SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file Number 33-58936
Dimeco, Inc.
------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2250152
----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
820 Church Street
-----------------
Honesdale, PA 18431
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(Address of principal executive offices)
(570) 253-1970
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(Issuer's Telephone Number)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of November 5, 1999, there were 732,042 shares outstanding of the issuer's
common stock outstanding.
<PAGE>
Dimeco, Inc.
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheet (unaudited) as of
September 30, 1999 and December 31, 1998 3
Consolidated Statement of Income (unaudited) for
the three and nine months ended September 30, 1999 and 1998 4
Consolidated Statement of Changes in Stockholders'
Equity (unaudited) for the nine months ended
September 30, 1999 5
Consolidated Statement of Cash Flows (unaudited)
for the nine months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submissions of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
<PAGE>
Dimeco, Inc.
CONSOLIDATED BALANCE SHEET (Unaudited)
September 30, December 31,
1999 1998
------------- -------------
Assets
Cash and due from banks $ 2,016,033 $ 1,528,650
Interest-bearing deposits in other banks 2,929,700 3,636,326
Federal funds sold and securities purchased
under agreement to resell - 945,000
------------- -------------
Total cash and cash equivalents 4,945,733 6,109,976
Mortgage loans held for sale - 923,449
Investment securities available for sale 32,269,603 36,360,618
Investment securities held to maturity
(market value $15,653,861 and $2,967,741) 15,684,084 2,923,222
Loans (net of unearned income of $1,024,292
and $1,074,606) 133,582,325 124,960,697
Less allowance for loan losses 1,806,410 1,681,735
------------- -------------
Net loans 131,775,915 123,278,962
Premises and equipment, net 3,661,782 3,820,704
Other real estate 438,936 274,894
Accrued interest receivable 1,371,394 910,750
Other assets 2,050,329 1,871,109
------------- -------------
Total Assets $ 192,197,776 $ 176,473,684
============= =============
Liabilities
Deposits
Noninterest-bearing $ 16,913,468 $ 14,378,252
Interest-bearing 149,846,890 140,514,277
------------- -------------
Total deposits 166,760,358 154,892,529
Short-term borrowings 6,978,093 3,612,876
Accrued interest payable 839,333 902,614
Other liabilities 654,036 913,074
------------- -------------
Total Liabilities 175,231,820 160,321,093
------------- -------------
Stockholder's Equity
Common stock, $.50 par value; 3,000,000
shares authorized, 734,186 and
730,518 shares issued 367,093 365,259
Capital surplus 2,960,040 2,823,152
Retained earnings 13,992,513 12,969,112
Accumulated other comprehensive loss (238,880) (4,932)
Less treasury stock (3,144 shares at cost) (114,810) -
------------- -------------
Total Stockholders' Equity 16,965,956 16,152,591
------------- -------------
Total Liabilities and
Stockholders Equity $ 192,197,776 $ 176,473,684
============= =============
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
Dimeco, Inc.
