SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
------------- -------------
Commission file Number 33-58936
Dimeco, Inc.
------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2250152
----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
820 Church Street
-----------------
Honesdale, PA 18431
--------------------
(Address of principal executive offices)
(570) 253-1970
--------------------
(Issuer's Telephone Number)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of July 19, 1999, there were 655,740 shares outstanding of the issuer's
common stock with an aggregate market value of approximately $23,606,633.
<PAGE>
Dimeco, Inc.
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheet (unaudited) as of
June 30, 1999 and December 31, 1998 3
Consolidated Statement of Income (unaudited) for
the six months ended June 30, 1999 and 1998 4
Consolidated Statement of Changes in Stockholders'
Equity (unaudited) for the six months ended
June 30, 1999 5
Consolidated Statement of Cash Flows (unaudited)
for the six months ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submissions of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
<PAGE>
Dimeco, Inc.
CONSOLIDATED BALANCE SHEET (Unaudited)
June 30, December 31,
1999 1998
------------- -------------
Assets
Cash and due from banks $ 2,357,931 $ 1,528,650
Interest-bearing deposits in other banks 4,606,088 3,636,326
Federal funds sold and securities purchased
under agreement to resell 5,300,000 945,000
------------- -------------
Total cash and cash equivalents 12,264,019 6,109,976
Mortgage loans held for sale 851,102 923,449
Investment securities available for sale 30,790,165 36,360,618
Investment securities held to maturity
(market value $13,390,493 and $2,967,741) 13,379,723 2,923,222
Loans (net of unearned income of $753,303
and $807,570) 127,029,655 124,960,697
Less allowance for loan losses 1,850,976 1,681,735
------------- -------------
Net loans 125,178,679 123,278,962
Premises and equipment, net 3,723,229 3,820,704
Other real estate 317,464 274,894
Accrued interest receivable 1,261,647 910,750
Other assets 1,974,575 1,871,109
------------- -------------
Total Assets $ 189,740,603 $ 176,473,684
============= =============
Liabilities
Deposits
Noninterest-bearing $ 16,134,380 $ 14,378,252
Interest-bearing 148,614,380 140,514,277
------------- -------------
Total deposits 164,748,760 154,892,529
Short-term borrowings 6,971,617 3,612,876
Accrued interest payable 829,046 902,614
Other liabilities 555,197 913,074
------------- -------------
Total Liabilities 173,104,620 160,321,093
------------- -------------
Stockholder's Equity
Common stock, $.50 par value; 3,000,000
shares authorized, 734,186 and
730,518 shares issued 367,093 365,259
Capital surplus 2,959,231 2,823,152
Retained earnings 13,604,580 12,969,112
Accumulated other comprehensive loss (144,921) (4,932)
Less treasury stock (4,000 shares at cost) (150,000) -
------------- -------------
Total Stockholders' Equity 16,635,983 16,152,591
------------- -------------
Total Liabilities and
Stockholders Equity $ 189,740,603 $ 176,473,684
============= =============
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
Dimeco, Inc.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,765,054 2,501,989 $5,497,655 4,928,754
Interest-bearing deposits in other banks 29,151 62,299 97,585 123,430
Federal funds sold and securities
purchased under agreement to resell 106,404 140,720 214,430 269,497
Investment securities:
Taxable 520,513 293,719 902,122 568,568
Exempt from federal income tax 11,445 48,126 27,418 99,637
---------- --------- ---------- ---------
Total interest income 3,432,567 3,046,853 6,739,210 5,989,886
---------- --------- ---------- ---------
INTEREST EXPENSE
Deposits 1,455,694 1,345,010 2,907,348 2,657,603
Short-term borrowings 43,661 17,942 69,658 28,717
---------- --------- ---------- ---------
Total interest expense 1,499,355 1,362,952 2,977,006 2,686,320
---------- --------- ---------- ---------
NET INTEREST INCOME 1,933,212 1,683,901 3,762,204 3,303,566
Provision for loan losses 93,750 91,500 206,250 181,000
---------- --------- ---------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,839,462 1,592,401 3,555,954 3,122,566
