Mortgage loans held for sale 156,871 160,521 206,813 211,481
Investment securities available
for sale 30,702,190 30,702,190 13,714,782 13,714,782
Investment securities 4,542,486 4,602,088 14,792,495 14,907,048
Net loans 107,303,412 109,608,479 98,647,318 100,080,713
Accrued interest receivable 859,177 859,177 1,003,565 1,003,565
------------- ------------- ------------- -------------
Total $ 148,044,686 $ 150,413,005 $ 134,878,665 $ 136,431,281
============= ============= ============= =============
Financial liabilities:
Deposits $ 135,101,386 $ 135,106,126 $ 126,002,507 $ 125,976,000
Short-term borrowings 2,390,044 2,390,044 - -
Accrued interest payable 701,099 701,099 521,229 521,229
------------- ------------- ------------- -------------
Total $ 138,192,529 $ 138,197,269 $ 126,523,736 $ 126,497,229
============= ============= ============= =============
</TABLE>
<PAGE>
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.
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.
31
<PAGE>
NOTE 13 - FAIR VALUE DISCLOSURE (Continued)
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 - PARENT COMPANY
Following are condensed financial statements for the parent company:
CONDENSED BALANCE SHEET
December 31,
1997 1996
------------- -------------
ASSETS
Cash and due from banks $ 30,209 $ 15,381
Investment in bank subsidiary 14,535,963 13,146,691
Other assets 99,411 115,145
------------- -------------
TOTAL ASSETS $ 14,665,583 $ 13,277,217
============= =============
LIABILITIES
Dividends payable $ 144,938 $ 129,942
STOCKHOLDERS' EQUITY 14,520,645 13,147,275
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,665,583 $ 13,277,217
============= =============
32
<PAGE>
NOTE 14 - PARENT COMPANY (Continued)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C> <C>
Dividends from bank subsidiary $ 483,000 $ 222,000 $ -
Other noninterest expense 45,571 41,340 37,059
------------- ------------- -------------
Net income (loss) before undistributed earnings
of bank subsidiary and income taxes 437,429 180,660 (37,059)
Undistributed earnings of bank subsidiary 1,371,977 1,417,930 1,591,535
Income tax benefit (15,806) (13,750) (12,600)
------------- ------------- -------------
NET INCOME $ 1,825,212 $ 1,612,340 $ 1,567,076
============= ============= =============
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,825,212 $ 1,612,340 $ 1,567,076
Adjustments to net income to net cash provided
by operating activities:
Undistributed earnings of bank subsidiary (1,371,977) (1,417,930) (1,591,535)
Other, net 15,735 (75,590) 8,221
------------- ------------- -------------
Net cash provided by (used for) operating activities 468,970 118,820 (16,238)
------------- ------------- -------------
FINANCING ACTIVITIES
Dividends paid (520,073) (407,961) (368,125)
Purchase of treasury stock (148,400) - -
Proceeds from dividend reinvestment
and stock purchase plan 214,331 261,637 333,577
------------- ------------- -------------
Net cash used for financing activities (454,142) (146,324) (34,548)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 14,828 (27,504) (50,786)
CASH AT BEGINNING OF YEAR 15,381 42,885 93,671
------------- ------------- -------------
CASH AT END OF YEAR $ 30,209 $ 15,381 $ 42,885
============= ============= =============
</TABLE>
33
<PAGE>
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, 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.
Wexford, PA
February 6, 1998
34
<PAGE>
PROMOTIONS AND APPOINTMENTS
- ------------------------------------------------------------------------------
JOHN R. BRANSTON is the Manager of the Greentown Office
and was promoted to Assistant Cashier. John graduated from
high school in Tioga Center, NY, served four years in the U.S.
Navy and is a veteran of the Vietnam War. He is a graduate of
Tompkins Cortland College, Ithaca, NY, the Central Atlantic
Advanced School of Banking at Bucknell University, the Dale
Carnegie course and received a Banking degree from the
American Institute of Banking. John is a member of the
Tobyhanna/Newfoundland Lions Club and the Newfoundland
American Legion.
RUTH E. DANIELS was promoted to Assistant Cashier and is
the manager of the Residential Mortgage Lending Department.
Ruth has been with the bank for more than 10 years, is a
graduate of Wallenpaupack High School and earned an Associates
Degree in Banking and Finance from Lackawanna Junior College
and the American Institute of Banking. Ruth is a member of the
Wayne and Pike County Builder's Association.
