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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X]
For the fiscal year ended December 31, 1998
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: (570) 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
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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.
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on a closing sale price: $23,258,681 at March 15, 1999.
As of March 15, 1999, the registrant had outstanding 732,168 shares
of its common stock, par value $.50 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1999 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, 1998, are incorporated by reference in Part II of this
Annual Report.
Page 1 of 28
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DIMECO, INC.
FORM 10-KSB
Index
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Part I Page
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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 Not Applicable
Part II
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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 Not Applicable
Part III
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Item 9. Directors, Executive Officers,
Promoters and Control Persons;
Compliance with Section 16(a) of the
Exchange Act 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 27-28
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DIMECO, INC.
FORM 10-KSB
Part I
Item 1. Description of the Business
General
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, 1998, the Company had total
consolidated assets, deposits and shareholders' equity of approximately
$176.5 million, $154.9 million and $16.2 million, 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 four branch offices
located in Honesdale Hawley, Damascus and Greentown, Pennsylvania. It's
business is as a full service commercial bank providing a wide range of
services to individuals and small to medium sized businesses in its
Northeastern Pennsylvania market area, including accepting time, demand, and
savings deposits and making secured and unsecured commercial, real estate and
consumer loans.
Supervision and Regulation - The Company
The Company is subject to the jurisdiction of the Securities and
Exchange Commission (the "SEC") and of state securities laws administrators
for matters relating to the offering and sale of its securities. The Company
is currently subject to the SEC's rules and regulations relating to periodic
reporting, insider trading reports and proxy solicitation materials in
accordance with the Securities Exchange Act of 1934. Furthermore, the Company
qualifies as a "small business issuer" as that term is defined under Item 10
of Regulation S-B of the SEC, and has elected to make its SEC filings under
the disclosure requirements afforded to small business issuers.
The Company is also subject to the provisions of the Bank Holding
Company Act of 1956, as amended ("Bank Holding Company Act"), and to
supervision by the Federal Reserve Board. The Bank Holding Company Act will
require the Company to secure the prior approval of the Federal Reserve Board
before it owns or controls, directly or indirectly, more than 5% of the voting
shares of substantially all of the assets of any institution, including
another bank. 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 1999,
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
("FIRREA")
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
("FDICIA")
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 6% 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 adjusted the Bank Insurance Fund
(BIF) premiums to an amount that is determined semiannually and are based
upon an institutions risk classification. In addition, as of January 1, 1997
the Financing Corporation (FICO) debt service assessment is not tied to the
FDIC risk classification, but is determined quarterly based upon funding
requirements of the FICO.
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
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institutions and the fees that are assessable against deposit accounts, so
that consumers can make a meaningful comparison between the competing claims
of banks with regard to deposit accounts and products. In addition to
disclosures to be provided when a customer establishes a deposit account, TSA
requires the depository institution to include, in a clear and conspicuous
manner, the following information with each periodic statement of a deposit
account: (1) the annual percentage yield earned; (2) the amount of interest
earned; (3) the amount of any fees and charges imposed; and (4) the number of
days in the reporting period. TSA allows for civil lawsuits to be initiated
by customers if the depository institution violates any provision or
regulation under TSA.
Regulatory Capital Requirements
The following table presents the Company's consolidated capital ratios at
December 31, 1998:
(In Thousands)
Tier I Capital $ 16,157
Tier II Capital $ 1,682
Total Capital $ 17,839
Adjusted Total Average Assets $ 177,513
Total Adjusted Risk-Weighted Assets(1) $ 146,087
Tier I Risk-Based Capital Ratio(2) 11.06%
Required Tier I Risk-Based Capital Ratio 4.00%
Excess Tier I Risk-Based Capital Ratio 7.06%
Total Risk-Based Capital Ratio(3) 12.21%
Required Total Risk-Based Capital Ratio 8.00%
Excess Total Risk-Based Capital Ratio 4.21%
Tier I Leverage Ratio(4) 9.10%
Required Tier I Leverage Ratio 4.00%
Excess Tier I Leverage Ratio 5.10%
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(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.
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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, 1998, the Bank had total assets of $176.5 million,
total stockholders' equity of $16.2 million and total deposits and other
liabilities of $160.3 million.
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
12
<PAGE>
Rate Control Act of 1987 ("FIRA") generally expands the circumstances under
which officers or directors of a bank may be removed by the institution's
federal supervisory agency; restricts lending by a bank to its executive
officers, directors, principal shareholders or related interests thereof;
restricts management personnel of a bank from serving as directors in other
management positions with certain depository institutions whose assets exceed
a specified amount or which have an office within a specified geographic area;
and restricts management personnel from borrowing from another institution
that has a correspondent relationship with their bank. Additionally, FIRA
requires that no person may acquire control of a bank unless the appropriate
federal supervisory agency has been given 60-days prior written notice and
within that time has not disapproved the acquisition or extended the period
for disapproval.
Under the Bank Secrecy Act ("BSA"), the Bank is required to report
to the Internal Revenue Service currency transactions of more than $10,000 or
multiple transactions of which the Bank is aware in any one day that aggregate
in excess of $10,000. Civil and criminal penalties are provided under the BSA
for failure to file a required report, for failure to supply information
required by the BSA or for filing a false or fraudulent report.
The 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
13
<PAGE>
these two options prior to that time. Effective January 1, 1996, a large
retail institution that opts to be examined pursuant to a strategic plan may
submit its strategic plan to the bank regulators for approval.
In addition, the revised CRA regulations include separate rules
regarding the manner in which "wholesale banks" and "limited purpose banks"
will be evaluated for compliance.
The new CRA regulations are being phased in over a two-year period,
beginning July 1, 1995, with a final effective date of July 1, 1997. Until
the applicable test is phased in, institutions may be examined under the prior
CRA regulations.
On December 27, 1995, the federal banking regulators issued a joint
final rule containing technical amendments to the revised CRA regulations.
Specifically, the recent technical amendments clarify the various effective
dates in the revised CRA regulations, correct certain cross references and
state that once an institution becomes subject to the requirements of the
revised CRA regulations, it must comply with all aspects of the revised CRA
regulations, regardless of the effective date of certain provisions.
Similarly, once an institution is subject to the revised CRA regulations, the
prior CRA regulations do not apply to that institution.
For the purposes of the revised CRA regulations, the Bank is deemed
to be a small depository institution, based upon financial information as of
December 31, 1995. In the future, the Bank will be evaluated for CRA
compliance using the streamlined procedures for a small bank/three-part,
performance-based test/strategic plan option. Under the 12 assessment factors
contained in the prior CRA regulations, the Bank received a "2" rating in
1995. The Dime Bank expects to receive a rating under the revised CRA
regulations which is consistent with its rating in 1995.
Concentration
The Company and the Bank are not dependent for deposits to a single
customer or to a small group of customers the loss of any one or more of which
would have a materially adverse effect on the financial condition of the
Company or the Bank.
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 was $22,600 annually until December 1998 at which time it
will increase based upon increases in the Consumer Price Index. In addition,
the Bank entered into a ten year lease with two 5 year renewal options for the
Operations Center in Honesdale, PA. Rent is fixed at $42,750 annually for the
first five years with a 3% increase in rent for each of the remaining years.
14
<PAGE>
It is management's opinion that the facilities currently utilized are suitable
and adequate for current and immediate future purposes.
Item 3. Legal Proceedings
General
The nature of the Company's and the Bank's business generates a
certain amount of litigation involving matters arising in the ordinary course
of business. However, in the opinion of management of the Company and the
Bank, there are no proceedings pending to which the Company and the Bank is a
party or to which their property is subject, which, if determined adversely to
the Company and the Bank, would be material in relation to the Company's and
the Bank's undivided profits or financial condition, nor are there any
proceedings pending other than ordinary routine litigation incident to the
business of the Company and the Bank. In addition, no material proceedings
are pending or are known to be threatened or contemplated against the Company
and the Bank by government authorities or others.
Environmental Issues
There are several federal and state statutes that govern the obligations of
financial institutions with respect to environmental issues. Besides being
responsible under such statutes for its own conduct, a bank also may be held
liable under certain circumstances for actions of borrowers or other third
parties on properties that collateralize loans held by the bank. Such
potential liability may far exceed the original amount of the loan made by the
bank. Currently, the Bank is not a party to any pending legal proceedings
under any environmental statue nor is the Bank aware of any circumstances that
may give rise to liability of the Bank under any such statute.
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 15 ) 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.
15
<PAGE>
The Pennsylvania Banking Code of 1965 (the "Code") provides that
cash dividends may be declared and paid only out of accumulated net earnings
and that, prior to the declaration of any dividend, if the surplus fund (as
defined in the Code) of the Bank is less than the amount of its common
capital, the Bank shall, until the surplus is equal to such an amount,
transfer to the surplus an amount which is at least 10% of the net earnings of
the Bank for the period since the end of the last fiscal year or for any
shorter period since the declaration of a dividend. If the surplus of the
Bank is less than 50% of the amount of capital, no dividend may be declared or
paid without the prior approval of the Department until such surplus is equal
to 50% of the Bank's capital.
As of December 31, 1998, there were $14,034,648 accumulated net
earnings available at the Bank that could be paid as a dividend to the Company
under current Pennsylvania law.
Dividend Restrictions on the Company
Under the Pennsylvania Business Corporation Law of 1988, as amended
(the "BCL"), the Company may not pay a dividend if, after giving effect
thereto, either (a) the Company would be unable to pay its debts as they
become due in the usual course of business or (b) the Company's total assets
would be less than its total liabilities. The determination of total assets
and liabilities may be based upon: (i) financial statements prepared on the
basis of generally accepted accounting principles; (ii) financial statements
that are prepared on the basis of other accounting practices and principles
that are reasonable under the circumstances; or (iii) a fair valuation or
other method that is reasonable under the circumstances.
Item 6. Management's Discussion and Analysis or Plan of Operation
The caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the Company's Annual Report
(at page 6) filed at Exhibit 13 hereto is incorporated in its entirety by
reference under this Item 6.
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, 1998 and 1997, the Company had
impaired loans of $874,277 and $1,089,374, respectively with related allowance
for loan loss of approximately $136,217 and $169,997, respectively. There
were no impaired loans without a related allowance for loan losses. For the
year ended December 31, 1998 and 1997, average impaired loans were $933,774
and $1,105,729, 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.
(Dollars in Thousands) December 31,
1998 1997
---- ----
Loans accounted for on a
non-accrual basis:
Mortgage loans $ 248 $ 589
Commercial 137 75
Consumer 140 155
--------- ---------
Total 525 819
--------- ---------
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans 627 616
Commercial 246 48
Consumer 68 91
--------- ---------
Total 941 755
--------- ---------
Renegotiated loans 822 1,219
--------- ---------
Total nonperforming loans 2,288 2,793
--------- ---------
Other real estate owned 275 626
--------- ---------
Total nonperforming assets $ 2,563 $ 3,419
========= =========
Nonperforming loans as a percent
of total loans 1.83% 2.57%
Nonperforming assets as a percent
of assets 1.45% 2.23%
Amount of interest lost on
nonperforming loans $ 103 $ 129
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, 1998.
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, 1998:
December 31,
1998 1997
---- ----
(Dollars in thousands)
Loans outstanding at end of period $124,961 $108,815
======== ========
Average loans outstanding $114,736 $103,637
======== ========
Reserve for possible losses:
Balance, beginning of the period $1,511 $1,366
Loans charged off:
Commercial 75 151
Real estate 46 165
Consumer 192 112
-------- --------
Total loans charged off 313 428
-------- --------
Recoveries:
Commercial 2 11
Real estate 3 4
Consumer 28 39
-------- --------
Total recoveries 33 54
-------- --------
Net loans charged off 280 374
-------- --------
Provisions charged to expense 451 519
-------- --------
Balance, end of period $ 1,682 $ 1,511
======== ========
Ratios:Net charge offs as a percent
of average loans outstanding 0.24% 0.36%
Reserve for loan losses as a percent
of average loans outstanding 1.45% 1.46%
18
<PAGE>
A portion of the allowance is specifically allocated to individual loans or
group of loans. As of December 31,1998 and 1997 the allowance for loan losses
is allocated as follows:
<TABLE>
<CAPTION>
Amount of % of Amount of % of
allowance for loans in allowance for loans in
loan loss each category loan loss each category
allocated to total loans allocated to total loans
---------------------- -----------------------
(Dollars in thousands)
1998 1997
---- ----
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 230 13.4% $ 169 13.5%
Real estate - construction 11 1.1% 6 0.9%
Real estate - mortgage 1,235 70.5% 927 67.4%
Installment loans to individuals 197 15.0% 276 18.2%
Unallocated 9 - 133 -
------- ------ ------- ------
$ 1,682 100.0% $ 1,511 100.0%
======= ====== ======= ======
</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, 1998:
Due 1 Due 1-5 Due after Total
year or years 5 years
less
------- ------ ------ ------
Fixed rate:
Commercial $ 836 $5,890 $1,060 $7,786
Real estate-construction 718 - - 718
------ ------ ------ ------
Total $1,554 $5,890 $1,060 $8,504
====== ====== ====== ======
Reprice Reprice Total
within within
1 year 1-5
years
------ ------ ------
Variable rate:
Commercial $8,389 $ - $8,389
Real estate-construction 666 - 666
------ ------ ------
Total $9,055 $ - $9,055
====== ====== ======
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, 1998 the market
value of the Company's held to maturity investment securities was $2,968,000
and $4,602,000 at December 31, 1997.
Available for Sale 1998 1997
- ------------------ ---- ----
(Dollars in thousands)
U. S. Treasury securities $ - $ 999
U. S. Government agency securities 9,708 7,260
Mortgage-backed securities 368 438
Commercial paper 25,815 21,154
Equity securities 470 851
------- -------
Total $36,361 $30,702
======= =======
Held to Maturity 1998 1997
---- ----
Obligations of states and political
subdivisions $ 1,397 $ 4,292
Corporate securities 1,526 250
------- -------
Total $ 2,923 $ 4,542
======= =======
There were no securities held for any issuer that were greater than ten
percent of stockholders' equity as of December 31, 1998.
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, 1998.