---------- --------- ---------- ---------
NONINTEREST INCOME
Service charges on deposit accounts 62,714 56,339 116,239 104,067
Mortgage loans held for sale gain (loss), net (34,671) 12,717 (56,590) 85,409
Other income 127,578 124,824 269,803 241,903
---------- --------- ---------- ---------
Total noninterest income 155,621 193,880 329,452 431,379
---------- --------- ---------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 555,155 490,024 1,124,332 1,001,949
Occupancy expenses, net 114,672 82,617 233,957 170,147
Furniture and equipment expense 95,879 88,082 200,910 170,999
Other expense 463,054 404,995 827,393 769,080
---------- --------- ---------- ---------
Total noninterest expense 1,228,760 1,065,718 2,386,592 2,112,175
---------- --------- ---------- ---------
Income before income taxes 766,323 720,563 1,498,814 1,441,770
Income taxes 256,565 222,400 498,258 456,535
---------- --------- ---------- ---------
NET INCOME $ 509,758 498,163 $1,000,556 985,235
========== ========= ========== =========
EARNINGS PER SHARE $ 0.70 $ 0.68 $ 1.37 $ 1.35
==== ==== ==== ====
Average shares outstanding 731,996 727,461 732,185 728,435
</TABLE>
4
<PAGE>
Dimeco, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Capital Retained Comprehensive Treasury Stockholders' Comprehensive
Stock Surplus Earnings Loss Stock Equity Income
------ ------- -------- ------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 365,259 $ 2,823,152 $12,969,112 $ (4,932) $ - $16,152,591
Net income 1,000,556 1,000,556 $ 1,000,556
Other comprehensive loss:
Net unrealized loss on
available for sale securities (139,989) (139,989) (139,989)
------------
Comprehensive income $ 482,841
============
Dividend reinvestment plan 1,834 136,079 137,913
Purchase treasury stock (150,000) (150,000)
Cash dividends ($.50 per share) (365,088) (365,088)
--------- ---------- ----------- --------- --------- -----------
Balance, June 30, 1999 $ 367,093 $2,959,231 $13,604,580 $(144,921) $(150,000) $16,635,983
======== ========== =========== ========= ========= ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
Dimeco, Inc.
STATEMENT OF CASH FLOWS (Unaudited)
For the six months ended June 30, 1999 1998
---- ----
Operating Activities:
Net income $ 1,000,556 $ 985,235
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 206,250 181,000
Depreciation 198,244 167,805
Amortization of premium and
discount on investment securities (403,237) (283,861)
Amortization of net deferred loan
origination fees (20,489) (18,388)
Net decrease (increase) in loans
held for sale 38,584 (766,858)
Unrealized loss on loans held
for sale 33,763 ---
Decrease (increase) in accrued
interest receivable (350,897) 10,719
Decrease in accrued interest payable (73,568) (20,991)
Other, net (388,766) (136,156)
----------- ----------
Net cash provided by operating activities 240,440 118,505
----------- ----------
Investing Activities:
Investment securities available for sale:
Proceeds from maturities or paydowns 57,854,956 48,297,286
Purchases (52,067,013) (48,050,000)
Investment securities held to maturity:
Proceeds from maturities or paydowns 1,075,000 2,940,000
Purchases (11,557,858) (2,871,368)
Net increase in loans (2,136,047) (3,835,649)
Purchase of premises and equipment (100,769) (168,529)
Proceeds from the sale of other real
estate owned 7,620 14,350
----------- ----------
Net cash used for investing activities (6,924,111) (3,673,910)
----------- ----------
Financing Activities:
Net increase in deposits 9,856,231 7,840,874
Increase in short-term borrowings 3,358,741 727,734
Proceeds from dividend reinvestment and
stock purchase plan 137,913 125,868
Purchase of treasury stock (150,000) ---
Cash dividends paid (365,171) (364,879)
----------- ----------
Net cash provided by financing activities 12,837,714 8,329,597
----------- ----------
Increase in cash and cash equivalents 6,154,043 4,774,192
Cash and cash equivalents beginning
of period 6,109,976 4,480,550
----------- ----------
Cash and cash equivalents end of period $12,264,019 $9,254,742
=========== ==========
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
Dimeco, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Dimeco, Inc.