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,827,553 $2,638,984 $8,325,208 $7,567,738
Interest-bearing deposits in other banks 30,436 23,722 128,021 147,152
Federal funds sold and securities
purchased under agreement to resell 13,913 52,118 228,343 321,615
Investment securities:
Taxable 658,016 483,700 1,560,138 1,052,268
Exempt from federal income tax 27,185 26,084 54,603 125,721
---------- --------- ---------- ---------
Total interest income 3,557,103 3,224,608 10,296,313 9,214,494
---------- --------- ---------- ---------
INTEREST EXPENSE
Deposits 1,438,353 1,397,216 4,345,701 4,054,819
Short-term borrowings 86,194 25,203 155,852 53,920
---------- --------- ---------- ---------
Total interest expense 1,524,547 1,422,419 4,501,553 4,108,739
---------- --------- ---------- ---------
NET INTEREST INCOME 2,032,556 1,802,189 5,794,760 5,105,755
Provision for loan losses 136,500 142,000 342,750 323,000
---------- --------- ---------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,896,056 1,660,189 5,452,010 4,782,755
---------- --------- ---------- ---------
NONINTEREST INCOME
Service charges on deposit accounts 67,376 62,899 183,615 166,966
Mortgage loans held for sale gain (loss), net 7,320 35,666 (49,270) 121,075
Investment securities gains, net - 8,900 - 8,900
Other income 121,122 115,893 390,925 357,796
---------- --------- ---------- ---------
Total noninterest income 195,818 223,358 525,270 654,737
---------- --------- ---------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 580,483 521,933 1,704,815 1,523,882
Occupancy expenses, net 110,159 91,967 344,116 262,114
Furniture and equipment expense 106,377 81,333 307,287 252,332
Other expense 445,111 419,801 1,272,504 1,188,881
---------- --------- ---------- ---------
Total noninterest expense 1,242,130 1,115,034 3,628,722 3,227,209
---------- --------- ---------- ---------
Income before income taxes 849,744 768,513 2,348,558 2,210,283
Income taxes 278,800 253,200 777,058 709,735
---------- --------- ---------- ---------
NET INCOME $ 570,944 $ 515,313 $1,571,500 $1,500,548
========== ========= ========== =========
EARNINGS PER SHARE $ 0.78 $ 0.71 $ 2.15 $ 2.06
==== ==== ==== ====
Average shares outstanding 731,251 730,097 731,322 728,375
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
Dimeco, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Capital Retained Comprehensive Treasury Stockholders' Comprehensive
Stock Surplus Earnings Loss Stock Equity Income
------ ------- -------- ------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 365,259 $ 2,823,152 $12,969,112 $ (4,932) $ - $16,152,591
Net income 1,571,500 1,571,500 $ 1,571,500
Other comprehensive loss:
Net unrealized loss on
available for sale securities (233,948) (233,948) (233,948)
------------
Comprehensive income $ 1,337,552
============
Dividend reinvestment plan 1,834 136,888 68,690 207,412
Purchase treasury stock (183,500) (183,500)
Cash dividends ($.75 per share) (548,099) (548,098)
--------- ---------- ----------- --------- --------- -----------
Balance, September 30, 1999 $ 367,093 $2,960,040 $13,992,513 $(238,880) $(114,810) $16,965,956
======== ========== =========== ========= ========= ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
Dimeco, Inc.
STATEMENT OF CASH FLOWS (Unaudited)
For the nine months ended September 30, 1999 1998
---- ----
Operating Activities:
Net income $ 1,571,500 $ 1,500,548
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 342,750 323,000
Depreciation 294,402 248,376
Amortization of premium and
discount on investment securities (580,689) (610,415)
Amortization of net deferred loan
origination fees (32,879) (29,089)
Investment securities (gains), net --- (8,900)
Proceeds from sales of loans
held for sale 7,092,980 8,416,554
Acquisition of loans held for sale (6,168,587) (9,360,797)
Increase in accrued interest receivable (460,644) (116,613)
Increase (decrease)in accrued interest
payable (63,281) 49,508
Other, net (318,687) (234,166)
----------- ----------
Net cash provided by operating activities 1,676,865 178,006
----------- ----------
Investing Activities:
Investment securities available for sale:
Proceeds from sales --- 389,900
Proceeds from maturities or paydowns 64,122,703 78,878,592
Purchases (59,723,811) (81,558,372)
Investment securities held to maturity:
Proceeds from maturities or paydowns 2,225,000 4,069,000
Purchases (15,067,515) (3,011,368)
Net increase in loans (8,997,993) (14,044,490)
Purchase of premises and equipment (135,480) (618,063)
Proceeds from the sale of other real
estate owned 26,748 306,927
----------- ----------
Net cash used for investing activities (17,550,348) (15,587,874)
----------- ----------
Financing Activities:
Net increase in deposits 11,867,829 16,894,591
Increase in short-term borrowings 3,365,217 1,434,773
Proceeds from dividend reinvestment and
stock purchase plan 207,412 205,843
Purchase of treasury stock (183,500) (87,000)
Cash dividends paid (547,718) (472,545)
----------- ----------
Net cash provided by financing activities 14,709,240 17,975,662
----------- ----------
Increase (decrease)in cash and
cash equivalents (1,164,243) 2,565,794
Cash and cash equivalents, beginning
of period 6,109,976 4,480,550
----------- ----------
Cash and cash equivalents end of period $ 4,945,733 $ 7,046,344
=========== ==========
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
Dimeco, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Dimeco, Inc.