<TABLE>
<CAPTION>
One year One to Five to After ten Total
or less five years ten years years Investment Securities
--------------------------------------------------------------------------------------------------------
Available for Sale
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield (1) Value Yield (1) Value Yield (1) Value Yield (1) Value Yield (1)
--------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <S> <C> <C>
U.S. Treasury securities $ - - - - - - - - $ - -
U.S. Government Agency
Securities $ 4,751 5.12% $ 4,958 5.41% - - - - $ 9,709 5.27%
Mortgage-backed securities - - - - - - $ 367 5.96% $ 367 5.96%
Commercial Paper $25,815 5.97% - - - - - - $25,815 5.97%
Equity securities - - - - - - $ 470 6.50% $ 470 6.50%
------------------------------------------------------------------------------------------------------
Total $30,566 5.84% $ 4,958 5.41% - - $ 837 6.26% $36,361 5.79%
======================================================================================================
</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, 1998.
<TABLE>
<CAPTION>
One year One to Five to After ten Total
or less five years ten years years Investment Securities
-----------------------------------------------------------------------------------------------------
Held to Maturity
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield (1) Value Yield (1) Value Yield (1) Value Yield (1) Value Yield (1) Value
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of states
and political subdivisions $ 365 6.13% $ 388 8.07% $ 544 9.25% $ 100 6.21% $1,397 7.86% $1,440
Other securities $ 526 5.85% $1,000 7.72% - - - - $1,526 7.07% $1,528
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------
Total $ 891 5.96% $1,388 7.81% $ 544 9.25% $ 100 6.21% $2,923 7.44% $2,968
=====================================================================================================
</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 18) 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 , and respectively) filed at Exhibit
99A hereto is incorporated in their entirety by reference under this Item 9.
Item 10. Executive Compensation
The captions "Executive Compensation" and "Directors Compensation"
contained in the Company's Proxy Statement (at pages and ) filed as
Exhibit 99A hereto is incorporated in its entirety by reference under this
Item 10.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The caption "Principal Beneficial Owners of the Company's Stock"
contained in the Company's Proxy Statement (at page ) filed as Exhibit 99A
hereto is incorporated in its entirety by reference under this Item 11.
Item 12. Certain Relationships and Related Transactions
The information under the caption "Certain Relationships and Related
Transactions" contained in the Company's Proxy Statement (at page ) filed as
Exhibit 99A 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, 1998.
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, 1998.
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, 1999
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, 1999
By: /s/ John S. Kiesendahl
---------------------------
John S. Kiesendahl
Director
Date: March 26,1999
27
<PAGE>
By: /s/ Joseph J. Murray
---------------------------
Joseph J. Murray
President, Chief Executive
Officer and Director
(Chief Executive Officer)
Date: March 26, 1999
By: /s/ Thomas A. Peifer
---------------------------
Thomas A. Peifer
Director
Date: March 26, 1999
By: /s/ William E. Schwarz
---------------------------
William E. Schwarz
Chairman of the Board
and Director
Date: March 26,1999
By: /s/ Henry M. Skier
---------------------------
Henry M. Skier
Director
Date: March 26, 1999
By: /s/ Gerald J. Weniger
---------------------------
Gerald J. Weniger
Secretary and Director
Date: March 26,1999
By: /s/ Barbara Jean Genzlinger
---------------------------
Barbara Jean Genzlinger
Director
Date: March 26, 1999
28
<PAGE>
By: /s/ Robert E. Genirs
---------------------------
Robert E.Genirs
Director
Date: March 26,1999
By: /s/ John F. Spall
---------------------------
John F. Spall
Director
Date: March 26, 1999
29
<PAGE>
INDEX TO EXHIBITS
Item Number Description
13 Annual Report to Shareholders for
Fiscal Year Ended December 31, 1998
22 List of Subsidiaries of the
Company
27 Financial Data Schedule
30
<PAGE>
MISSION STATEMENT
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
For the year ended December 31,
% Increase
(amounts in thousands, except per share) 1998 1997 (decrease)
------------------------------------
Performance
Net income . . . . . . . . . . . . . $ 2,117 $ 1,825 15.98%
Return on average assets . . . . . . 1.29% 1.28% 0.78%
Return on average equity . . . . . . 13.75% 13.86% -0.79%
Shareholders' Value (per share)
Net income . . . . . . . . . . . . . $ 2.90 $ 2.52 15.08%
Dividends. . . . . . . . . . . . . . $ 0.95 $ 0.74 28.38%
Book value . . . . . . . . . . . . . $ 22.11 $ 20.04 10.34%
Market value . . . . . . . . . . . . $ 42.00 $ 31.00 35.48%
Market value/book value ratio. . . . 189.95% 154.71% 22.78%
Price/earnings multiple. . . . . . . 14.5 X 12.3 X 17.89%
Dividend yield . . . . . . . . . . . 2.38% 2.39% -0.42%
Safety and Soundness
Shareholders' equity/asset ratio . . 9.15% 9.46% -3.32%
Dividend payout ratio. . . . . . . . 32.76% 29.33% 11.69%
Nonperforming assets/total assets. . 1.45% 2.23% -34.98%
Allowance for loan loss as
a % of loans . . . . . . . . . . . 1.35% 1.39% -2.88%
Net charge-offs/average loans. . . . 0.24% 0.35% -31.43%
Allowance for loan
loss/nonaccrual loans. . . . . . . 124.84% 74.15% 68.36%
Allowance for loan
loss/non-performing loans. . . . . 65.62% 44.20% 48.46%
Risk-based capital . . . . . . . . . 12.21% 13.05% -6.44%
Balance Sheet Highlights
Total assets . . . . . . . . . . . . $176,474 $153,421 15.03%
Investment securities. . . . . . . . $ 39,284 $ 35,245 11.46%
Loans, net unearned discount . . . . $124,961 $108,815 14.84%
Allowance for loan losses. . . . . . $ 1,682 $ 1,511 11.32%
Deposits . . . . . . . . . . . . . . $154,893 $135,101 14.65%
Stockholders' equity . . . . . . . . $ 16,153 $ 14,521 11.24%
Trust assets under management. . . . $ 13,016 $ 11,465 13.53%
1
<PAGE>
Consolidated Financial Highlights..........................................1
Letter to the Shareholders.................................................3
Dimeco, Inc. and The Dime Bank
Board of Directors......................................................4
The Dime Bank Officers.....................................................5
Management's Discussion and Analysis of Financial
Condition and Results of Operation......................................6
Selected Financial Data...................................................16
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditor's Report..............................................17
Balance Sheet.............................................................18
Statement of Income.......................................................19
Statement of Changes in Stockholders' Equity..............................20
Statement of Cash Flows...................................................21
Notes to Consolidated Financial Statements................................22
<PAGE>
March 8, 1999
1998 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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, 1998 and 1997. 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 of The Dime Bank ("the Bank"),
which is wholly-owned by Dimeco, Inc. 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 pays 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, 1998, the bank
had 62 full-time and 19 part-time employees.
Statement of Condition
Total assets increased $23,053,000 or 15.0% from December 31, 1997 to December
31, 1998. This increase is mainly attributable to increased loans of
$16,146,000 or 14.9% along with an increase of $4,039,000 or 11.5% in
investment securities. These positive changes were principally funded by
growth of $19,791,000 or 14.6% in deposit accounts.
Cash and cash equivalents increased $1,629,000 or 36.4% from December 31, 1997
to December 31, 1998. The Bank has a need for greater amounts of cash on hand
in order to be compliant with Federal Reserve cash requirement guidelines,
which are based on deposits. In addition, both interest-bearing deposits in
other banks and federal funds sold balances at December 31, 1998 showed
increases from the previous year due mainly to maturities of commercial paper
in December which were not reinvested due to lower market interest rates
available. In viewing the changes in the comparative balance sheet dates,
mortgage loans held for sale increased $766,000 or 488.7%. The Company,
through its wholly-owned bank subsidiary, has seen a marked increase in loan
originations of one-to-four family homes, in the form of both new purchases
and refinances of existing mortgages. These loans are typically originated
with the intention to sell in the secondary market and were sold in February
and March 1999.
Investment securities available for sale increased $5,658,000 or 18.4% mainly
due to an increase in commercial paper in the portfolio coupled with increased
balances of U.S. Government agency securities. The Company has chosen to
invest in more commercial paper in 1998 in light of the flattened interest
rate yield curve. With interest rates at a low point as compared to rates in
the past five years, management decided to maintain liquidity with these
shorter term investments which represent increased interest yields to the more
liquid federal funds sold. Holdings of U.S. Government agency securities
increased concurrently with decreases in municipal securities, both of which
are used to pledge for municipal deposits, required according to Pennsylvania
regulatory guidelines. At the same time that investment securities available
for sale increased, the balance sheet shows a decrease in investment
securities (held to maturity). This category of investments has typically
represented holdings of municipal securities and certain corporate bonds. The
availability of municipal securities with our desired maturities and
attractive rates has been negligible during 1998, therefore maturities of
these investments has decreased the portfolio as compared with balances at
December 31, 1997. Management has placed fewer securities in the held to
maturity category in light of the accounting guidelines regarding the
availability for sale of these securities. The Company views the investment
portfolio as a complement to the loan portfolio, with our main business having
to do with servicing the needs of the communities in which we operate. In
light of this philosophy, it is natural to maintain the ability to use the
investment portfolio as a liquidity source, which we would be precluded from
doing if securities are held to maturity and not available for sale. The
Company may continue to place municipal investments in this category since
investments will continue to be used for municipal deposit pledging
requirements.
6
<PAGE>
Loan activity was strong during 1998. Overall, the loan portfolio increased
$16,146,000, or 14.8%, boosting the total loans at December 31,1998 to
$124,961,000 from $108,815,000 at December 31, 1997. Commercial real estate
mortgages accounted for the majority of this growth, increasing by $13,106,000
or 42.2%. Additionally, commercial and industrial loans for working capital
increased $1,900,000 or 13.3%. These loans were granted to both existing and
new clientele for manufacturing concerns, childrens camps, small public
utilities, retail establishments and non-profit groups. Management attributes
a resurgence in the local economy, lower interest rates in general and
increased sales activity on the part of loan officers for this growth.
Premises and equipment increased $875,000 or 29.7% during 1998 which is mainly
attributable to the transfer of "back room" personnel to the new Operations
Center. These departments had previously been housed in the lower level of
the Honesdale branch. Management was concerned with that location due to the
potential of water damage. The computer system, which is an "in-house"
system, was located in the lower level along with the remaining operations
departments. In light of this concern for possible flooding, combined with
the sheer growth of the operations staff, which had outgrown the available
space, these departments were moved offsite to a leased facility. The new
facility is a first floor space located within a mile of the Honesdale branch.
The goal of management is to have all non-customer contact personnel located
in the new facility within two years.
Deposits increased $19,791,000 or 14.7% from December 31, 1997 to December 31,
1998. Management believes that these increases are derived from a combination
of the volatility shown in the stock market during 1998 which served to draw
customers back to the security of bank deposits, our competitive pricing on
deposit products and the effects of additional branches which were opened in
the past few years and continue to attract new customers in their markets.
Noninterest-bearing deposits represent increases of $1,413,000 or 10.9% over
December 31, 1997 due to new accounts opened and additional deposits in
existing accounts. Interest-bearing deposits increased $18,378,000 or 15.1%
with the majority of the change being $14,789,000 or 22.2% in time deposits.
This growth is attributable to aggressive pricing on these products, the
introduction of a new certificate of deposit product and to the opportunities
of a wider customer base when considering the impact of the market penetration
in the newer branches in Damascus and Greentown, PA. Municipal time deposits
have also increased due to increased relationships in this market sector.
Allowance for Loan Losses
The balance in the allowance for loan losses is based upon management's
assessment of risk in the loan portfolio. The analysis is based upon the
grades assigned by our internal loan review system which takes into account
perceived risk by category. Risk is determined by a number of factors
including historical analysis of similar credits, delinquency reports, ratio
analysis compared to industry peers, concentration of credit risk, local
economic conditions and regulatory evaluations of the allowance for loan
losses. The evaluation is reviewed monthly by management and at least
quarterly with the Board of Directors. Management considers the allowance for
loan losses to be adequate at December 31, 1998 based on this analysis.
7
<PAGE>
A summary of loans charged-off and recoveries to the allowance for loan losses
follows:
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) 1998 1997
--------- ---------
Balance January 1, $ 1,511 $ 1,366
Charge-offs:
Commercial 75 150
Real estate 46 165
Installment 192 113
--------- ---------
Total charge-offs 313 428
--------- ---------
Recoveries:
Commercial 2 11
Real estate 3 4
Installment 28 39
--------- ---------
Total recoveries 33 54
--------- ---------
Net charge-offs 280 374
Additions charged to operations 451 519
--------- ---------
Balance December 31, $ 1,682 $ 1,511
========= =========
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.24% 0.35%
Allowance for loan loss as a % of average
loans outstanding 1.45% 1.43%
Liquidity
The Company's liquidity is reflected in its capacity to have sufficient
amounts of cash available to fund customers' deposit withdrawal requests,
accommodate loan demand, maintain reserve requirements, take advantage of
investment opportunities and fund operating expenses. The primary sources for
funding these liquidity needs are core deposits gathered through our branches,
payments received on existing loans, sales of assets such as mortgage loans
held for sale or investments available for sale, income from operations and
decreases of cash equivalent items such as federal funds sold and
interest-bearing deposits in other banks. 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. The Bank has a borrowing arrangement of approximately $29,500,000
available at the Federal Home Loan Bank.
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, 1998 was $38,490,000 less short-term
borrowings of $3,613,000 to net $34,877,000 which represents 19.8% of total
assets. This compares with a net of $29,459,000 or 19.2% of total assets at
December 31, 1997. The Company believes that these liquidity levels are
adequate.