(the "Company") and its wholly-owned subsidiary The Dime Bank (the "Bank").
All significant intercompany balances and transactions have been eliminated in
the consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore, do
not necessarily include all information that would be included in audited
financial statements. The information furnished reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results of operations. All such adjustments are of a normal recurring nature.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
Certain comparative amounts for prior periods have been reclassified to
conform with current year presentation. The reclassifications did not effect
net income or equity capital.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Condition
Total assets at June 30, 1999 increased $13,267,000 or 7.5% from December 31,
1998, as compared to the 6.0% growth recorded in the first half of 1998.
Management believes that this growth is the result of the Company's continuing
business development efforts in conjunction with the natural deposit growth
associated with our two newest branches and our involvement with the camping
industry.
Cash and cash equivalents increased $6,154,000 or 100.7% with increases in all
categories as compared to December 31, 1998. Additional cash was required to
meet the needs of increased activity for the July 4 holiday. Interest bearing
deposits and federal funds sold also increased due to maturities of investments
during the first half of 1999 which we were not entirely able to invest in
attractive yield investments.
Investment securities available for sale decreased $5,570,000 or 15.3% due to
maturities of short-term commercial paper and US Government agencies. The funds
received from commercial paper maturities were not fully reinvested in like kind
instruments due to lower interest rates available. Management did choose to
invest in several issues of US Government agency securities and high quality
corporate bonds with maturities of two to five years yielding 5.99%. Purchases
of corporate bonds have been classified as held to maturity and therefore the
balance of this type of investment has grown $10,457,000 or 357.7% from December
31, 1998 to June 30, 1999.
The loan portfolio increased $2,069,000 or 1.7% from December 31, 1998 to June
30, 1999. A promotion of home equity loans in the spring produced $3,165,000 of
one to four family loans, some of which were refinanced loans previously on our
books and some new loans. At the same time, commercial mortgages increased
$955,000 due to the continually improving local economy and management's
commitment to remain involved with local businesses and camps.
Total deposits increased $9,856,000 or 6.4% from December 31, 1998 to June 30,
1999. Noninterest-bearing accounts increased $1,756,000 or 12.2%. Management
believes that the implementation of a cash management program for commercial
customers, which has served to solidify these relationships, combined with
increased balances related to the development of relationships in the branch
network both contribute to this growth. In addition, interest-bearing checking
accounts increased $3,063,000 or 37.8%, which represents a temporary
increase in business deposits. Statement savings balances were augmented by
$2,188,000 or 9.6%, also aided by seasonal business account cash and a larger
number of accounts due to our business development efforts. Time deposits
have increased $1,790,000 or 2.2% from December 31, 1998 with increased
balances in time deposits less than $100,000 and decreases of time deposits
greater than $100,000. The latter is due to a slowing of growth during the
second quarter in public
funds accounts, which typically decrease at this time of year. In addition,
management believes that competitive pricing of all deposit products,
development of our branch system and the advantage of providing personalized
service to all customers are the main reasons for the growth of deposits.
Short-term borrowings consist of our cash management accounts, which were
mentioned previously. These accounts show an increase of $3,359,000 or 93.0%
from balances at December 31, 1998 in light of business development emphasis
given to these products.