(the "Company") and its wholly-owned subsidiary The Dime Bank (the "Bank").
All significant intercompany balances and transactions have been eliminated in
the consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore, do
not necessarily include all information that would be included in audited
financial statements. The information furnished reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results of operations. All such adjustments are of a normal recurring nature.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
Certain comparative amounts for prior periods have been reclassified to
conform with current year presentation. The reclassifications did not effect
net income or equity capital.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward Looking Statement
The Private Securities Litigation Act of 1995 contains safe harbor provisions
regarding forward-looking statements. When used in this discussion, the
words "believes," "anticipates," "contemplated," "expects," and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Those risks and
uncertainties include changes in interest rates, the ability to control costs
and expenses, and general economic conditions. The company undertakes no
obligation to publicly releases the results of any revisions to those
forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Financial Condition
Total assets at September 30, 1999 increased $15,724,000 or 8.9% from
December 31, 1998. Management continues to believe that this growth is the
result of the Company's continuing business development efforts associated
with our two newest branches and involvement with the camping industry.
Investment securities available for sale decreased $4,091,000 or 11.3% due
mainly to the maturity of short-term commercial paper and US Government
agencies. The funds received from these maturities, which were held in the
available for sale portfolio, were reinvested in instruments that are
classified as held to maturity. Investment securities held to maturity
increased $12,761,000 or 436.5% due mainly to second quarter purchases of
corporate bonds combined with third quarter purchases of tax-exempt municipal
bonds. Management is reinvesting short-term maturities in longer-term
investments whenever the opportunity exists to increase yield with similar
risk.
Loans increased $8,621,000 or 6.9% from December 31, 1998 to September 30,
1999. In addition to the home equity loan promotion in the spring, which
produced a net increase as of September 30, 1999 of $2,431,000, commercial
real estate loans increased $4,285,000 with several new camp loans combined
with loans to retail and service businesses. Commercial loans increased
$2,005,000 with loans made to a diverse mix of customers. Management does
continue to see the local economy improving and desires to be part of this
trend by making quality loans to local businesses and camps.
Total deposits increased $11,867,000 or 7.7% from December 31, 1998 to
September 30, 1999. Noninterest-bearing accounts increased $2,535,000 or
17.6%. The overall increase in deposits is the combined result of our
increasing branching network and an increase in commercial deposits obtained
in conjunction with our cash management program customers. Interest-bearing
deposits increased $9,333,000 or 6.6% due mainly to time deposits increasing
by $3,925,000 along with growth of $3,642,000 in interest-bearing checking
accounts. Management has been aggressively pricing time deposits in an effort
to maintain relationships with current customers and attract new customers.
Interest-bearing checking accounts typically increase at this time each year
due to the collection of real estate taxes by municipal customers.
Short-term borrowings consist of our cash management accounts and advances on
the Federal Home Loan Bank (FHLB) credit line. The cash management account
balances are decreased from balances at December 31, 1998 due mainly to
cyclical cash flow changes in camping customers, who receive payment in the
winter months and spend funds in the summer months. With the opportunity to
fund commercial loans, management chose to utilize the FHLB credit line as a
temporary cash source until balances in the cash management accounts increase
and/or investments mature.
Stockholders' Equity increased $813,000 or 5.0% which was mainly due to
earnings of $1,572,000. Shareholder participation in the dividend
reinvestment program contributed $207,000 during 1999. These increases were
offset by the dividend declaration of $0.75 per share or $548,000. The
purchase of $184,000 of treasury stock, and a decline of $234,000 in
unrealized gain or loss on securities available for sale were also included in
decreases of Stockholders' Equity. Lower market values in the available for
sale investment portfolio, mainly in government agencies, accounts for this
change. Unless management has a need to liquidate these investments, which we
do not foresee at this time, these values will reverse as the instruments
mature. Treasury stock acquired will be utilized to fund the dividend
reinvestment program in future periods.