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 maximize earnings
within acceptable guidelines for risk tolerance, management, through the Asset
/Liability Committee, is responsible for implementing policy and monitoring
the status of interest rate sensitivity. The Asset/Liability Committee
employs various methods to accomplish this goal, including interest rate shock
analysis to measure interest rate sensitivity and a static gap analysis. The
interest shock analysis uses a model which assumes a positive and a negative
200 basis point movement in interest rates applied to our current balance
sheet. The model for December 31, 1998 shows that the level of net interest
income at risk due to these variations is minus 17.9%. The effect on total
equity of these movements would be
8
<PAGE>
minus 4.2%. These 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 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. Following is the
static gap table as of December 31, 1998:
<TABLE>
<CAPTION>
3/05/99
Statement of Interest Sensitivity Gap
90 days >90 days 1 - 5
(amounts in thousands) or less but < 1 year years >5 years Total
--------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold $ 945 $ - $ - $ - $ 945
Interest-bearing deposits 3,636 - - - 3,636
Mortgage loans held for sale 923 - - - 923
Investment securities
available for sale 30,066 500 4,957 838 36,361
Investment securities
held to maturity 526 365 1,388 644 2,923
Loans 10,426 61,720 37,256 15,237 124,639
-------- -------- -------- -------- --------
Rate sensitive assets $ 46,522 $ 62,585 $ 43,601 $ 16,719 $ 169,427
======== ======== ======== ======== ========
Liabilities:
Interest-bearing deposits:
Interest-bearing demand $ 22,743 $ - $ - - $ 22,743
Money market 2,939 - - - 2,939
Savings 22,730 10,824 33,554
Time deposits 22,663 42,116 16,465 - 81,244
Short-term borrowings 3,613 - - - 3,613
-------- -------- -------- -------- --------
Rate sensitive liabilities $ 74,688 $ 52,940 $ 16,465 $ 0 $ 144,093
======== ======== ======== ======== ========
Interest sensitivity gap $ (28,166) $ 9,645 $ 27,136 $ 16,719 $ 25,334
Cumulative gap $ (28,166) $ (18,521) $ 8,615 $ 25,334
Cumulative gap to total assets -15.96% -10.50% 4.88% 14.36%
</TABLE>
Capital Resources
A strong capital position is an important element of shareholder and customer
confidence in the Company. The capital base assists the Company in operating
its business and acts as additional protection against potential losses.
Total Stockholders' Equity increased $1,632,000 or 11.3% in 1998 as compared
to an increase of $1,373,000 or 10.4% during 1997. Net income, the primary
source of growth in each year, was $2,117,000 in 1998 and $1,825,000 in 1997.
An offset to this increase in capital were dividends paid to stockholders of
$693,000 in 1998 and $535,000 in 1997. The Company has taken advantage of
opportunities to purchase common stock at market price in both 1998 and 1997
for use in the dividend
9
<PAGE>
reinvestment plan. In 1998 the Company purchased 2,000 shares with a cost of
$87,000 and in 1997 purchased 5,600 shares at a cost of $148,000. The
dividend reinvestment plan returned $289,000 in 1998 and $214,000 in 1997 to
stockholders' equity.
Management evaluates capital position attempting to maintain an optimum
capital to asset ratio of between 9% and 10%. This ratio was 9.2% on December
31, 1998 and was 9.5% on December 31, 1997.
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, 1998, the
Company's ratio was 12.2% with 11.1% being in the form of Tier I risk-based
capital. At December 31, 1997, these ratios were 13.1% and 11.8%,
respectively. In addition, the regulatory agencies have set a minimum of 4%
for Tier I leverage capital; the Company's ratio at December 31, 1998 was 9.1%
and at December 31, 1997 was 9.6%.
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."
Net interest income, on a tax equivalent basis, increased $602,000 or 9.3%
from 1997 to 1998. Interest income increased $1,353,000 or 11.9% from 1997 to
1998 mainly as a result of increased loan volume during the period. The year
1997 showed a great increase in loan volume which continued into 1998. As a
result of increased loan volume during the past two years interest income
increased $975,000 in 1998 and $1,014,000 in 1997. This loan interest income
increase was partially offset in 1998 by a decrease of $74,000 due to a
decline of seven basis points and $111,000 in 1997 due to a decline of eleven
basis points. Interest earned on investments, interest-bearing deposits and
federal funds sold increased $139,000 , $132,000 and $181, 000 mainly as a
result of volume increases in those accounts during 1998.
With no change in the average interest rates paid for all liabilities from
1997 to 1998, the increase in interest expense is attributable to larger
balances in all product categories while balances of borrowings from the
Federal Home Loan Bank declined. The Bank has seen increased balances due to
the successes in our branches combined with competitive pricing on certificate
of deposit products including the introduction of a new variable rate
certificate of deposit with options for additions, a withdrawal and a step up
in interest rate which generated $3,492,000 in 1998. In addition, the Bank
introduced a sweep product for commercial customers in 1997 on a small scale
and increased sales of this product in 1998 to achieve balances of $3,613,000
at December 31, 1998. Other than time deposits, all other categories of
deposits can be repriced immediately but due to the competitive environment in
which the Bank operates, management believes that it is prudent to slowly
adjust these interest rates, as was done during 1998.
Provision for Loan Losses
The provision for loan losses decreased $68,000 or 13.1% from 1997 to 1998.
An internal model is used to assess the appropriate level for the allowance
for loan losses, which management believes indicates an adequate balance at
December 31, 1998. Over the past few years, management has taken a more
aggressive approach to handling loan charge-offs, delinquencies and collection
efforts; the results of these efforts have enabled the provision expense to
decline. Net loans charged-off decreased 25.1% to $280,000 in 1998 from
$374,000 in 1997. Nonperforming loans decreased $507,000 or 17.4% from
December 31, 1997 to December 31, 1998 while other real estate owned
decreased $351,000 or 56.1% to $275,000 at December 31, 1998. The allowance
for loan losses represents 1.35% of total loans at December 31, 1998.
During 1997, the Company expended $520,000 as the provision for loan loss
which represented a decrease over the $549,000 recorded in 1996.
Noninterest Income
Noninterest income includes a collection of income items which are not related
to interest rates but rather to services rendered and activities conducted in
conjunction with the operation of a commercial bank. Service charges earned
on deposit accounts is the largest item in this category and includes fees
charged for overdrafts on
10
<PAGE>
<TABLE>
<CAPTION>
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, 1998, 1997 and 1996:
(amounts in thousands) 1998 1997 1996
--------------------------- --------------------------- ---------------------------
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) $ 114,303 $ 10,372 9.07% $ 103,637 $ 9,471 9.14% $ 92,667 $ 8,568 9.25%
Investment securities:
Taxable 27,035 1,584 5.86% 21,009 1,298 6.18% 16,304 974 5.97%
Exempt from federal income tax(2) 3,088 226 7.31% 5,130 373 7.27% 6,323 482 7.62%
Interest-bearing deposits 5,187 154 2.97% 2,336 22 0.94% 2,063 23 1.11%
Federal funds sold and securities
purchased under agreements to resell 6,540 357 5.46% 3,168 176 5.56% 7,119 383 5.38%
Total interest-earning assets/ ---------- --------- --------- --------- --------- ---------
interest income 156,153 12,693 8.13% 135,280 11,340 8.38% 124,476 10,430 8.38%
Cash and due from banks 1,340 1,244 1,262
Premises and equipment, net 3,130 3,000 2,963
Other assets, less allowance
for loan losses 3,303 3,090 3,445
---------- --------- ---------
Total assets $ 163,926 $ 142,614 $ 132,146
========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings $ 32,980 1,006 3.05% $ 32,706 $ 1,030 3.15% $ 31,183 $ 989 3.17%
Interest-bearing checking 25,446 622 2.44% 22,482 583 2.59% 20,413 514 2.52%
Time deposits 71,959 3,895 5.41% 59,539 3,225 5.42% 53,213 2,885 5.42%
Securities sold under agreements to
repurchase 2,551 85 3.33% 430 15 3.49% 1,003 59 5.88%
Federal Home Loan Bank advances 71 3 4.23% 112 7 6.25% 7 - -
---------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities/
interest expense 133,007 5,611 4.22% 115,269 4,860 4.22% 105,819 4,447 4.20%
Noninterest-bearing deposits 14,039 13,149 12,697
Other liabilities 1,490 1,031 1,151
---------- --------- ---------
Total liabilities 148,536 129,449 119,667
Stockholders' Equity 15,390 13,165 12,479
---------- --------- ---------
Total Liabilities and
Stockholders' Equity $ 163,926 $ 142,614 $ 132,146
========== ========= =========
--------- --------- ---------
Net interest income/interest spread $ 7,082 3.90% $ 6,480 4.15% $ 5,983 4.18%
========= ===== ========= ===== ========= =====
Margin Analysis:
Interest income/earning assets $ 12,693 8.13% $ 11,340 8.38% $ 10,430 8.38%
Interest expense/earning assets 5,611 3.59% 4,860 3.59% 4,447 3.57%
--------- ----- --------- ----- --------- -----
Net interest income/earning assets $ 7,082 4.54% $ 6,480 4.79% $ 5,983 4.81%
========= ===== ========= ===== ========= =====
Ratio of average interest-earning assets
to average interest-bearing liabilities 117.40% 117.36% 117.63%
</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 daily balances.
(4) Interest on loans includes fee income.
11
<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>
RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
1998 Compared to 1997 1997 Compared to 1996
-------------------------------------------------------------
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) $ 901 $ (7) $ 975 $ 903 $ (111) $ 1,014
Investment securities:
Taxable 286 (86) 372 324 43 281
Exempt from federal income tax (147) 1 (148) (109) (18) (91)
Interest-bearing deposits 132 105 27 (1) (4) 3
Federal funds sold and securities
purchased under agreements to r 181 (6) 187 (207) 6 (213)
-------- ------- -------- -------- --------- ---------
Total interest-earning assets 1,353 (60) 1,413 910 (84) 994
-------- ------- -------- -------- --------- ---------
Interest expense:
Savings (24) (33) 9 41 (7) 48
Interest-bearing checking 39 (38) 77 69 17 52
Time deposits 670 (3) 673 340 (3) 343
Securities sold under agreements
to repurchase 70 (4) 74 (44) (10) (34)
Federal Home Loan Bank advances (4) (1) (3) 7 7 0
-------- ------- -------- -------- --------- ---------
Total interest-bearing liabilities 751 (79) 830 413 4 409
-------- ------- -------- -------- --------- ---------
Net change in net interest income $ 602 $ 19 583 $ 497 $ (88) $ 585
======== ======= ======== ======== ========= =========
</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.
checking accounts, checking account service charge fees and several other
miscellaneous fees related to checking accounts. Income in this category
increased $8,000 or 3.8% from 1997 to 1998 resulting from the increased number
of deposit accounts.
Gains on loans available for sale decreased $38,000 or 19.4% from 1997 to
1998. Competitive forces in the markets served by the Bank led to the
addition of new product offerings with 0% origination fee on residential loans
in 1998. These fees are included as an adjustment of the loan balance and
recognized in income on the sale of these mortgages; when there were no points
charged, gains recognized on these sales were lower in 1998.
Gains(losses) on sales of investment securities increased $15,000 from 1997 to
1998 with the sale of Sallie Mae preferred stock and mutual funds that the
Company has owned for at least ten years. These investments, which do not
have a maturity, have shown market value decreases for a number of years. In
the declining interest rate environment of the past few years, management took
advantage of an opportunity to sell these securities, recognize a gain and
eliminate that volatility in the balance sheet for the future. In 1996 the
Company recognized a gain of $52,000 on the sale of a municipal security which
had previously been in nonaccrual status along with a gain of $7,000
recognized on the sale of a low balance mortgage-backed security.
12
<PAGE>
Other noninterest income includes a variety of fee income. This type of income
increased $67,000 or 14.4% from 1997 to 1998. Fees earned on sales of mutual
fund products increased $21,000 in 1998 due to market value increases of
customers accounts on which our fees are based. During 1997 the Company began
charging a fee for use of our ATM machines by noncustomers and at
approximately the same time introduced a debit card for our customer use.
Fees earned on the debit card usage increased $21,000 from 1997 to 1998 and
ATM surcharge fees generated $16,000 more income in 1998 than in 1997.
Smaller variations in a number of other type fee income accounts represents
the remaining difference in income. No significant changes were noted in
income in these categories between 1996 and 1997.
Noninterest Expense
Noninterest expense includes all other operating expenses of the Company.
Compensation and related benefits to employees are the largest expense in
this category. Included are salaries and the cost of employment taxes,
workman's compensation insurance, medical insurance, disability and life
insurance for staff, education expenses and other employment benefits. Total
salary and employee benefits increased $72,000 or 3.6% from 1997 to 1998 as a
result of normal salary increases. Salary and employee benefits increased
$62,000 or 3.2% from 1996 to 1997 based on similar reasons.
Included in occupancy expense are the costs to operate facilities including
depreciation, leases, utilities, real estate taxes and property insurance.
Occupancy expense increased $36,000 or 10.5% from 1997 to 1998 which was
mainly due to the opening of the Operations Center in 1998. An increase of
$56,000 in 1997 as compared to 1996 was the result of a full year of occupancy
in the Greentown branch in 1997 versus three months in 1996.
Furniture and equipment expense represents the costs associated with
depreciation of personal property, leasing of equipment and maintenance of
these items. The Company has opted to lease the majority of computer
equipment in the past few years rather than purchase it due to the continual
upgrading of technology and the ease of implementing upgrades on leased
equipment versus the risk of owning outdated equipment that would represent
significant expense to replace. This lease expense increased $22,000 or
104.6% in 1998 over 1997. Maintenance on equipment, especially equipment
which is critical to operations, is essential. As the Company takes advantage
of new technologies, the maintenance costs for this equipment increases.
Equipment maintenance expense increased $13,000 or 19% in 1998 as compared to
1997. Increased depreciation expenses related to furniture and equipment
purchased for the Operations Center, including a new proof solution, accounts
for the remaining increase in furniture and equipment expense in 1998 compared
to 1997. Expense related to furniture and fixtures increased $44,000 or 16.4%
from 1996 to 1997 due to the opening of the Greentown office in late 1996 and
increased computer lease expenses.
Professional fees remained relatively stable from 1997 to 1998. In 1997 the
Company began using the services of an outside agency to assist in
profitability analysis and continued that relationship in 1998. In addition,
the outsourcing of the internal audit function has been very successful and
the Company expects to maintain this arrangement going forward. Legal
expenses remain fairly constant both for normal operations and for the
increased efforts related to delinquent loan situations. In 1997 the Company
recognized an increase in professional fees of $81,000 from 1996. This
increase was attributable to utilizing outside vendors for profitability
analysis, internal audit, consulting on EDP issues, strategic planning and
legal assistance in both corporate matters and loan delinquency matters.
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, significant expenses included in this
category are expenses to operate and sell other real estate owned, directors'
fees, correspondent bank fees, the cost of bank liability and directors and
officer's insurance, postage and many other day-to-day operating expenses.
Other expense increased $134,000 or 11.1% from 1997 to 1998. Advertising
expense increased $35,000 or 26.4% from 1997 to 1998 due to a number of
additional marketing promotions. These include the expansion of the use of a
local radio station, an enhanced advertising campaign in conjunction with the
addition of a new trust officer and additional expenses for advertising in new
telephone books and billboards.