Stockholders' Equity increased $483,000 or 3.0% which was mainly due to earnings
of $1,001,000. Shareholder participation in the dividend reinvestment program
contributed $138,000 during 1999. These increases were offset by the dividend
declaration of $0.50 per share which equaled $365,000. The purchase of $150,000
of treasurery stock, and $140,000 decline in accumulated other comprehensive
income. Due to decreased market values in the available for sale investment
portfolio, mainly in the area of government agencies, an adjustment of $140,000
was made to the accumulated other comprehensive income account. These
investments have maturities of between one and five years. Considering that
management does not foresee requiring sales of any of the investments in the
portfolio, this negative adjustment will correct itself in future periods. The
treasury stock acquired will be utilized to fund the dividend reinvestment
program. Management monitors risk-based capital and leverage capital ratios in
order to assess compliance with regulatory guidelines. At June 30, 1999 the
Company had total risk-based capital of 12.5% which exceeded the requirement of
8.0%. Tier I risk-based capital was 11.2%, well within the guideline of at
least fifty percent of total risk-based capital. The Company's leverage
ratio, which by requirement must be at least 3%, was 8.8%.
8
<PAGE>
Results of Operations
Comparison of the six months ended June 30, 1999 and 1998
The Company earned $1,001,000 for the six months ended June 30, 1999, an
increase of $15,000 or 1.6% over the $985,000 in the first half of 1998.
Interest and fees earned on loans increased $569,000 or 11.5% from 1998 to 1999
with an increase in the average loan portfolio of $17,736,000 or 16.1%. The
average rate earned on the portfolio decreased .34% to 8.38% from 8.72% the
previous year due to refinances and new originations at lower rates during the
period. Interest earned on investments, interest-bearing deposits in other
banks and federal funds sold increased $180,000 or 17.0% as compared to the
first half of 1998. This increase was due to an increase in the average
portfolio of $10,279,000 or 25.9% but was offset by a decrease of .38% in the
average rate
received on these assets to 4.97% as compared to 5.35% in 1998.
Interest expense increased $291,000 or 10.8% based upon an increase in average
interest-bearing liabilities of $26,773,000 or 19.2% which was offset by a
decrease of .27% in the average interest rate paid, from 3.85% to 3.58%. In the
decreasing interest rate environment of the first half of 1999, time deposits
tend to reprice at a slower rate than other deposits and borrowings and
therefore will take a longer time to show the effects of the lower interest
rates during the period. At the same time, the increase of $3,854,000 in our
Financial Manager accounts (customer cash management accounts) has served to
make a nominal increase in the cost of funds due to the payment of interest
on accounts that may have previously been in noninterest-bearing type
accounts. To offset that increase in cost, the Company has attracted a
number of new accounts and therefore the ultimate cost has not greatly
increased.
The provision for loan losses increased $25,000 or 14.0% from 1998 to 1999.
Management's analysis of the allowance for loan loss identifies the
appropriate charge to the provision for losses. The 1999 increase in expense
is the result of the larger loan portfolio coupled with increased expense
associated with risks related to the commercial lending activity over the past
year.
Gains (losses) on mortgage loans held for sale decreased $142,000 or 166.3% due
to the inability in 1999 to match 1998 gains on loan sales. Interest rates were
decreasing more rapidly in 1998 and therefore the Company was able to take
advantage of this changing interest rate environment to secure gains on selling
loans in the secondary market. During the first
half of 1999 interest rates were slightly lower for a period of time and
then rebounded to normal levels. Loans which were originated at market rates
during this period and held in portfolio were valued lower when interest rates
increased slightly. Management has taken action to alleviate this problem by
accelerating the process of origination and selling in the secondary market and
expects losses in future periods to be less exaggerated.
Salaries and employee benefits increased $122,000 or 12.2% due to annual
salary compensation adjustments combined with additional staffing related to
growth in the number of accounts serviced.
Occupancy expense increased $64,000 or 37.5% from 1998 to 1999 with the majority
of this increase attributable to expenses associated with the Operation Center,
which was opened in October 1998. In addition, building maintenance expenses
associated with snow plowing during the first quarter were higher in 1999
that in 1998 due to a greater number of snowfalls in 1999.