Management monitors risk-based capital and leverage capital ratios in order to
assess compliance with regulatory guidelines. At September 30, 1999 the
Company had total risk-based capital of 12.1% which exceeded the requirement
of 8.0%. Tier I risk-based capital was 10.9%, well within the guideline of at
least fifty percent of total risk-based capital. The Company's leverage
ratio, which by requirement must be at least 3%, was 8.8%.
8
<PAGE>
Results of Operations
Comparison of the nine months ended September 30, 1999 and 1998
The Company earned $1,572,000 for the nine months ended September 30, 1999, an
increase of $71,000 or 4.7% over the same period in 1998.
Interest and fees earned on loans increased $757,000 or 10.0% from 1998 to
1999 with an increase in the average loan portfolio of $16,357,000 or 14.5%.
The average rate earned on the portfolio in 1999 decreased .37% to 8.38% from
8.75% in 1998 due to refinances and new originations at lower rates during the
period. Interest earned on investments, interest-bearing deposits in other
banks and federal funds sold increased $324,000 or 19.7% as compared to the
previous year. This increase was due to an increase in the average portfolio
of $9,149,000 or 22.5% which was offset by a decrease in the average rate
received on these assets of .12% to 5.28% as compared to 5.40% in 1998.
Interest expense increased $393,000 or 9.6% based upon an increase in average
interest-bearing liabilities of $26,364,000 or 18.5% which accounts for the
majority of the change. This increase in average liabilities was partially
offset by a decrease of .29% in the average interest rate paid, from 3.84% to
3.55%.
The provision for loan losses increased $20,000 or 6.1% from 1998 to 1999.
The 1999 increase in expense is mainly attributable to the increased size of
the loan portfolio.
Gains (losses) on mortgage loans held for sale decreased $170,000 or 140.7%
due to the inability in 1999 to match 1998 gains on loan sales. Interest
rates were decreasing more rapidly in 1998 and therefore the Company was able
to take advantage of this changing interest rate environment to secure gains
on selling loans in the secondary market. During the first half of 1999
interest rates were slightly lower for a period of time and then rebounded to
current levels. Loans that were originated at market rates during this period
and held in portfolio were valued lower when interest rates increased
slightly. Management has taken action to alleviate this problem by
accelerating the timing between origination and sale in the secondary market
and therefore expects less volatility in income as a result of this timing
difference.
Salaries and employee benefits increased $181,000 or 11.8% due to annual
salary compensation adjustments combined with additional staffing related to
growth in the number of accounts serviced.
Occupancy expense increased $82,000 or 31.3% from 1998 to 1999, mainly due to
expenses associated with the Operation Center, which opened in October 1998.
In addition, building maintenance expenses associated with snow plowing during
the first quarter were higher in 1999 than in 1998 due to a greater number of
snowfalls in 1999.
Furniture and equipment expense increased $55,000 or 21.8% due to additional
expense associated with depreciation on furniture and equipment purchased in
the fourth quarter of 1998 for the Operation Center and for leases on computer
hardware updates.
The category of other expense increased $84,000 or 7.0% from 1998 to 1999.
The most significant changes are individually enumerated. Bank supplies
showed an increase of $43,000 or 76.8% based on larger supply usage due to the
increased size of the Company, timing differences in purchases with larger
quantities purchased in 1999 than in 1998 (in 1998 we were trying to deplete
inventories of supplies because of the move of these items to the Operation
Center), additional printing expenses related to a change in the telephone
area code and additional supplies purchased for conversion to returning check
images to our customers rather than the original checks. Outside professional
fees increased $38,000 or 72.7% due mainly to expenses associated with the Y2K
project, conversion to check images on deposit accounts, tabulation of a
market survey, consultation regarding profit improvement and outsourcing of
our telephone administration. Internal audit and compliance expense increased
$27,000 or 141.7% due mainly to the replacement of the loan review/compliance
officer with an outsourcing arrangement. Amortization of computer software
expenses increased $27,000 or 49.2%, mainly attributable to implementation of
the loan platform software and software purchased in 1998 to operate the check
processing equipment. Director fees increased $14,000 or 27.7% with the
addition of two directors in 1999. Telephone expenses increased $14,000 or
40.3% due to the opening of the Operation Center and implementation of better
communication methods to the branches. Decreases during the same period
include $78,000 or 78.8% in association with expenses incurred in the
ownership of other real estate due to better management of the function.