13
<PAGE>
Telephone expense increased $19,000 or 52.3% due mainly to one time costs
incurred to set up the new Operations Center, additional phone lines at that
facility including a more efficient method of communicating with branch
operations and increased calls placed over the course of the year in order
to completely install the mortgage platform system. Travel and entertainment
expenses increased $14,000 or 45.7% due mainly to expenses associated with
setting up and training employees on the new mortgage platform system.
Pennsylvania shares tax expense, which is based on assets, increased $13,000
or 11.9% in 1998. Computer software maintenance increased $13,000 or 26.2%
due mainly to additional software placed in service in 1997 relating to the
mortgage platform system. Bank supplies increased $13,000 or 10.3% from 1997
to 1998. This increase is due mainly to the increased size of the Company.
Fees paid in conjunction with sales of the mutual fund product decreased
$17,000 or 73.6% from 1997 to 1998 because of a one year arrangement made
with the provider of this product in conjunction with the assignment of one
employee to work specifically on sale of the mutual funds. Changes in various
other categories accounted for the remaining increase with no one category
being a significant dollar amount.
From 1996 to 1997 other expenses increased $113,000 primarily due to
additional fees of $17,000 paid to operate additional ATM machines, increased
deposit insurance premiums of $14,000 , increased advertising expenses of
$12,000, increased Pennsylvania shares tax of $12,000, additional amortization
of computer software of $11,000 and a variety of smaller items, no one of
which was a significant dollar amount.
Federal income tax expense increased $190,000 or 23.2% based mainly on
increased net income. The effective tax rate was 32.3% in 1998 as compared to
31.0% in 1997. A slight increase in the effective rate is due to management's
policy of looking at the tax equivalent rate of interest on securities before
purchases are made. Municipal investment securities generally did not offer
higher interest earnings on this basis and therefore have not been replaced
with similar exempt securities at maturity of these type investments.
The effective tax rate for 1996 was 30.2%, again lower than 1997 or 1998 due
to the type of investments purchased to replace matured securities.
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 re-written,
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 while the validation of that testing is expected to
be 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 non-compliant 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 adversely 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
14
<PAGE>
results internally and are expected to amount to $40,000 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 non-compliant third party vendors or similar uncertainties.
Contingency Plans
Management is in the process of preparing contingency plans in the event that
our assessment is not correct or that third party affiliate systems are not
operational. Our preliminary plan involves the creation of a back up system
for every 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.
Market Prices of Stock/Dividends Declared
The Company's stock is listed on the OTC Bulletin Board under the symbol DIMC
and the cusip number 25432W104. The Company and previously the Bank has paid
dividends for over 50 years and intends to continue to pay dividends in the
future; however, further dividends must necessarily depend upon earnings,
financial condition, appropriate legal restrictions and other factors at the
time that the Board of Directors considers dividend payments. Book value of
the common stock at December 31, 1998 was $22.11 and at December 31, 1997 was
$20.04. As of December 31, 1998 there were approximately 669 holders of
record of the Company's stock.
Market Prices of Stock/Dividends Declared
1998 1997
-------------------------- --------------------------
Dividend Dividend
High Lows Declared High Lows Declared
------ ------ ---------- ------ ------ ----------
First Quarter..........$42.00 $31.00 $0.20 $25.00 $23.50 $0.18
Second Quarter.........$51.50 $41.00 $0.25 $30.00 $24.25 $0.18
Third Quarter..........$50.75 $40.00 $0.25 $29.00 $26.25 $0.18
Fourth Quarter.........$44.00 $42.00 $0.25 $31.00 $27.38 $0.20
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.
15
<PAGE>
SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(amounts in thousands, except per share)
<S> <C> <C> <C> <C> <C>
Summary of operations
Interest income $ 12,616 $ 11,213 $ 10,267 $ 9,491 $ 8,007
Interest expense $ 5,611 $ 4,860 $ 4,447 $ 4,115 $ 3,308
Net interest income $ 7,005 $ 6,353 $ 5,820 $ 5,375 $ 4,699
Provision for possible loan losses $ 451 $ 520 $ 549 $ 382 $ 162
Net interest income after provision
for possible loan losses $ 6,554 $ 5,833 $ 5,271 $ 4,993 $ 4,537
Other income $ 930 $ 878 $ 735 $ 645 $ 506
Other expenses $ 4,356 $ 4,065 $ 3,695 $ 3,394 $ 3,154
Income before income taxes $ 3,128 $ 2,646 $ 2,646 $ 2,311 $ 2,244
Income taxes $ 1,011 $ 821 $ 699 $ 677 $ 589
Net Income $ 2,117 $ 1,825 $ 1,612 $ 1,567 $ 1,300
Per common share
Cumulative effect of accounting
change for income taxes - - - - 0.36
Net income $ 2.90 $ 2.52 $ 2.24 $ 2.24 $ 1.91
Cash dividends $ 0.95 $ 0.74 $ 0.60 $ 0.54 $ 0.43
Book value $ 22.11 $ 20.04 $ 18.21 $ 16.58 $ 14.60
Shares outstanding at year end 731 727 722 708 686
Balance sheet data - end of year
Total assets $176,474 $153,421 $140,284 $124,808 $115,080
Deposits $154,893 $135,101 $126,003 $109,878 $102,571
Loans, net $124,961 $107,303 $ 98,647 $ 88,409 $ 80,838
Loans held for sale $ 923 $ 157 $ 207 $ 465 $ 829
Investment securities available for sale $ 36,361 $ 30,702 $ 13,715 $ 11,453 $ 11,236
Investment securities held to maturity $ 2,923 $ 4,542 $ 14,792 $ 9,267 $ 14,576
Shareholders' equity $ 16,153 $ 14,521 $ 13,147 $ 11,743 $ 10,011
Performance yardstick
Return on average assets 1.29% 1.28% 1.22% 1.31% 1.15%
Return on average equity 13.75% 13.86% 12.92% 14.37% 13.60%
Dividend payout ratio 32.76% 29.33% 26.79% 24.11% 22.51%
Average equity to average
assets ratio 9.39% 9.23% 9.44% 9.12% 8.69%
</TABLE>
16
<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Wexford, PA
February 12, 1999
17
<PAGE>
DIMECO, INC.
CONSOLIDATED BALANCE SHEET
December 31,
1998 1997
------------- -------------
Assets
Cash and due from banks $ 1,528,650 $ 1,358,842
Interest-bearing deposits in other banks 3,636,326 3,121,708
Federal funds sold 945,000 -
------------- -------------
Total cash and cash equivalents 6,109,976 4,480,550
Mortgage loans held for sale (market
value of $923,449 and $160,521) 923,449 156,871
Investment securities available for sale 36,360,618 30,702,190
Investment securities held to maturity
(market value of $2,967,741
and $4,602,088) 2,923,222 4,542,486
Loans (net of unearned income of
$807,570 and $1,078,581) 124,960,697 108,814,535
Less allowance for loan losses 1,681,735 1,511,123
------------- -------------
Net loans 123,278,962 107,303,412
Premises and equipment 3,820,704 2,945,303
Other real estate 274,894 625,619
Accrued interest receivable 910,750 859,177
Other assets 1,871,109 1,805,495
------------- -------------
TOTAL ASSETS $ 176,473,684 $ 153,421,103
============= =============
Liabilities
Deposits:
Noninterest-bearing $ 14,378,252 $ 12,965,190
Interest-bearing 140,514,277 122,136,196
------------- -------------
Total deposits 154,892,529 135,101,386
Short-term borrowings 3,612,876 2,390,044
Accrued interest payable 902,614 701,099
Other liabilities 913,074 707,929
------------- -------------
TOTAL LIABILITIES 160,321,093 138,900,458
------------- -------------
Stockholders' Equity
Common stock, $.50 par value; 3,000,000
shares authorized; 730,518 and 726,216
shares issued 365,259 363,108
Capital surplus 2,823,152 2,662,333
Retained earnings 12,969,112 11,547,197
Net unrealized loss on securities (4,932) (11,586)
Treasury stock, at cost (1,525 shares) - (40,407)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 16,152,591 14,520,645
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 176,473,684 $ 153,421,103
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
DIMECO, INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
1998 1997 1996
----------- ----------- -----------
Interest Income
Interest and fees on loans $10,371,556 $ 9,471,235 $ 8,568,178
Interest-bearing deposits in
other banks 154,120 22,198 23,218
Federal funds sold 356,711 176,020 383,487
Investment securities:
Taxable 1,584,397 1,297,590 973,948
Exempt from federal income tax 148,721 245,779 318,281
----------- ----------- -----------
Total interest income 12,615,505 11,212,822 10,267,112
----------- ----------- -----------
Interest Expense
Deposits 5,522,955 4,838,505 4,388,073
Short-term borrowings 87,553 21,820 59,011
----------- ----------- -----------
Total interest expense 5,610,508 4,860,325 4,447,084
----------- ----------- -----------
Net Interest Income 7,004,997 6,352,497 5,820,028
Provision for loan losses 451,400 519,500 549,000
----------- ----------- -----------
Net Interest Income After Provision
for Loan Losses 6,553,597 5,832,997 5,271,028
----------- ----------- -----------
Noninterest Income
Service charges on deposit accounts 232,470 223,975 213,222
Mortgage loans held for sale gains, net 157,860 195,794 16,453
Investment securities gains (losses), net 8,900 (5,650) 59,257
Other income 531,218 464,340 446,539
----------- ----------- -----------
Total noninterest income 930,448 878,459 735,471
----------- ----------- -----------
Noninterest Expense
Salaries and employee benefits 2,075,353 2,003,280 1,940,853
Occupancy expense, net 372,663 337,159 280,754
Furniture and equipment expense 366,973 314,419 270,074
Professional fees 208,121 211,099 130,538
Other expense 1,333,072 1,199,528 1,072,940
----------- ----------- -----------
Total noninterest expense 4,356,182 4,065,485 3,695,159
----------- ----------- -----------
Income before income taxes 3,127,863 2,645,971 2,311,340
Income taxes 1,011,235 820,759 699,000
----------- ----------- -----------
NET INCOME $ 2,116,628 $ 1,825,212 $ 1,612,340
=========== =========== ===========
Earnings Per Share $ 2.90 $ 2.52 $ 2.24
=========== =========== ===========
Average Shares Outstanding 728,913 723,518 718,531
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
<TABLE>
<CAPTION>
DIMECO, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Net
Unrealized Total
Common Capital Retained Gain (Loss) Treasury Stockholders' Comprehensive
Stock Surplus Earnings on Securities Stock Equity Income
----------- ----------- ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 $ 1,612,340
Other comprehensive income:
Unrealized loss on available
for sale securities, net of
reclassification adjustment (38,107) (38,107) (38,107)
-----------
Comprehensive income $ 1,574,233
===========
Dividend reinvestment and stock
purchase plan 6,727 254,910 261,637
Cash dividends ($.60 per share) (431,637) (431,637)
----------- ----------- ----------- ------------ ---------- -----------
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 $ 1,825,212
Other comprehensive income:
Unrealized gain on available for
sale securities, net of
reclassification adjustment 17,295 17,295 17,295
-----------
Comprehensive income $ 1,842,507
===========
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)
----------- ----------- ----------- ------------ ---------- -----------
Balance, December 31, 1997 363,108 2,662,333 11,547,197 (11,586) (40,407) 14,520,645
Net income 2,116,628 2,116,628 $ 2,116,628
Other comprehensive income:
Unrealized gain on available
for sale securities, net of
reclassification adjustment 6,654 6,654 6,654
Comprehensive income $ 2,123,282
Dividend reinvestment plan 2,151 160,819 (1,860) 127,407 288,517
Purchase treasury stock (87,000) (87,000)
Cash dividends ($.95 per share) (692,853) (692,853)
----------- ----------- ----------- ------------ ---------- -----------
Balance, December 31, 1998 $ 365,259 $ 2,823,152 $12,969,112 $ (4,932) $ - $16,152,591
=========== =========== =========== ============ ========== ===========
</TABLE>
[CAPTION]
<TABLE>
1998 1997 1996
----------- ------------ ----------
<S> <C> <C> <C>
Components of comprehensive income:
Change in net unrealized gain on
investment securities held for sale $ 12,528 $ 13,566 $ 1,003
Realized (gains) losses included in net income,
net of tax (5,874) 3,729 (39,110)
----------- ------------ ----------
Total $ 6,654 $ 17,295 $ (38,107)
=========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
DIMECO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
------------ ------------ ------------
Operating Activities
Net income $ 2,116,628 $ 1,825,212 $ 1,612,340
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 451,400 519,500 549,000
Depreciation 348,748 329,526 256,893
Amortization of premium and
discount on investment securities (995,180) (330,791) 107,486
Amortization of net deferred loan
origination fees (34,969) (67,653) (85,396)
Deferred tax provision 29,900 73,620 39,338
Investment securities (gains)
losses, net (8,900) 5,650 (59,257)
Net decrease (increase) in loans
held for sale (766,578) 49,942 259,231
Decrease (increase) in accrued
interest receivable (51,573) 144,388 (60,246)
Increase (decrease) in accrued
interest payable 201,515 179,870 (47,184)
Other, net 122,819 128,486 (35,456)
------------ ------------ ------------
Net cash provided by operating
activities 1,413,810 2,857,750 2,536,749
------------ ------------ ------------
Investing Activities
Investment securities available
for sale:
Proceeds from sales 389,900 72,650 354,248
Proceeds from the maturities
or paydown 113,039,238 36,071,760 13,304,451
Purchases (118,086,772) (52,741,229) (15,938,665)
Investment securities held to
maturity:
Proceeds from maturities or
paydown 4,644,000 12,711,001 6,430,001
Purchases (3,011,368) (2,500,235) (12,042,470)
Net increase in loans (16,445,490) (9,330,941) (11,025,956)
Purchase of premises and equipment (1,224,149) (208,679) (362,421)
Proceeds from the sale of other
real estate owned 349,926 - 208,113
------------ ------------ ------------
Net cash used for investing
activities (20,344,715) (15,925,673) (19,072,699)
------------ ------------ ------------
Financing Activities
Net increase in deposits 19,791,143 9,098,879 16,124,275
Increase (decrease) in short-term
borrowings 1,222,832 2,390,044 (2,050,000)
Proceeds from dividend reinvestment
and stock purchase plan 288,517 214,331 261,637
Purchase of treasury stock (87,000) (148,400) -
Cash dividends paid (655,161) (520,073) (407,961)
------------ ------------ ------------
Net cash provided by financing
activities 20,560,331 11,034,781 13,927,951
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents 1,629,426 (2,033,142) (2,607,999)
Cash and cash equivalents at
beginning of year 4,480,550 6,513,692 9,121,691
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 6,109,976 $ 4,480,550 $ 6,513,692
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
DIMECO, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 bank-related services which
include interest earnings on residential real estate, commercial mortgage, and
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 balance sheet date 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
management's 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.