Furniture and equipment expense increased $30,000 or 17.5% due to additional
expense associated with depreciation on furniture and equipment purchased in the
fourth quarter of 1998 for the Operation Center and for leases on computer
hardware updates.
9
<PAGE>
Results of Operations (Continued)
Other operating expense increased $58,000 or 7.5% from 1998 to 1999. Bank
supplies showed an increase of $21,000 or 53.2% based on larger supply usage due
to the increased size of the Company, and timing differences in purchases and
additional printing expenses related to a change in the telephone area code.
Internal audit and compliance expense increased $17,000 or 130.8% due to the
replacement of the loan review/compliance officer with an outsourcing
agreement. Management believes that this arrangement offers a greater depth
of knowledge, in that we now utilize the service of an entire staff of people
as compared to one individual; in addition, we realize a savings in that we
will pay approximately the same as a salary but not incur additional expense
for employee benefits or education. Outside professional fees increased
$15,000 or 38.5% due mainly to expenses associated with the Y2K project and
to a consultant hired to advise management regarding conversion to image
deposit statements for our customers. Advertising expense showed an increase
of $12,000 or 18.2% which was associated with the use of a consultant on a
regular part-time basis during the first quarter. Director fees increased
$11,000 or 35.9% with the addition of two directors in 1999. At the same
time, expenses associated with the operation of other real estate decreased
$29,000 or 62.5% due to better management of the function. The remainder of
additional expense is not significant in any one account but small increases
and decreases were noted in various accounts.
Comparison of the Three Months Ended June 30, 1999 and 1998
During the second quarter of 1999, the company earned $510,000 which
represents a 2.3% increase over the $498,000 earned in the second quarter of
1998.
Interest and fees on loans increased $263,000 or 10.5% in 1999 as compared to
1998. The average loans outstanding increased $15,320,000 or 13.5% while the
interest rate received on the loan portfolio decreased from 8.85% in the second
quarter of 1998 to 8.64% during the second quarter of 1999. At the same time
interest earned in other areas increased $386,000 or 12.7% from the same time
frame in 1998 to 1999. The average asset base for investments, interest-bearing
deposits in other banks and federal funds sold increased $14,019,000 or 35.3%
while the average interest rate received on these assets decreased from 5.49% in
1998 to 4.97% in 1999. The lower interest rate in 1999 is attributable to the
investment in shorter term assets which will produce a lower average rate as
assets mature and are reinvested at the current, lower rate. Beginning with the
recent change in market rates, we see an opportunity to reverse this trend in
the second half of 1999.
Interest expense increased $136,000 or 10.0% from the second quarter of 1998 to
the second quarter of 1999 with the average balance of interest-costing
liabilities increasing $26,666,000 or 20.9% while the average interest rate paid
for these liabilities decreased from 4.28% in 1998 to 3.89% in 1999. As time
deposits mature, they are replaced with lower costing deposits, thereby lowering
the average rate paid.
Gain (loss) on loans available for sale decreased $47,000 or 372.6% from 1998 to
1999. As explained above, in 1998 the Company took advantage of
opportunities to generate gains on sales due to the declining interest rate
scenario. However, in 1999 interest rates were relatively stable with a
slight increase in market interest rates, thereby creating a loss on loans
which were not sold as quickly as anticipated.
Salaries and employee benefits increased $65,000 or 13.3% from 1998 to 1999
based upon annual salary increases combined with additional employees to
handle the increased number of accounts due to balance sheet growth during
the period.
Occupancy expenses increased $32,000 or 38.8% with the expenses related to the
Operation Center, which did not exist until October 1998, being the main
increase. In addition, the Company incurred expenses related to repair work on
the HVAC units in the Honesdale office.
Other operating expenses increased $58,000 or 14.3% from the second quarter of
1998 to the second quarter of 1999. The largest increase was $21,000 or 113.4%
in outside professional fees, which are related to Y2K expenses. In addition,
there was an increase of $10,000 in internal audit/compliance fees as explained
above.