Advertising expenses decreased $19,000 or 14.7% with a decrease in the number
of advertising campaigns during the period. Management expects this change to
be temporary because of plans for a fourth quarter advertising campaign
associated with our expanded trust services. The remainder of
additional expense is not significant in any one account but small increases
and decreases were noted in various accounts.
9
<PAGE>
Results of Operations (Continued)
Comparison of the Three Months Ended September 30, 1999 and 1998
During the second quarter of 1999, the Company earned $571,000 which
represents an increase of 10.8% over the $515,000 earned in the third quarter
of 1998.
Interest and fees on loans increased $189,000 or 7.1% in 1999 as compared to
1998. The average loans outstanding increased $13,643,000 or 11.6% while the
interest rate received on the loan portfolio decreased from 9.00% in the third
quarter of 1998 to 8.57% during the third quarter of 1999. With a large
percentage of loans in the portfolio granted on variable interest rates, many
repriced to lower rates since the third quarter of 1998. Interest earned on
the investment portfolio, federal funds sold and on interest-bearing balances
in other banks increased $144,000 or 24.6% during the third quarter of 1999 as
compared to the third quarter of 1998. The average balance of these assets
increased $11,903,000 or 28.0% while the average interest rate received on
these assets decreased from 5.5% in 1998 to 5.3% in 1999. The lower interest
rate in 1999 is attributable to investment in shorter-term assets which has
produced a lower average interest rate as assets matured and were reinvested
at the current, lower rate. Investments purchased during the third quarter of
1999 carried longer maturity dates. Changing the strategy to investing in
longer-term investments should increase the average interest rates in the
future.
Interest expense increased $102,000 or 7.2% in the third quarter of 1999 as
compared to the same quarter in 1998. The average balance of interest-costing
liabilities increased $9,097,000 or 6.1% while the average interest rate paid
for these liabilities decreased from 3.83% in 1998 to 3.70% in 1999.
Gain (loss) on loans available for sale decreased $28,000 or 79.5% from 1998
to 1999. Due to the interest rate environment, the Company was able to
generate larger gains on loans sold in 1998 while during 1999 the opportunity
for similar gains was not available. Management has employed processes that
allow for quicker turnover of these loans in order to minimize the opportunity
for losses in the future.
Salaries and employee benefits increased $59,000 or 11.2% from 1998 to 1999
based upon annual salary increases combined with hiring of additional
employees to manage the increased number of accounts due to balance sheet
growth during the period.
Occupancy expenses increased $18,000 or 19.8% with the expenses related to the
Operation Center, which did not exist until October 1998, being the main
increase. In addition, the Company incurred expenses related to repair work
on the HVAC units in the Honesdale office.
Other operating expenses increased $25,000 or 6.0% during the third quarter of
1999 as compared to the third quarter of 1998. The largest increase was
$23,000 or 166.6% in outside professional fees, which are related to the
profit improvement program, conversion to check images versus original
documents, market survey tabulation and outsourcing telephone administration.
Purchases of bank supplies also increased $23,000 or 131.6% with purchases of
most of the items noted above happening in the third quarter of 1999.
Amortization of computer software purchases increased $20,000 or 115.8%, which
is due to implementation of new software on the loan platform and check
processing. In addition, there was an increase of $11,000 or 162.1% in
internal audit/compliance fees due to outsourcing the loan review/compliance
function. In addition, expenses related to the operation of other real estate
decreased $45,000 as losses on sales and market price declines that were
incurred in the third quarter of 1998 were not matched in 1999.