22
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR LOAN LOSSES
- -------------------------
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.
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.
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 other expense.
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
- ------------------
The Company currently maintains a simple capital structure; therefore, there
are no dilutive effects on earnings per share. As such, earnings per share
are calculated using the weighted-average number of shares outstanding for the
periods.
23
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COMPREHENSIVE INCOME
- --------------------
Effective January 1, 1998, the Company adopted Financial Accounting Standards
Board ("FASB") Statement No. 130, "Reporting Comprehensive Income." In
adopting Statement No. 130, the Company is required to present comprehensive
income and its components in a full set of general financial statements for
all periods presented. The Company has elected to report the effects of
Statement No. 130 as part of the Statement of Changes in Stockholders' Equity.
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:
Federal
Interest Income Taxes
Paid Paid
----------- -----------
Year ended December 31,
1998 $ 5,408,993 $ 905,384
1997 $ 4,680,455 $ 700,000
1996 $ 4,494,268 $ 592,000
PENDING ACCOUNTING PRONOUNCEMENT
- --------------------------------
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement provides accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, by requiring the recognition of those
items as assets or liabilities in the consolidated balance sheet, recorded at
fair value. Statement No. 133 precludes a held to maturity security from
being designated as a hedged item; however, at the date of initial application
of this Statement, an entity is permitted to transfer any held to maturity
security into the available for sale or trading categories. The unrealized
holding gain or loss on such transferred securities shall be reported
consistent with the requirements of Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Such transfers do not raise an
issue regarding an entity's intent to hold other debt securities to maturity
in the future. This Statement applies prospectively for all fiscal quarters
of all years beginning after June 15, 1999. Earlier adoption is permitted for
any fiscal quarter that begins after the issue date of this Statement.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This SOP, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and provides guidance for determining whether computer software
is for internal use. The Company will adopt SOP 98-1 in the first quarter of
1999 and does not believe the effect of adoption will be material.
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 stockholders' equity.
24
<PAGE>
NOTE 2 - INVESTMENT SECURITIES
The amortized costs and estimated market value of investment securities are
summarized as follows:
1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
AVAILABLE FOR SALE
U.S. Government agency
securities $ 9,708,802 $ 5,595 $ (6,248) $ 9,708,149
Mortgage-backed
securities 375,523 - (8,256) 367,267
Commercial paper 25,813,465 2,597 (1,160) 25,814,902
----------- ----------- ----------- -----------
Total debt securities 35,897,790 8,192 (15,664) 35,890,318
Equity securities 470,300 - - 470,300
----------- ----------- ----------- -----------
Total $36,368,090 $ 8,192 $ (15,664) $36,360,618
=========== =========== =========== ===========
1997
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
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
=========== =========== =========== ===========
1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
HELD TO MATURITY
Obligations of states
and political
subdivisions $ 1,397,269 $ 43,135 $ (210) $ 1,440,194
Corporate securities 1,525,953 1,594 - 1,527,547
----------- ----------- ----------- -----------
Total $ 2,923,222 $ 44,729 $ (210) $ 2,967,741
=========== =========== =========== ===========
25
<PAGE>
NOTE 2 - INVESTMENT SECURITIES (Continued)
1997
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
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
=========== =========== =========== ============
The amortized cost and estimated market values of debt securities at December
31, 1998, 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.
Available for Sale Available for Sale
------------------------- -------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
Due in one year or less $30,563,497 $30,565,545 $ 890,888 $ 891,178
Due after one year
through five years 4,958,770 4,957,506 1,387,907 1,397,938
Due after five years
through ten years - - 543,717 578,125
Due after ten years 375,523 367,267 100,710 100,500
----------- ----------- ----------- -----------
Total debt securities $35,897,790 $35,890,318 $ 2,923,222 $ 2,967,741
=========== =========== =========== ===========
The following is a summary of proceeds received, gross gains, and gross losses
realized on the sale of investment securities:
1998 1997 1996
----------- ----------- -----------
Proceeds from sales $ 389,900 $ 72,650 $ 354,248
Gross gains $ 20,100 $ - $ 59,257
Gross losses $ 11,200 $ 5,650 $ -
Investment securities with an amortized cost of $21,885,599 and $13,326,088
and estimated market values of $21,928,901 and $13,377,748 at December 31,
1998 and 1997, respectively, were pledged to secure deposits, short-term
borrowings and for other purposes as required by law.
26
<PAGE>
NOTE 3 - LOANS
- --------------
Major classifications of loans are as follows:
1998 1997
------------ ------------
Loans secured by real estate:
Construction and development $ 1,383,758 $ 958,425
Secured by farmland 2,485,621 2,135,231
Secured by 1-4 family residential properties:
Revolving, open-end loans secured by 1-4 family
residential properties 1,359,899 1,651,949
All other loans secured by 1-4 family
residential properties 40,628,489 39,233,416
Secured by non-farm, non-residential properties 44,174,518 31,067,911
Commercial and industrial loans 16,174,960 14,274,503
Loans to individuals for household, family and
other personal expenditures:
Ready credit loans 95,369 95,203
Other installment loans 18,457,317 18,852,767
Other loans:
Agricultural loans 644,605 612,068
All other loans 363,731 1,011,643
------------ ------------
Total loans 125,768,267 109,893,116
Less unearned income 807,570 1,078,581
------------ ------------
Loans, net of unearned income $124,960,697 $108,814,535
============ ============
Real estate loans, serviced for others, which are not included in the
consolidated balance sheet, totaled $41,417,648 and $37,058,674 at December
31, 1998 and 1997, 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 not on nonaccrual status because they
are well secured or in process of collection. The following table presents
information concerning nonperforming loans:
1998 1997
------------ ------------
Ninety days or more past due and
accruing interest $ 940,740 $ 755,516
Nonaccrual 584,292 1,061,182
Impaired loans 874,277 1,089,374
------------ ------------
Total nonperforming loans $ 2,399,309 $ 2,906,072
============ ============
The Company had impaired loans of $874,27 and $1,089,374 as of December 31,
1998 and 1997, respectively, with related allowance for loan losses of
$136,217 and $169,997, respectively. There were no impaired loans without a
related allowance for loan losses. For the years ended December 31, 1998 and
1997, average impaired loans were $933,774 and $1,105,729, respectively.
Interest recognized on impaired loans for the years ended December 31, 1998,
1997 and 1996, was $8,706, $12,927 and $13,826, respectively.
27
<PAGE>
NOTE 3 - LOANS (Continued)
Changes in the allowance for loan losses are as follows:
1998 1997 1996
----------- ----------- -----------
Balance, beginning of year $ 1,511,123 $ 1,366,006 $ 1,247,629
Provision charged to operations 451,400 519,500 549,000
Recoveries credited to allowance 32,475 54,110 83,393
Losses charged to allowance (313,263) (428,493) (514,016)
----------- ----------- -----------
Balance, end of year $ 1,681,735 $ 1,511,123 $ 1,366,006
=========== =========== ===========
In the normal course of business loans are extended to officers, directors and
corporations in which they are beneficially interested as stockholders,
officers, or directors. A summary of loan activity for those officers and
directors with aggregate loan balances in excess of $60,000 for the year ended
December 31, 1998 is as follows:
Balance Amounts Balance
December 31, 1997 Additions Collected December 31, 1998
--------------- --------- --------- -----------------
$ 2,994,773 $ 1,247,877 $ 978,800 $ 3,263,850
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, 1998 and 1997, 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:
1998 1997
----------- -----------
Land $ 277,044 $ 277,044
Premises and improvements 3,742,858 3,016,742
Furniture and equipment 2,345,199 1,866,116
----------- -----------
Total, at cost 6,365,101 5,159,902
Less accumulated depreciation 2,544,397 2,214,599
----------- -----------
Net premises and equipment $ 3,820,704 $ 2,945,303
=========== ===========
Depreciation expense was $348,748, $329,526 and $256,893 in 1998, 1997 and
1996, respectively.
Occupancy expenses were reduced by rental income received in the amounts of
$8,266, $11,267 and $19,909 for the years ended December 31, 1998, 1997 and
1996, respectively.
28
<PAGE>
NOTE 5 - DEPOSITS
Deposits are summarized as follows:
1998 1997
------------- -------------
Demand - noninterest-bearing $ 14,378,252 $ 12,965,190
Demand - interest-bearing 22,742,701 20,856,090
Money market 2,939,310 3,739,896
Savings 33,375,592 30,872,690
Time deposits of $100,000 or more 25,304,403 16,379,787
Other time deposits 56,152,271 50,287,733
------------- -------------
Total $ 154,892,529 $ 135,101,386
============= =============
The following table summarizes the maturity distribution of certificates of
deposit of $100,000 or more:
1998
-------------
Three months or less $ 9,604,854
Four through six months 9,058,633
Seven through twelve months 4,332,448
Over twelve months 2,308,468
-------------
Total $ 25,304,403
=============
Interest expense on certificates of deposit of $100,000 or more amounted to
$1,075,303, $633,138 and $392,564 for the years ended December 31, 1998, 1997
and 1996, respectively.
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings consist of borrowings from the Federal Home Loan Bank of
Pittsburgh (AFHLB@) 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 outstanding balances and related information for short-term borrowings are
summarized as follows:
1998 1997
----------------------------------------------
Amount Rate Amount Rate
------------ ------- ------------ -------
Balance at year end $ 3,612,876 2.75 % $ 2,390,044 4.50 %
Average balance outstanding
during the year $ 2,622,292 3.34 % $ 544,209 4.01 %
Maximum amount outstanding
at any month end $ 5,017,194 - % $ 2,390,044 - %
The Bank has the capability to borrow additional funds through their credit
arrangement with the FHLB. The FHLB borrowings are subject to annual renewal,
incur no service charges and are secured by a blanket security agreement on
certain investment securities, qualifying residential mortgages and the Bank's
investment in FHLB stock. At December 31, 1998, the Bank's maximum borrowing
capacity with the FHLB was approximately $29.5 million. There were no
advances on the credit arrangement at December 31, 1998 and 1997.
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 $10,944,528 and
$10,945,640, respectively, at December 31, 1998 were pledged as collateral for
the securities sold under agreements to repurchase.
29
<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 has curtailed
these provisions since January 1996. A participant may withdraw from the Plan
at any time. Stockholders purchased 7,834 shares in 1998 and 8,392 shares in
1997 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 percent matching of voluntary contributions up to
3 percent, and 50 percent matching on the next 2 percent of individual
compensation. Additionally, the Bank may contribute a discretionary amount
each year. For each of the years of 1998, 1997 and 1996, the Board of
Directors authorized an additional 4 percent of each eligible employee's
compensation. Employee contributions are vested at all times, and Bank
contributions are fully vested after five years. Contributions for 1998, 1997
and 1996 to this plan amounted to $109,252, $110,838 and $97,711,
respectively.
NOTE 9 - INCOME TAXES
Federal income tax expense consists of the following:
1998 1997 1996
----------- ----------- -----------
Currently payable $ 981,335 $ 747,139 $ 659,662
Deferred taxes 29,900 73,620 39,338
----------- ----------- -----------
Total provision $ 1,011,235 $ 820,759 $ 699,000
=========== =========== ===========
Income taxes applicable to investment securities gains (losses), net amounted
to $3,206, ($1,921) and $20,147, for the years ended 1998, 1997 and 1996,
respectively.
The components of the net deferred tax assets and liabilities at December 31,
1998 and 1997 are as follows:
1998 1997
---------- ----------
Deferred tax assets:
Allowance for loan losses $ 438,515 $ 387,438
Deferred compensation 30,960 35,323
Allowance for loss on other real estate 9,050 -
Allowance for loss on securities - 12,886
Unrealized loss on investment securities 2,540 4,614
Other, net 321 86
---------- ----------
Total 481,386 440,347
---------- ----------
Deferred tax liabilities:
Premises and equipment 232,927 210,745
Deferred loan origination fees, net 69,968 19,137
---------- ----------
Total 302,895 229,882
---------- ----------
Net deferred tax assets $ 178,491 $ 210,465
========== ==========
No valuation allowance was established at December 31, 1998 in view of the
Company's ability to carry back taxes paid in previous years and certain tax
strategies and anticipated future taxable income as evidenced by the Company's
earnings potential.
30
<PAGE>
NOTE 9 - INCOME TAXES (Continued)
A reconciliation between the expected statutory income tax rate and the
effective income tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- ---------------------- ----------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate $1,063,473 34.0 % $ 899,630 34.0 % $ 785,856 34.0 %
Tax-exempt income (53,571) (1.7) (83,904) (3.2) (108,611) (4.7)
Non-deductible interest 14,164 0.4 39,869 1.5 34,996 1.5
Other, net (12,831) (0.4) (34,836) (1.3) (13,241) (0.6)
---------- ------- ---------- ------- ---------- -------
Effective income tax and rates $1,011,235 32.3 % $ 820,759 31.0 % $ 699,000 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:
1998 1997
------------ ------------
Commitments to extend credit $ 16,050,818 $ 14,515,496
Standby letters of credit $ 725,090 $ 390,419
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 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, 1998, the minimum rental commitments for all noncancellable
leases are as follows:
2000 177,120
2001 150,354
2002 94,361
2003 94,144
2004 and thereafter 712,054
------------
Total $ 1,406,305
============
Contingent Liabilities
The Company and its subsidiary are involved in various legal actions from the
normal course of business activities. Management believes the liability, if
any, arising from such actions will not have a material adverse effect on the
Company's financial position.
31
<PAGE>
NOTE 11 - REGULATORY RESTRICTIONS
Cash and Due from Banks
Included in cash and due from banks are required federal reserves of $999,000
and $849,000 at December 31, 1998 and 1997, 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 state-chartered banks to the surplus of the Bank.
Accordingly, at December 31, 1998, 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 possible
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, 1998, that the
Company and the Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 1998, 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 of at least 100 to 200 basis points above those ratios set forth in the
table. There have been no conditions or events since that notification that
management believes have changed the Company's and the Bank's category.
The following table reflects the Company's capital ratio and minimum
requirements at December 31. The Bank's capital ratios are substantially the
same as the Company's.