NANCY M. LAVENDUSKI was promoted to Assistant Cashier
in the Hawley office. A graduate of Honesdale High School and
Wayne Commercial School, she joined the bank in 1986. She is
involved with the lending function and the Bank's Client
Investment Services Department. Nancy is a member of the
American Institute of Banking and is a Board member and
Treasurer of the American Red Cross.
MELANIE E. RUTLEDGE was promoted to Assistant Cashier.
She has been with the Bank for 13 years and is the Supervisor of
the Loan Processing Department. A graduate of Honesdale High
School, she earned an Associates Degree in Banking and Finance
from Lackawanna Junior College and the American Institute of
Banking. She serves on the Advisory Board of the Wayne County
Cooperative Extension.
35
<PAGE>
PROMOTIONS AND APPOINTMENTS
- ------------------------------------------------------------------------------
CHERYL A. SMITH was also promoted to Assistant Cashier
after 13 years with the Bank. Cheryl worked in various
bookkeeping positions and is currently the Supervisor of the
Bank's Deposit Processing Department. A graduate of Mid-Valley
High School, she earned an Associates Degree in Mechanical
Engineering from the Pennsylvania State University and an
Associates Degree in Banking and Finance from Lackawanna
Junior College and the American Institute of Banking.
LINDA S. TALLMAN was promoted to Corporate Assistant
Secretary. She joined The Dime Bank in 1986 as Executive
Secretary to the Chief Executive Officer and remains in that
capacity today. She is also involved with the Bank's Client
Investment Services Department. Linda is the Treasurer of
Honesdale's Junior Miss Softball League and the Stourbridge
Heights Property Owner's Association
CYNTHIA D. THEOBALD celebrated her 20th year with The
Dime Bank in 1997 and was promoted to Assistant Cashier.
Cindy began her career as a bookkeeper and served as Loan
Secretary, Teller and Head Teller. She graduated from Honesdale
High School and is a member of the Wayne Highlands PTA.
DANA L. VANDERHOOK was promoted to Assistant Cashier
and subsequently celebrated her 20th year with the Bank. Having
started in Customer Service, Dana has served as Executive
Secretary, Loan Processing Supervisor and is currently in charge
of the Bank's compliance and Loan Review functions. She is a
graduate of Honesdale High School and has earned an Associates
Degree in Banking and Finance from Lackawanna Junior College
and the American Institute of Banking. She graduated from the
American Bankers Association Compliance School in Norman, OK
and is a member of the Chronic Pain Association.
<PAGE>
EXHIBIT 22
LIST OF SUBSIDIARIES OF THE COMPANY
The Dime Bank, 820-822 Church Street, Honesdale, Pennsylvania 18431,
a Pennsylvania state-chartered banking institution.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1997
<CASH> 1,358,842
<INT-BEARING-DEPOSITS> 3,121,708
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,702,190
<INVESTMENTS-CARRYING> 4,542,486
<INVESTMENTS-MARKET> 4,602,088
<LOANS> 108,814,535
<ALLOWANCE> 1,511,123
<TOTAL-ASSETS> 153,421,103
<DEPOSITS> 135,101,386
<SHORT-TERM> 2,390,044
<LIABILITIES-OTHER> 707,929
<LONG-TERM> 0
0
0
<COMMON> 363,108
<OTHER-SE> 14,157,537
<TOTAL-LIABILITIES-AND-EQUITY> 153,421,103
<INTEREST-LOAN> 9,471,235
<INTEREST-INVEST> 1,543,369
<INTEREST-OTHER> 198,218
<INTEREST-TOTAL> 11,212,822
<INTEREST-DEPOSIT> 4,838,505
<INTEREST-EXPENSE> 4,860,325
<INTEREST-INCOME-NET> 6,352,497
<LOAN-LOSSES> 519,500
<SECURITIES-GAINS> (5,650)
<EXPENSE-OTHER> 4,065,485
<INCOME-PRETAX> 2,645,971
<INCOME-PRE-EXTRAORDINARY> 2,645,971
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,825,212
<EPS-PRIMARY> 2.52
<EPS-DILUTED> 2.52
<YIELD-ACTUAL> 8.38
<LOANS-NON> 1,061,182
<LOANS-PAST> 755,516
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,061,182
<ALLOWANCE-OPEN> 1,366,006
<CHARGE-OFFS> 428,493
<RECOVERIES> 54,110
<ALLOWANCE-CLOSE> 1,511,123
<ALLOWANCE-DOMESTIC> 1,511,123
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 133,000
</TABLE>