10
<PAGE>
Liquidity and Cash Flows
To ensure that the Company can satisfy customer credit needs for current and
future commitments and deposit withdrawal requirements, the Bank manages the
liquidity position by ensuring that there are adequate short-term funding
sources available for those needs. Liquid assets consists of cash and due
from banks, federal funds sold, interest-bearing deposits with other banks and
investment securities maturing in one year or less. The following table shows
these liquidity sources, minus short-term borrowings, as of September 30, 1999
compared to December 31, 1998:
September 30, December 31,
1999 1998
---- ----
(dollars in thousands)
Cash and due from banks $ 2,016 $ 1,529
Interest-bearing deposits with other banks 2,930 3,636
Mortgage loans held for sale - 923
Federal funds sold - 945
Investment securities maturing in
one year or less 23,468 31,457
------ ------
28,414 38,490
Less short-term borrowings 6,978 3,613
------ ------
Net liquidity position $21,436 $34,877
====== ======
As a percent of total assets 11.2% 19.8%
===== =====
Management monitors liquidity on a consistent basis and feels that liquidity
levels are adequate. In addition to these liquidity sources, the Bank also
has a maximum borrowing capacity with the Federal Home Loan Bank of
approximately $29.5 million. Management feels that with this line of credit
available, it is more prudent to invest available funds in longer maturity
investments in order to increase profits while not hampering liquidity.
Due to the possibility of higher customer cash withdrawals during December
1999 in association with the year 2000 event, management has instituted a cash
contingency plan. Such plan may decrease the Company's investment in
interest-earning assets and may increase its investment in interest-bearing
liabilities, which may cause the Company's net income to slightly decrease in
the fourth quarter of 1999.
Management is not aware of any known trends, events or uncertainties that will
have or is reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations, nor is management aware of any
current recommendations by regulatory authorities which, if implemented, would
have such an effect.
11
<PAGE>
Risk Elements
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days or more past due, other
real estate loans and repossessed assets at September 30,1999 and December 31,
1998. A loan is classified as nonaccrual when, in the opinion of management,
there are doubts about collectability of interest and principal. At the time
the accrual of interest is discontinued, future income is recognized only when
cash is received. Renegotiated loans are those loans in which terms have been
renegotiated to provide a reduction or deferral of principal or interest as a
result of the credit quality deterioration of the borrower.
September 30, December 31,
1999 1998
---- ----
(dollars in thousands)
Loans on nonaccrual basis $ 500 $ 525
Loans past due 90 days or more 1,158 941
Renegotiated loans 933 822
----- -----
Total nonperforming loans 2,591 2,288
Other real estate 439 275
Repossessed assets 15 -
----- -----
Total nonperforming assets $3,045 $2,563
===== =====
Nonperforming loans as a percent of total loans 1.9% 1.8%
==== ====
Nonperforming assets as a percent of total assets 1.6% 1.5%
==== ====
Allowance for loan loss as a percent of
nonperforming loans 69.7% 73.5%
===== =====
Allowance for loan loss as a percent of loans 1.4% 1.4%
===== =====
Management believes the level of the allowance for loan losses at September
30, 1999 is sufficient. The relationship between the allowance for loan
losses and outstanding loans is a function of the credit quality and known
risk attributed to the loan portfolio. The on-going loan review program and
credit approval process is used to determine the adequacy of the allowance for
loan losses.
Included in total loans are loans of $841,228 which management has classified
as impaired under the terms of Financial Accounting Standards Board Statement
No. 114, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosure". The related allowance for loan losses on these
loans amounted to $149,334. There were no impaired loans without a related
allowance for loan losses. The average balance of impaired loans for the
period was $862,250.