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------
Amount Ratio Amount Ratio
------------- ----------- ------------- -----------
Total Capital
(to Risk-Weighted Assets)
- ----------------------------------
<S> <C> <C> <C> <C>
Actual $ 17,839,258 12.21% $ 16,043,354 13.05%
For Capital Adequacy Purposes $ 11,686,989 8.00% $ 9,834,640 8.00%
To Be Well Capitalized $ 14,608,736 10.00% $ 12,293,300 10.00%
Tier I Capital
(to Risk-Weighted Assets)
- ----------------------------------
Actual $ 16,157,523 11.06% $ 14,532,231 11.82%
For Capital Adequacy Purposes $ 5,843,494 4.00% $ 4,917,320 4.00%
To Be Well Capitalized $ 8,765,242 6.00% $ 7,375,980 6.00%
Tier I Capital (to Average Assets)
- ----------------------------------
Actual $ 16,157,523 9.10% $ 14,532,231 9.59%
For Capital Adequacy Purposes $ 7,100,530 4.00% $ 6,059,440 4.00%
To Be Well Capitalized $ 8,875,663 5.00% $ 7,574,300 5.00%
</TABLE>
32
<PAGE>
NOTE 13 - FAIR VALUE DISCLOSURE
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 1,528,650 $ 1,528,650 $ 1,358,842 $ 1,358,842
Interest-bearing deposits in
other banks 3,636,326 3,636,326 3,121,708 3,121,708
Federal funds sold 945,000 945,000 - -
Mortgage loans held for sale 923,449 923,449 156,871 160,521
Investment securities:
Available for sale 36,360,618 36,360,618 30,702,190 30,702,190
Held to maturity 2,923,222 2,967,741 4,542,486 4,602,088
Net loans 123,278,962 128,216,340 107,303,412 109,608,479
Accrued interest receivable 910,750 910,750 859,177 859,177
----------- ----------- ----------- -----------
Total $170,506,977 $175,488,874 $148,044,686 $150,413,005
=========== =========== =========== ===========
Financial liabilities:
Deposits $154,892,529 $155,702,881 $135,101,386 $135,106,126
Short-term borrowings 3,612,876 3,612,876 2,390,044 2,390,044
Accrued interest payable 902,614 902,614 701,099 701,099
----------- ----------- ----------- -----------
Total $159,408,019 $160,218,371 $138,192,529 $138,197,269
=========== =========== =========== ===========
</TABLE>
Financial instruments are defined as cash, evidence of ownership interest in
an entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments should be based upon management's judgment regarding current
economic conditions, interest rate risk, expected cash flows, future estimated
losses and other factors as determined through various option pricing formulas
or simulation modeling. As many of these assumptions result from judgments
made by management based upon estimates which are inherently uncertain, the
resulting estimated fair values may not be indicative of the amount realizable
in the sale of a particular financial instrument. In addition, changes in
assumptions on which the estimated fair values are based may have a
significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are
not considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not
available based upon the following assumptions:
Cash and Due From Banks, Interest-bearing Deposits in Other Banks, Federal
Funds Sold, Accrued Interest Receivable, Short-term Borrowings, and Accrued
Interest Payable
The fair value is equal to the current carrying value.
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.
33
<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,
1998 1997
---------- ----------
Assets
Cash and due from banks $ 16,606 $ 30,209
Investment in bank subsidiary 16,119,115 14,535,963
Other assets 199,500 99,411
---------- ----------
Total Assets $16,335,221 $14,665,583
========== ==========
Liabilities
Dividends payable $ 182,630 $ 144,938
Stockholders' Equity 16,152,591 14,520,645
---------- ----------
Total Liabilities and
Stockholders' Equity $16,335,221 $14,665,583
========== ==========
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
1998 1997 1996
---------- ---------- ----------
Dividends from bank subsidiary $ 574,000 $ 483,000 $ 222,000
Other noninterest expense 51,369 45,571 41,340
---------- ---------- ----------
Net income before undistributed
earnings of bank subsidiary and
income taxes 522,631 437,429 180,660
Undistributed earnings of bank
subsidiary 1,576,497 1,371,977 1,417,930
Income tax benefit (17,500) (15,806) (13,750)
---------- ---------- ----------
Net Income $ 2,116,628 $ 1,825,212 $1,612,340
========== ========== =========
34
<PAGE>
NOTE 14 - PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
---------- ---------- ----------
Operating Activities
Net income $ 2,116,628 $ 1,825,212 $ 1,612,340
Adjustments to reconcile net
income to net cash provided
by operating activities:
Undistributed earnings of
bank subsidiary (1,576,497) (1,371,977) (1,417,930)
Other, net (100,090) 15,735 (75,590)
---------- ---------- ----------
Net cash provided by
operating activities 440,041 468,970 118,820
---------- ---------- ----------
Financing Activities
Dividends paid (655,161) (520,073) (407,961)
Purchase of treasury stock (87,000) (148,400) -
Proceeds from dividend reinvestment
and stock purchase plan 288,517 214,331 261,637
---------- ---------- ----------
Net cash used for financing
activities (453,644) (454,142) (146,324)
---------- ---------- ----------
Increase (decrease) in cash and
cash equivalents (13,603) 14,828 (27,504)
Cash at Beginning of Year 30,209 15,381 42,885
---------- ---------- ----------
Cash at End of Year $ 16,606 $ 30,209 $ 15,381
========== ========== ==========
35
<PAGE>
The following firms are known to handle Dimeco, Inc. Stock transactions:
Hopper Soliday & Co., Inc.
1703 Oregon Pike, Lancaster, PA 17601-4201
P.O. Box 4548, Lancaster, PA 17604-4548
(717)560-3042
(800)646-8647
Legg Mason Wood Walker, Inc.
330 Montage Mountain Road
Scranton, PA 18507-1762
(570)346-9300
Ryan Beck & Company
740 Broad Street
Shrewsbury, NJ 07702
(888)231-7226
Transfer Agent:
The Dime Bank
820 Church Street
P.O. Box 509
Honesdale, PA 18431
(570)253-1970
36
<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
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,528,650
<INT-BEARING-DEPOSITS> 3,636,326
<FED-FUNDS-SOLD> 945,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 2,923,222
<INVESTMENTS-MARKET> 2,967,741
<LOANS> 124,960,697
<ALLOWANCE> 1,681,735
<TOTAL-ASSETS> 176,473,684
<DEPOSITS> 154,892,529
<SHORT-TERM> 3,612,876
<LIABILITIES-OTHER> 1,815,688
<LONG-TERM> 0
0
0
<COMMON> 365,259
<OTHER-SE> 15,787,332
<TOTAL-LIABILITIES-AND-EQUITY> 176,473,684
<INTEREST-LOAN> 10,371,556
<INTEREST-INVEST> 1,733,118
<INTEREST-OTHER> 510,831
<INTEREST-TOTAL> 12,615,505
<INTEREST-DEPOSIT> 5,522,955
<INTEREST-EXPENSE> 5,610,508
<INTEREST-INCOME-NET> 7,004,997
<LOAN-LOSSES> 451,400
<SECURITIES-GAINS> 8,900
<EXPENSE-OTHER> 4,356,182
<INCOME-PRETAX> 3,127,863
<INCOME-PRE-EXTRAORDINARY> 3,127,863
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,116,628
<EPS-PRIMARY> 2.90
<EPS-DILUTED> 2.90
<YIELD-ACTUAL> 8.13
<LOANS-NON> 584,292
<LOANS-PAST> 940,740
<LOANS-TROUBLED> 822,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,511,123
<CHARGE-OFFS> 313,263
<RECOVERIES> 32,475
<ALLOWANCE-CLOSE> 1,681,735
<ALLOWANCE-DOMESTIC> 1,681,735
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,000
</TABLE>
<PAGE>
DIMECO, INC.
PROXY
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 22, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Jerome D. Theobald
and Susan Wright and each and any of them, proxies of the undersigned, with
full power of substitution, to vote all of the shares of Dimeco, Inc. (the
"Company") that the undersigned may be entitled to vote at the Annual Meeting
of Shareholders of the Company to be held at the Operations Center of The
Dime Bank, 120 Sunrise Avenue, Honesdale, Pennsylvania 18431, on Thursday,
April 22, 1999, at 2:00 p.m.,Eastern Standard Time, and at any adjournment or
postponement of the meeting as follows:
1. ELECTION OF CLASS A DIRECTORS
Joseph J. Murray, Thomas A. Peifer and Robert E. Genirs
[ ] For all nominees listed [ ] WITHHOLD AUTHORITY
above (except as provided to vote for all nominees
to the contrary below) listed above
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
-------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES LISTED ABOVE.
2. Ratification of the selection of S. R. Snodgrass, A.C., Certified
Public Accountants, as the auditors of the Company for the year ending
December 31, 1999.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting and any adjournment or
postponement of the meeting.
THIS PROXY, WHEN PROPERLY SIGNED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR ALL NOMINEES LISTED ABOVE AND FOR PROPOSAL 2.
Dated , 1999
----------------------
-------------------------------
-------------------------------
Signature(s)
Number of Shares Held of
Record on March 15, 1999:
-------------------
THIS PROXY MUST BE DATED, SIGNED BY THE SHAREHOLDER AND RETURNED
PROMPTLY TO THE COMPANY IN THE ENCLOSED ENVELOPE.
WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE
GIVE FULL TITLE. IF MORE THAN ONE TRUSTEE, ALL SHOULD SIGN. IF STOCK IS HELD
JOINTLY, EACH OWNER MUST SIGN.
<PAGE>
DIMECO, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF DIMECO, INC.:
Dimeco, Inc. (the "Company") hereby gives notice that the Annual
Meeting of Shareholders will be held at 2:00 p.m., Eastern Standard time, on
Thursday, April 22, 1999, at the Operations Center of The Dime Bank, 120
Sunrise Avenue, Honesdale, Pennsylvania 18431, for the following purposes:
1. To elect three Class A directors to serve for a three-year
term and until their successors are properly elected and qualified;
2. To ratify the selection of S. R. Snodgrass, A.C., Certified
Public Accountants, of Wexford, Pennsylvania, as the independent auditors of
the Company for the fiscal year ending December 31, 1999; and
3. To transact such other business as may properly come before
the Annual Meeting and any adjournment or postponement of the meeting.
Only those shareholders of record at the close of business, at 5:00
p.m., on Monday, March 15, 1999, may vote at the Annual Meeting.
A copy of the Company's Annual Report for the fiscal year ended
December 31, 1998, is being mailed with this notice.
You are urged to mark, sign, date and promptly return your proxy in
the enclosed, postage-prepaid envelope. By so doing, you will assure that
your shares will be voted in accordance with your wishes, whether or not you
personally attend the meeting. The return of your proxy will also help to
assure the presence of a quorum at the meeting. Finally, the prompt return of
your signed proxy, regardless of the number of shares you hold, will aid the
Company in reducing the expense of additional proxy solicitation. The giving
of such proxy does not affect your right to vote in person if you attend the
meeting and give written notice to the Secretary of the Company.
By Order of the Board of Directors
Joseph J. Murray
President & Chief Executive Officer
April 1, 1999
<PAGE>
PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD APRIL 22, 1999
GENERAL
Introduction, Date, Place and Time of Meeting
Dimeco, Inc. (the "Company"), a Pennsylvania business corporation
and registered bank holding company, is furnishing this Proxy Statement in
connection with the solicitation by the Board of Directors of proxies to be
voted at the Annual Meeting of Shareholders of the Company and any
adjournment or postponement of the meeting. The Annual Meeting will be held
at the Operations Center of The Dime Bank, 120 Sunrise Avenue, Honesdale,
Pennsylvania 18431, on Thursday, April 22, 1999, at 2:00 p.m., Eastern
Standard time.
The main office of the Company is located at The Dime Bank, 820
Church Street, Honesdale, Pennsylvania 18431. The Dime Bank is the wholly-
owned subsidiary of the Company and its sole subsidiary. The telephone number
for the Company is (570) 253-1970. All inquiries should be directed to Joseph
J. Murray, President and Chief Executive Officer.
The Company is first sending this Proxy Statement and the enclosed form of
proxy to shareholders of the Company on or about April 1, 1999.
Solicitation
By properly filling out, signing and returning the accompanying form
of proxy in the enclosed postage-prepaid envelope, a shareholder is appointing
the proxy holders to vote his or her shares in accordance with the
shareholder's directions on the proxy. Unless a proxy specifies to the
contrary, the proxy holders will vote the shares held by the shareholder
giving the proxy as follows:
- - FOR the election of the three nominees for Class A Director named below;
and
- - FOR the ratification of the selection of S. R. Snodgrass, A.C., Certified
Public Accountants of Wexford, Pennsylvania, as the independent auditors
for the Company for the year ending December 31, 1999.
The execution and return of the enclosed proxy will not affect a
shareholder's right to attend the Annual Meeting and vote in person, after
giving written notice to the Secretary of the Company of his or her intent to
vote in person.
The Company will pay for preparing, assembling, mailing and
soliciting proxies. In addition to the use of the mails, certain directors,
officers and employees of the Company intend to solicit proxies personally, by
telephone and by facsimile. The Company will arrange with brokerage houses
and other custodians, nominees and fiduciaries to forward proxy solicitation
material to the beneficial owners of stock held of record by these persons.
Upon request, the Company will reimburse such custodians for their reasonable
forwarding expenses.
Right of Revocation
A shareholder who executes and returns a proxy may revoke the proxy
at any time before it is voted only by:
- - Giving written notice of the revocation to Mr. Gerald Weniger, Secretary,
Dimeco, Inc., 820 Church Street, Honesdale, Pennsylvania, 18431, telephone:
(570)253-1970;
- - Executing a later-dated proxy and giving written notice of this fact to the
Secretary of the Company; or
- - Giving written notice to the Secretary of the Company that the shareholder
intends to vote in person at the Annual Meeting.
Voting Securities and Record Date
At the close of business on March 15, 1999, the Company had
outstanding 732,168 shares of common stock, $.50 par value per share.
Only holders of common stock on the Company's records as of the
close of business on March 15, 1999, may vote at the Annual Meeting. On all
matters to come before the Annual Meeting, each share of common stock entitles
its holder to one vote.
Quorum
Pennsylvania law requires the presence of a quorum prior to the
transaction of business at the Annual Meeting. Section 3.1 of the By-laws of
the Company provide that the presence, in person or by proxy, of shareholders
entitled to cast at least a majority of the votes which all shareholders are
entitled to cast shall constitute a quorum for the transaction of business at
the meeting. Votes withheld and abstentions will be counted in determining
the presence of a quorum for the particular matter. Broker non-votes will not
be counted in determining the presence of a quorum for the particular matter,
as to votes which the broker withheld authority. Those shareholders present,
in person or by proxy, may adjourn the meeting to another time and place if a
quorum is lacking.