Income taxes increased $34,000 or 15.4% due to the decreased number of
nontaxable investments in 1999 as compared to 1998. Management has purchased
more taxable investments to replace matured nontaxable issues because of the
more favorable tax-adjusted yields on the taxable issues.
Liquidity and Cash Flows
To ensure that the Company can satisfy customer credit needs for current and
future commitments and deposit withdrawal requirements, the Bank manages the
liquidity position by ensuring that there are adequate short-term funding
sources available for those needs. Liquid assets consists of cash and due
from banks, federal funds sold, interest-bearing deposits with other banks and
investment securities maturing in one year or less. The following table shows
these liquidity sources, minus short-term borrowings, as of June 30, 1999
compared to December 31, 1998:
June 30, December 31,
1999 1998
---- ----
(dollars in thousands)
Cash and due from banks $ 2,358 $ 1,529
Interest-bearing deposits with other banks 4,606 3,636
Mortgage loans held for sale 851 923
Federal funds sold 5,300 945
Investment securities maturing in
one year or less 18,556 31,457
------ ------
31,671 38,490
Less short-term borrowings 6,972 3,613
------ ------
Net liquidity position $24,699 $34,877
====== ======
As a percent of total assets 13.0% 19.8%
===== =====
Management monitors liquidity on a consistent basis and feels that liquidity
levels are adequate. In addition to these liquidity sources, the Bank also
has a maximum borrowing capacity with the Federal Home Loan Bank of
approximately $29.5 million. Management feels that with this line of credit
available, it is more prudent to invest available funds in longer maturity
investments in order to increase profits while not hampering liquidity.
Management is not aware of any known trends, events or uncertainties that will
have or is reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations, nor is management aware of any
current recommendations by regulatory authorities which, if implemented, would
have such an effect.
10
<PAGE>
Risk Elements
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days or more past due, other
real estate loans and repossessed assets at June 30, 1999 and December 31,
1998. A loan is classified as nonaccrual when, in the opinion of management,
there are doubts about collectability of interest and principal. At the time
the accrual of interest is discontinued, future income is recognized only when
cash is received. Renegotiated loans are those loans which terms have been
renegotiated to provide a reduction or deferral of principal or interest as a
result of the credit quality deterioration of the borrower.
June 30, December 31,
1999 1998
---- ----
(dollars in thousands)
Loans on nonaccrual basis $ 585 $ 525
Loans past due 90 days or more 1,151 941
Renegotiated loans 961 822
----- -----
Total nonperforming loans 2,697 2,288
Other real estate 317 275
Repossessed assets 2 -
----- -----
Total nonperforming assets $3,016 $2,563
===== =====
Nonperforming loans as a percent of total loans 2.1% 1.8%
==== ====
Nonperforming assets as a percent of total assets 1.6% 1.5%
==== ====
Allowance for loan loss as a percent of loans 1.4% 1.4%
===== =====
Management believes the level of the allowance for loan losses at June 30,
1999 is sufficient. The relationship between the allowance for loan loses and
outstanding loans is a function of the credit quality and known risk
attributed to the loan portfolio. The on-going loan review program and credit
approval process is used to determine the adequacy of the allowance for loan
losses.
Included in total loans are loans of $858,728 which management has classified
as impaired under the terms of Financial Accounting Standards Board Statement
No. 114, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosure". The related allowance for loan losses on these
loans amounted to $152,649. There were no impaired loans without a related
allowance for loan losses. The average balance of impaired loans for the
period was $869,260.
Management does not believe that loans classified as loss, doubtful
substandard or special mention for internal or regulatory purposes (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 loans about which management is aware of
any information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
11
<PAGE>
Year 2000
COMPANY'S STATE OF READINESS
The year 2000 ("Y2K") problem is associated with the inability of some computer
programs to distinguish between the year 1900 and the year 2000 because of
software programs that were written with a two digit year field instead of a
four digit field. If not correctly programmed or rewritten, some computer
applications could fail to operate or may create erroneous results when the
year changes to 2000 or other key dates in the first quarter of the year 2000.