Management does not believe that loans classified as loss, doubtful
substandard or special mention for internal or regulatory purposes (i)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources, or (ii) represent material loans about which management is aware of
any information which causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
12
<PAGE> Year 2000
COMPANY'S STATE OF READINESS
The year 2000 ("Y2K") problem is associated with the inability of some
computer programs to distinguish between the year 1900 and the year 2000
because of software programs that were written with a two digit year field
instead of a four digit field. If not correctly programmed or rewritten, some
computer applications could fail to operate or may create erroneous results
when the year changes to 2000 or other key dates in the first quarter of the
year 2000. This could cause entire system failures, miscalculations and
disruptions of normal business operations. As the banking industry is heavily
dependent on computer systems, the effects of this problem could be the
temporary inability to process transactions, generate statements and billings
or engage in normal day to day business activities. The extent of the
potential impact of this problem is not known and if not timely corrected
could affect the global economy.
The Company has assessed the extent of its vulnerability to the Y2K problem
and believes that our core processing systems will not be affected. The
Company uses the Jack Henry and Associates Silverlake software system run on
an IBM AS/400 mainframe computer. The Silverlake software was certified by
the Information Technology Association of America on March 16, 1998 and the
IBM AS/400 received the first Year 2000 certification by that organization.
Internal testing of these primary mission critical systems was successfully
completed in December 1998 and the validation of that testing was completed
during March 1999. The remaining mission critical software systems have
either been tested by the Company or have been tested by outside agencies and
have been found to be substantially compliant.
RISK ASSESSMENT OF THE YEAR 2000
We believe that with modifications to existing software and conversions to
new software, the Y2K problem will not pose a significant operational problem
for the Company. However, because most computer systems are, by their very
nature, interdependent, it is possible that noncompliant third party computers
could impact the Company's computer systems. In addition, we have contacted
third parties, such as wire transfer systems, debit card systems, telephone
systems, public utilities and other vendors with which we transact business in
order to request status reports on their Y2K projects. If any of these agents
are unsuccessful in their attempt to deal with the Y2K problem, it could
aversely affect the Company. We have contacted all of the Bank's large
commercial loan customers in order to attempt to assess their readiness for
the Year 2000 and determine the possible effects on the commercial loan
portfolio.
COST OF YEAR 2000
We do not anticipate that the cost of the Y2K problem will have a significant
effect on the Company's financial position or results of operations in 1999.
As described above, our primary systems are Year 2000 ready, therefore we
believe that little programming costs will be incurred. The majority of
costs associated with this issue are related to planning, testing and
validating the results internally and are expected to amount to $50,000 of
which $40,000 has been incurred to date. There is no guarantee that our
estimates of compliance with the Y2K problem will be achieved and actual
results could differ materially from those planned. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the replacement of
noncompliant third party vendors or similar uncertainties.
CONTINGENCY PLANS
Management has assessed the potential risk in each of our systems and the risk
associated with outside vendors and has prepared contingency plans in the
event that our assessment is not correct or that third party affiliate systems
are not operational. A number of these plans have been tested and the
remaining areas will be tested during the month of November 1999 in order to
assure that they will work if necessary. These plans involve the creation of
a back up system for every critical application, which in certain cases will
be a manual operation. Our goal is to be ready for every possible situation
with the specific intent to have no interruption in service to our customers
or our shareholders.
Despite management's best efforts to address the year 2000 issue, the vast
number of external entities that have direct and indirect business
relationships with the Bank, such as customers, vendors, payment system
providers, utility companies, and other financial institutions, make it
im0possible to assure that a failure to achieve compliance by one or more of
these entities would not have a material adverse impact on the Bank's business
or on the Company's consolidated financial statements.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
NONE
Item 2 - Changes in the rights of the Company's security holders
NONE
Item 3 - Defaults by the Company on its senior securities
NONE
Item 4 - Submissions of matters to a vote of security holders
NONE
Item 5 - Other Information
NONE
Item 6 - Exhibits and Reports on Form 8-K
NONE
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIMECO, INC.
Date: November 5, 1999 By:
-------------------------------
Joseph J. Murray
Executive Vice President and
Chief Executive Officer
Date: November 5, 1999 By:
-------------------------------
Maureen H. Beilman
Chief Financial Officer
15
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