Vote Required for Approval
Assuming the presence of a quorum, the three nominees for director
receiving the highest number of votes cast by shareholders entitled to vote
for the election of directors shall be elected. Votes withheld from a nominee
and broker non-votes will not be cast for the nominee.
Assuming the presence of a quorum, the affirmative vote of a
majority of the votes cast by all shareholders, in person or by proxy, who are
entitled to vote at the Annual Meeting will be sufficient to approve the
selection of S.R. Snodgrass, A.C., Certified Public Accountants, as the
auditors of the Company for the year ending December 31,1999. Abstentions and
broker non-votes, which do not count either for or against a proposal, have
the practical effect of reducing the number of affirmative votes required to
achieve a majority for the matter by reducing the total number of shares voted
from which the required majority is calculated.
2
<PAGE>
PRINCIPAL BENEFICIAL OWNERS OF THE COMPANY'S STOCK
Principal Owners
As of March 15, 1999 there was no person who owned of record or who
is known by the Board of Directors to be the beneficial owner of more than
five percent (5%) of the Company's outstanding common stock.
Beneficial Ownership by Officers, Directors and Nominees
The following table indicates the amount and percentage of the
common stock of the Company beneficially owned by each director, each nominee
and all officers and directors of the Company as a group as of March 15, 1999.
All shares reported have been rounded to the nearest whole share and are
individually owned by the reporting person unless otherwise indicated.
<TABLE>
<CAPTION>
Name of Individual Amount and Nature of Percent of Outstanding Common
or Identity of Group Beneficial Ownership(1)(2) Stock Beneficially Owned
- -------------------- -------------------------- ------------------------
<S> <C> <C>
Robert E. Genirs(4) 1,000 -----
Barbara Jeanne Genzlinger(5) 151 -----
John S. Kiesendahl(5)(9) 10,932 1.49%
Joseph J. Murray(4)(10) 1,427 -----
Thomas A. Peifer(4)(7) 7,041 -----
William E. Schwarz(6) 5,550 -----
Henry M. Skier(6)(8) 29,600 4.04%
John F. Spall(5)(7) 11,115 1.52%
Gerald J. Weniger(6) 3,789 -----
All Officers and Directors as a
Group (11 persons in total) 72,346 9.88%
- -------------------------------
</TABLE>
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth
in the General Rules and Regulations of the Securities and
Exchange Commission ("SEC") and may include securities owned by or for
the individual's spouse and minor children and any other relative who
has the same home, as well as securities to which the individual has or
shares voting or investment power or has the right to acquire beneficial
ownership within 60 days after March 15, 1999. Beneficial ownership may
be disclaimed as to certain of the securities.
(2) Information furnished by the directors and the Company.
(3) Less than one percent (1%) unless otherwise indicated.
(4) A Class A Director whose term expires in 1999 and a nominee for Class A
Director whose term expires in 2002.
(5) A Class B Director whose term expires in 2000.
(6) A Class C Director whose term expires in 2001.
(7) All shares are held jointly with his spouse.
(8) Includes 29,347 shares held individually by Mr. Skier and 253 shares
held by Mr. Skier as custodian for his two children.
(9) Includes 1,588 shares held individually by Mr. Kiesendahl, 2,383 shares
held by his stepson who resides with Mr. Kiesendahl and 6,961 shares
held by Woodloch Pines, Inc., of which Mr. Kiesendahl is the President.
(10) Includes 1,415 shares held jointly by Mr. Murray with his spouse and 12
shares held by his son who resides with Mr. Murray.
3
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than
ten percent of a registered class of the Company's equity securities (in this
case the Company's common stock), to file reports of ownership and changes in
ownership with the Securities and Exchange Commission, (the "SEC"). SEC
regulation require officers, directors and greater than ten-percent
shareholders to furnish the Company with copies of all Section 16(a) forms
that they file.
Based solely on its review of the copies of such forms received by
it, or on written representations from certain reporting persons that no Forms
5 were required for those persons, the Company believes that during the period
January 1, 1998 through December 31, 1998 all filing requirements applicable
to its officers, directors and greater than ten-percent shareholders were
complied with, except as follows: Mr. Henry M. Skier, a director of the
Company, did not file a Form 4 in a timely manner. On July 26, 1996, Mr.
Skier purchased 660 additional shares of the Company's common stock for his
retirement account. The Form 4 was filed on February 8, 1999, in conjunction
with the filing of Mr. Skier's Form 5.
ELECTION OF DIRECTORS
The Company has a classified Board of Directors with staggered
three-year terms of office. In a classified board, the directors are
generally divided into separate classes of equal number with the terms of the
separate classes expiring in successive years. The Company's Board is divided
into three classes. Thus, at the 1999 Annual Meeting of Shareholders,
successors to the current Class A directors whose terms expire in 1999 shall
be elected to hold office for a term of three years.
In addition, there is no cumulative voting for the election of
directors. Accordingly, each share of common stock entitles its holder to
cast only one vote for each nominee. For example, if a shareholder owns 100
shares of common stock, he or she may cast up to 100 votes for each of the
nominees for director in the class to be elected. Only the affirmative vote
of at least a majority of the shares of common stock represented at the Annual
Meeting can elect a nominee to the office of director.
The Board of Directors of the Company has nominated the current
Class A directors to serve as Class A directors for the next three-year term
of office. The nominees for re-election this year are as follows:
- Joseph J. Murray, director of the Company since 1992;
- Thomas A. Peifer, director of the Company since 1992; and
- Robert E. Genirs, director of the Company since 1998.
Each nominee has consented to serve a three year term of office and until his
successor is elected and qualified.
Unless otherwise instructed, the proxy holders will vote the Proxies
received by them for the election of the three nominees for Class A director
named above. If any nominee should become unavailable for any reason, the
proxy holders will vote the proxies in favor of a substitute nominee as the
Board of Directors of the Company shall determine. The Board of Directors has
no reason to believe the nominees named will be unable to serve if elected. A
majority of directors of the Company may fill any vacancy occurring on the
Board of Directors of the Company for any reason until the expiration of the
term of vacancy. Also, pursuant to Section 10.2 of the Company's By-Laws, the
Board of Directors may from time to time fix the number of directors and their
classifications, except that the total number of directors may not be less
than three.
4
<PAGE>
INFORMATION AS TO NOMINEES AND DIRECTORS
The following table contains certain information with respect to the
current Class A directors who are also the nominees for Class A director and
the current Class B and Class C directors. The terms of office for class A, B
and C directors expire in 1999, 2000 and 2001, respectively.
<TABLE>
<CAPTION>
Principal Occupation
for Past Five Years
Age as of and Position Held with Director Since
Name March 15, 1999 Company and Bank Company/Bank
- ---- -------------- ---------------- ------------
Nominees For Class A Directors Whose Term Will Expire
In 2002 And Current Class A Directors Whose Term Expires In 1999
- ----------------------------------------------------------------
<S> <C> <C> <C>
Joseph J. Murray 59 President and Chief Executive 1992/1991
Officer of the Company and
the Bank
Thomas A. Peifer 56 Superintendent of the 1992/1987
Wallenpaupack Area
School District
Robert E. Genirs(1) 63 Retired 1998; prior 1998/ -
Chief Administrative Officer -
Lehman Brothers
Class B Directors Whose Term Expires In 2000
- --------------------------------------------
John S. Kiesendahl 52 President - Woodloch 1992/1985
Pines, Inc. (resort)
Barbara J. Genzlinger(1) 47 Owner - Settlers Inn 1998/ -
(bed & breakfast)
John F. Spall(1) 52 Attorney-at-law 1999/ -
Class C Directors Whose Term Expires In 2001
- --------------------------------------------
William E. Schwarz 56 Chairman of the Board of 1992/1971
the Company and the Bank
President - Edw. J. Schwarz, Inc
(automobile dealership)
Henry M. Skier 58 President and Treasurer - 1992/1982
A. M. Skier Agency, Inc.
(independent insurance agency)
Gerald J. Weinger 68 Secretary of the Company 1992/1986
Assistant Secretary of the Bank
Retired - 1998; prior
President - Weniger Electronics,
Inc. (retail electronic
appliances and equipment)
</TABLE>
(1) New directors appointed to fill vacancies in the Board which were
created by increasing the number of Class A and Class B directors to
three each and by the vacancy created by the death of Mr. David Boyd in
1997.
5
<PAGE>
The members of the Board of Directors of the Company also serve as
members of the Board of Directors of the Bank. During 1998, the Board
of Directors of the Company held seven meetings. Directors received no
additional remuneration for attendance at meetings of the Board of Directors
of the Company. The Board of Directors of the Bank held 28 meetings.
Each of the Directors, with the exception of Mr. Skier, attended at
least 75% of the total number of meetings of the Company's Board of Directors.
Each of the directors, with the exception of Mr. Genirs, attended at least 75%
of the total number of meetings of the Bank's Board of Directors.
At present, the Board of Directors of the Company has no standing
committees. Neither the Company nor the Bank has a nominating committee. A
shareholder who desires to nominate an individual for director should submit a
proposal in writing to the Secretary of the Company in accordance with Section
10.1 of the Company's By-laws not less than 60 days prior to the date of any
meeting of shareholders called for the election of directors and must provide
the specific information listed in Section 10.1 of the By-Laws.
INFORMATION AS TO COMPENSATION OF EXECUTIVES AND DIRECTORS
Executive Compensation
The following table sets forth the total compensation for services
in all capacities paid by the Company and the Bank during 1998, 1997, and 1996
to the Company's and the Bank's President and Chief Executive Officer. No
other officer of the Company or the Bank had total annual salary and bonus
that exceeded $100,000 during 1998, 1997 or 1996.
SUMMARY COMPENSATION TABLE (1)
Annual Compensation
------------------------------------------------
Other Annual| All Other
Name and Fiscal Compensation|Compensation
Principal Position Year Salary($) Bonus($) ($) | ($)
- ------------------------------------------------------------------------------
|
Joseph J. Murray, 1998 130,179 8,650 6,210(2) | 48,993(3)
President and Chief 1997 132,592 8,000 7,351(2) | 37,781(4)
Executive Officer of 1996 100,511 10,047 6,398(2) | 34,877(5)
the Company and Bank |
==============================================================================
(1) From January 1, 1996 through December 31, 1998, the Company did not pay
any long-term compensation in the form of stock options, stock
appreciation rights, restricted stock or any other long-term
compensation, nor did it make any long-term incentive plan payments.
Accordingly, no such information is presented in the Summary
Compensation Table.
(2) Incremental costs for an automobile made available to Mr. Murray.
(3) Includes $40,377 vested benefit in salary continuation plan, a $7,688
contribution to Mr. Murray's 401(k) profit sharing plan and $928
representing various medical, disability and life insurance
premiums.
(4) Includes $26,405 vested benefit in salary continuation plan, a $9,324
contribution to Mr. Murray's 401(k) profit-sharing plan and $2,052
representing various medical, disability and life insurance premiums
(5) Includes $24,260 vested benefit in a salary continuation plan, a $7,962
contribution to Mr. Murray's 401(k) profit-sharing plan and $2,655
representing various medical, disability and life insurance premiums.
6
<PAGE>
Salary Continuation Plan for Executive Officers
Joseph J. Murray has served as the Company's and the Bank's
President and Chief Executive Officer since 1993 and Executive Vice President
and Chief Executive Officer of the Bank since 1986. Maureen H. Beilman has
served as the Company's and the Bank's Treasurer since 1993, the Bank's
Secretary since 1997, the Company's Assistant Secretary since 1997 and as
Controller of the Bank since 1988 and as of 1999 as the Chief Financial
Officer of the Company and the Bank. Gary C. Beilman has served as Vice
President of the Company since 1993 and as Vice President of the Bank since
1989 and as of 1999 as the Senior Vice President of the Company and the Bank.
As a result of these officers' active involvement and experience in the
affairs of the Bank, the Bank has depended upon, and continues to depend upon,
their continued employment. The Bank does not maintain employment contracts
or key man insurance, other than in connection with the salary continuation
plans below, with respect to Messrs. Murray and Beilman and Ms. Beilman.
However, in 1995, the Bank entered into agreements to establish a non-
qualified salary continuation plan (the "Salary Continuation Plan") for these
officers. If an officer continues to serve as an officer of the Bank until he
or she attains age 65, the Bank agrees to pay that officer 120 guaranteed
consecutive monthly payments commencing on the first day of the month
following the officer's 65th birthday. If the officer attains 65 years of
age, but dies before receiving all of the guaranteed monthly payments or dies
before age 65 while serving as an officer, then the Bank will make the
remaining payments to that officer's designated beneficiary or to the
representative of his or her estate. The Bank has obtained life insurance
(designating the Bank as beneficiary) on the life of each participating
officer in an amount which is intended to cover the Bank's obligations under
the Salary Continuation Plan, based upon certain actuarial assumptions. In
1998, the Bank accrued $44,877 as an expense for the Salary Continuation Plan.
Income realized from increases in the cash surrender values of the life
insurance policies in 1998 was $55,579.
Report of the Board of Directors on Executive Compensation
The Board of Directors of Dimeco, Inc. is responsible for the
governance of the Company and its subsidiary, The Dime Bank. In fulfilling
its fiduciary duties, the Board of Directors acts in the best interests of the
Company's shareholders, customers and the communities served by the Company
and the Bank. To accomplish the strategic goals and objectives of the
Company, the Board of Directors engages competent persons who undertake to
accomplish these objectives with integrity in a cost-effective manner. The
compensation of these individuals is part of the Board of Directors'
fulfillment of its duties to accomplish the Company's strategic mission. The
Bank provides compensation to the employees of the Company and the Bank.
The fundamental philosophy of the Company's and the Bank's
compensation program is to offer competitive compensation opportunities for
all employees based on the individual's contribution and personal performance.
The Board of Directors in its entirety acts as the Compensation Committee.
The objectives of the Board of Directors in administering this duty are to
establish a fair compensation policy to govern executive officers' base
salaries and to develop incentive plans to attract and motivate competent,
dedicated and ambitious managers whose efforts will enhance the products and
services of the Company, the results of which will be improved profitability,
increased dividends to our shareholders and subsequent appreciation in market
value of our shares.
The Board of Directors annually reviews and approves the
compensation of the Company's and Bank's top executive officers. The top
executives whose compensation is determined by the Board include the president
and chief executive officer, the chief financial officer and treasurer, the
senior vice president and all other vice presidents. As a guideline for
review in determining base salaries, the Board uses compensation information
from the L.R. Webber Associates, Inc. Survey Report, which includes peer group
banks in Pennsylvania with assets of $100,000,000 to $199,999,000.