This could cause entire system failures, miscalculations and disruptions of
normal business operations. As the banking industry is heavily dependent on
computer systems, the effects of this problem could be the temporary inability
to process transactions, generate statements and billings or engage in normal
day to day business activities. The extent of the potential impact of this
problem is not known and if not timely corrected could affect the global
economy.
The Company has assessed the extent of its vulnerability to the Y2K problem
and believes that our core processing systems will not be affected. The
Company uses the Jack Henry and Associates Silverlake software system run on
an IBM AS/400 mainframe computer. The Silverlake software was certified by
the Information Technology Association of America on March 16, 1998 and the
IBM AS/400 received the first Year 2000 certification by that organization.
Internal testing of these primary mission critical systems was successfully
completed in December 1998 and the validation of that testing was completed
during March 1999. The remaining mission critical software systems have
either been tested by the Company or have been tested by outside agencies and
have been found to be substantially compliant.
RISK ASSESSMENT OF THE YEAR 2000
We believe that with modifications to existing software and conversions to
new software, the Y2K problem will not pose a significant operational problem
for the Company. However, because most computer systems are, by their very
nature, interdependent, it is possible that noncompliant third party computers
could impact the Company's computer systems. In addition, we have contacted
third parties, such as wire transfer systems, debit card systems, telephone
systems, public utilities and other vendors with which we transact business in
order to request status reports on their Y2K projects. If any of these agents
are unsuccessful in their attempt to deal with the Y2K problem, it could
aversely affect the Company. We have contacted all of the Bank's large
commercial loan customers in order to attempt to assess their readiness for
the Year 2000 and determine the possible effects on the commercial loan
portfolio.
COST OF YEAR 2000
We do not anticipate that the cost of the Y2K problem will have a significant
effect on the Company's financial position or results of operations in 1999.
As described above, our primary systems are Year 2000 compliant, therefore we
believe that little programming costs will be incurred. The majority of
costs associated with this issue are related to planning, testing and
validating the results internally and are expected to amount to $50,000 of
which $25,000 are for capital items. These expenses will be incurred in
1999. There is no guarantee that our estimates of compliance with the Y2K
problem will be achieved and actual results could differ materially from
those planned. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the replacement of noncompliant third party vendors or
similar uncertainties.
CONTINGENCY PLANS
Management has assessed the potential risk in each of our systems and the risk
associated with outside vendors and has prepared contingency plans in the event
that
our assessment is not correct or that third party affiliate systems are not
operational. Our plan involves the creation of a back up system
for every critical application, which in certain cases will be a manual
operation. Our goal is to be ready for every possible situation with the
specific intent to have no interruption in service to our customers or our
shareholders.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
NONE
Item 2 - Changes in the rights of the Company's security holders
NONE
Item 3 - Defaults by the Company on its senior securities
NONE
Item 4 - Results of votes of security holders
The following represents the results of matters submitted
to a vote of the shareholders at the annual meeting held
on April 22, 1999:
Election of Directors:
The following directors were elected with terms to
expire April, 2002:
For Withhold Authority
--- ------------------
Joseph J. Murray 406,093.6247 13,328.8538
Thomas A. Peifer 406,093.6247 13,328.8538
Robert E.Genirs 405,975.5867 13,446.8918
S.R. Snodgrass was elected as the Company's Independent
Auditors for the year ending December 31, 1999 by the
following vote:
For 417,651.9404
Against 0.0000
Abstain 1,770.5381
Item 5 - Other Information
NONE
Item 6 - Exhibits and Reports on Form 8-K
NONE
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIMECO, INC.
Date: July 29, 1999 By:
-------------------------------
Joseph J. Murray
Executive Vice President and
Chief Executive Officer
Date: July 29, 1999 By:
-------------------------------
Maureen H. Beilman
Chief Financial Officer
14
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