7
<PAGE>
President and Chief Executive Officer Compensation
The Board of Directors, with the exception of Mr. Murray, determines
the annual salary and bonus for the President and CEO. They have determined
that the CEO's 1998 compensation of $130,179 is appropriate in light of the
following Company performance accomplishments over the past five years: (1) a
ninety-seven percent (97%) increase in net income; (2) an eleven percent (11%)
increase in return on equity; and (3) a fifty-nine percent (59%) increase in
assets. In addition, the Company, through its Bank subsidiary, has introduced
a number of new products over this time frame and expanded the operations of
the Company. There is, however, no direct correlation between the CEO's
compensation, the CEO's increase in compensation and any of the above
criteria, nor is there any weight given by the Board to any of the above
specific individual criteria. Such increase in the CEO's compensation is
based on the Board's subjective determination after review of all information,
including the above, that it deems relevant.
Executive Officers
The Board of Directors establishes the compensation of the Company's
and the Bank's executive officers. The members determined compensation
increases based on its subjective analysis of each individual's contribution
to the Company's strategic goals and objectives. In determining whether
strategic goals have been achieved, the Board of Directors considers among
numerous factors, the following; the Company's performance as measured by
earnings, revenues, return on assets, return on equity, market share, total
assets and non-performing loans. Although performance and increases in
compensation were measured in light of these factors, there is no direct
correlation between any such criteria in the Board of Director's analysis.
The determination by the Board is subjective after review of all information,
including the above, it deems relevant.
Total compensation opportunities available to the employees of the
Bank are influenced by general labor market conditions, the specific
responsibilities of the individual and the individual's contributions to the
Company's success. Individuals are reviewed annually on a calendar year
basis. The Bank strives to offer compensation that is competitive with that
offered by employers of comparable size in our industry. Through these
compensation policies, the Company strives to meet its strategic goals and
objectives to its constituencies and provide compensation that is fair and
meaningful to its employees.
Submitted By The Board of Directors Acting
as the Executive Compensation Committee:
Joseph J. Murray John S. Kiesendahl
William E. Schwarz Thomas A. Peifer
Gerald J. Weniger Henry M. Skier
Robert E. Genirs Barbara J. Genzlinger
8
<PAGE>
Board of Directors Interlocks and Insider Participation in Compensation
Decisions
Joseph J. Murray, President and Chief Executive Officer of the
Company and the Bank is a member of the Board of Directors. Mr. Murray makes
recommendations to the Board of Directors regarding compensation for all
employees. The recommendations are submitted to the entire Board of
Directors to be voted upon to establish compensation policies. Mr. Murray
does not participate in the discussions and decision relating to his base
salary and cash bonus.
Directors' Compensation
Each outside director of the Bank, with the exception of Mr. Genirs
and Ms. Genzlinger, received $11,000 for his services as a director in 1998.
Mr. Genirs and Ms. Genzlinger, who each received $7,597, were appointed to
serve on the Board of Directors in April 1998 and their compensation was
prorated accordingly. In 1998, the directors of the Bank received $70,194,
in the aggregate, for attendance at Board meetings. Directors received no
remuneration for attendance at meetings of the Board of Directors of the
Company. Mr. Murray is a salaried employee of the Bank and therefore receives
no additional income for his duties as a member of the Board of Directors.
Director Deferred Compensation Plans
The Bank has entered into agreements with two directors to
establish non-qualified deferred compensation plans, the Director Deferred
Compensation Plans. Although Messrs. Skier and Kiesendahl are the only
directors who have entered into these agreements as of this date, the Bank has
offered these plans to all directors and may enter into substantially similar
plans with its remaining directors. Mr. Skier is deferring substantially all
of his directors' fees described above. These fees are paid to a split dollar
insurance plan, which neither the Company nor the Bank pay any additional
amounts. The plan is equal to a sum of money measured by the collateral
assignment portion of the insurance plan between the director and the Bank
accruing during the term of his appointment in connection with the director's
agreement with the Bank. If the directors's appointment is terminated due to
his death or disability while still named as a director of the Bank, the Bank
shall make the payment at the termination of service, if disabled, or to his
beneficiary, if deceased.
The plan for Mr. Kiesendahl is recorded by the Bank in a deferred
compensation account for his benefit. He is entitled to receive all amounts
credited to the account as of the date of termination of service. If
termination is due to his death, his beneficiary will be entitled to receive
all amounts credited to the account as of the date of his death, either in
installments or as a lump sum, at the Bank's discretion. Mr. Kiesendahl chose
not to defer any portion of his director's fees during 1998.
9
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the opinion of the management of Dimeco, Inc and The Dime Bank,
there have been no material transactions since January 1, 1998, nor are any
such transactions currently proposed, to which the Company or the Bank was or
is to be a party and in which any director or executive officer of the
Company, or any beneficial owner of more than 5% of the common stock of the
Company or his associate, had or will have a material interest. The Company
and the Bank have engaged in and intend to continue to engage in banking and
financial transactions in the ordinary course of business with directors and
executive officers of the Company and their associates on comparable terms
and with similar interest rates and collateral as those prevailing from time
to time for other non-affiliated customers of the Company and the Bank. Total
loans outstanding from the Company and the Bank, at December 31, 1998, to the
Company's officers and directors as a group and members of their immediate
families and companies in which they had an ownership interest of 10% or more
was $3,263,850 or 20.2% of the Bank's total equity capital accounts. The
largest amount of indebtedness outstanding at any time during fiscal year 1998
to the above identified group was $3,564,423, which was 23.2% of the Bank's
total equity capital accounts. Such loans do not involve more than the normal
risk of collectibility nor do they present other unfavorable features.
EXECUTIVE OFFICERS OF THE COMPANY
The following table presents selected information about the
executive officers of the Company, each of whom is selected annually by the
Board of Directors and each of whom holds office at the discretion of the
Board of Directors. All reported shares have been rounded to the nearest
whole share.
<TABLE>
<CAPTION>
Bank Number of Age as of
Held Employee Company Shares March 15,
Name Office/Position with Company Since Since Beneficially Owned (6) 1999
- ---- ---------------------------- ----- -------- --------------------- ---------
<S> <C> <C> <C> <C> <C>
William E. Schwarz Chairman 1993 (1) 5,550 (3) 56
Joseph J. Murray President and CEO 1993 1986(2) 1,427 (3) 59
Gerald J. Weniger Secretary 1993 (1) 3,789 (3) 68
Maureen H. Beilman CFO,Treasurer and 1993 1988(2) 863 (4) 43
Asst.Secretary
Gary C. Beilman Sr.Vice President 1994 1989(2) 878 (5) 44
- -----------------------------------------------
</TABLE>
(1) Messrs. Schwarz and Weniger have never been employees of the Bank.
Refer to "Information as to Nominees and Directors" above.
(2) Messrs. Murray and Beilman and Ms. Beilman are full-time employees of
the Bank. Mr. Beilman is Ms. Beilman's brother-in-law.
(3) Details regarding the beneficial ownership of this individual may be
found in footnotes to "Beneficial Ownership of Officers and Directors
and Nominees" above.
(4) Includes 749 shares held jointly with spouse and 114 shares held by Mrs.
Beilman as custodian for her two children.
(5) All shares held jointly with his spouse.
(6) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in
the General Rules and Regulations of the Securities and Exchange
Commission ("SEC") and may include securities owned by or for the
individual's spouse and minor children and any other relative who has
the same home, as well as securities to which the individual has or
shares voting or investment power or has the right to acquire beneficial
ownership within 60 days after March 15, 1999. Beneficial ownership may
be disclaimed as to certain of the securities.
10
<PAGE>
EXECUTIVE OFFICERS OF THE BANK
The following table sets forth selected information about the
principal officers of the Bank, each of whom is selected by the Board of
Directors of the Bank and each of whom holds office at the discretion of the
Board of Directors of the Bank. All shares reported have been rounded to the
nearest share.
<TABLE>
<CAPTION>
Bank Number of Age as of
Held Employee Company Shares March 15,
Name Office/Position with Bank Since Since Beneficially Owned(3) 1999
- ---- ------------------------- ----- -------- --------------------- ---------
<S> <C> <C> <C> <C> <C>
William E. Schwarz Chairman 1986 (1) 5,550 (3) 56
Joseph J. Murray President and CEO 1993 1986 1,427 (3) 59
Gerald J. Weniger Assistant Secretary 1991 (1) 3,789 (3) 68
Gary C. Beilman(2) Sr. Vice President 1989 1999 878 (4) 44
Maureen H. Beilman(2) Chief Financial Officer, 1988 1999 863 (5) 43
Secretary and Treasurer
L. Jill George Vice President 1999 1983 304 (4) 37
Jeffrey H. Ketcham Vice President 1998 1998 - 56
- ----------------------------------------------------
</TABLE>
(1) Messrs. Schwarz and Weniger have never been employees of the Bank. Refer
to "Information as to Nominees and Directors" above.
(2) Mr. Beilman is Ms. Beilman's brother-in-law.
(3) Details regarding the beneficial ownership of this individual may be
found in footnotes to "Beneficial Ownership of Officers and Directors
and Nominees" above.
(4) All shares held jointly with his/her spouse.
(5) Includes 749 shares held jointly with spouse and 114 shares held by Mrs.
Beilman as custodian for her two children.
(6) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in
the General Rules and Regulations of the Securities and Exchange
Commission ("SEC") and may include securities owned by or for the
individual's spouse and minor children and any other relative who has
the same home, as well as securities to which the individual has or
shares voting or investment power or has the right to acquire beneficial
ownership within 60 days after March 15, 1999. Beneficial ownership may
be disclaimed as to certain of the securities.
11
<PAGE>
RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
Unless instructed to the contrary, the proxy holders will cast all
votes represented by proxies for the ratification of the selection of S. R.
Snodgrass, A.C., Certified Public Accountants, of Wexford, Pennsylvania
("Snodgrass"), as the Company's independent public accountants for its fiscal
year ending December 31, 1999. The Company has been advised by Snodgrass that
none of its members has any financial interest in the Company. Ratification
of Snodgrass will require an affirmative vote of a majority of the votes cast
by all shareholders in person or in proxy, entitled to vote at the Annual
Meeting. Snodgrass served as the Company's independent public accountants for
the Company's 1998 fiscal year.
In addition to performing customary audit services, Snodgrass
assisted the Company with the preparation of its federal and state tax
returns, provided consulting services and provided assistance in connection
with regulatory matters, charging the Company for such services at its
customary hourly billing rates. The Company's and the Bank's Board of
Directors approved these non-audit services, after due consideration of the
effect of the performance of such services on the independence of the
accountants and after the conclusion by the Company's and the Bank's Board of
Directors that there was no effect on the independence of the accountants.
The Bank's Board of Directors also hired Snodgrass to perform internal audit
services for 1998 and has hired Snodgrass to perform the same services in
1999. The Board of Directors has reviewed the issue of the effect of such
internal audit services on the independence of Snodgrass in the performance of
its external audit services. They believe that this arrangement will not
compromise the independence of Snodgrass in their role as external auditor.
In the event that the shareholders do not ratify the selection of
Snodgrass as the Company's independent public accountants for the 1999 fiscal
year, the Board of Directors may choose another accounting firm to provide
independent public accountant audit services for the 1999 fiscal year. The
Board of Directors recommends that the shareholders vote FOR the ratification
of the selection of Snodgrass as the auditors for the Company for the year
ending December 31, 1999. As stated below, under "Annual Report", a
representative of Snodgrass will attend the Annual Meeting and be available to
respond to questions.
It is understood that even if the selection of Snodgrass is
ratified, the Board of Directors, at its discretion, may direct the
appointment of a new independent auditing firm at any time during the year if
the Board of Directors determines that such a change would be in the best
interest of the Company and its shareholders.
LEGAL PROCEEDINGS
General
In the opinion of the management of the Company, there are no
proceedings pending to which the Company or the Bank is a party or to which
its property is subject, which, if determined adversely to the Company and/or
the Bank, would have a material effect on the Company's and the Bank's
undivided profits or financial condition. There are no proceedings pending
other than ordinary routine litigation incident to the business of the Company
and the Bank. In addition, to management's knowledge, no government
authorities have initiated, threatened to initiate, or contemplated any
material proceedings against the Company or the Bank.
12
<PAGE>
ANNUAL REPORT
A copy of the Company's Annual Report for its fiscal year ended
December 31, 1998, is being mailed with this Proxy Statement. A
representative of Snodgrass, the accounting firm which examined the financial
statements in the Annual Report, will attend the Annual Meeting. This
representative of Snodgrass will have the opportunity to make a statement, if
he or she desires to do so, and will be available to respond to any
appropriate questions presented by shareholders at the Annual Meeting.
Additional copies of the Annual Report may be obtained by contacting Maureen
H. Beilman, Treasurer, Dimeco, Inc. 820 Church Street, Honesdale, Pennsylvania
18431, telephone (570) 253-1970.
SHAREHOLDER PROPOSALS
Any shareholder, who in accordance with and subject to the
provisions of the proxy rules of the SEC, wishes to submit a proposal for
inclusion in the Company's Proxy Statement for its 2000 Annual Meeting of
Shareholders must deliver such proposal in writing to the Secretary of Dimeco,
Inc. at the principal executive offices of the Company at The Dime Bank, 820
Church Street, Honesdale, Pennsylvania 18431, not later than Thursday,
December 2, 1999. In addition, if the Company does not receive notice of
shareholder proposals by February 16, 2000, the proxy holders may vote on
these proposals at their discretion.
OTHER MATTERS
The Board of Directors does not know of any matters to be presented
for consideration other than the matters described in the Notice of Annual
Meeting of Shareholders, but if any matters are properly presented, the
persons named in the accompanying proxy intend to vote on such matters in
accordance with their best judgment.
ADDITIONAL INFORMATION
Any shareholder may obtain a copy of the Company's report on Form
10-KSB for its fiscal year ended December 31, 1998, including the financial
statements and the schedules thereto, required to be filed with the SEC,
without charge, by submitting a written request to Maureen H. Beilman,
Treasurer, Dimeco, Inc., 820 Church Street, Honesdale, Pennsylvania 18431,
telephone: (570) 253-1970.
In addition, any shareholder may obtain a copy of the Annual
Disclosure Statement of The Dime Bank, without charge, from Maureen H.
Beilman, Treasurer.
13
