FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X]
For the fiscal year ended December 31, 1999
OR
[ ]
For the transition period from to
------------- ----------------
Commission file Number:
---------------
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
------------------- -----------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant based on a closing sale price: $17,915,812 at
March 17, 2000.
As of March 17, 2000, the registrant had outstanding 735,728
shares of its common stock, par value $.50 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 2000 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, 1999, are incorporated by reference in Part II of this
Annual Report.
Page 1 of 34
<PAGE>
DIMECO, INC.
FORM 10-KSB
Index
-----
Part I Page
- ------ ----
Item 1. Description of the Business 1
Item 2. Description of Property 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote
of Security Holders Not Applicable
Part II
- -------
Item 5. Market for Common Equity and Related
Stockholder Matters 15
Item 6. Management's Discussion and Analysis or Plan
of Operation 16
Item 7. Financial Statements and Schedules 24
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure Not Applicable
Part III
- --------
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 25
Item 10. Executive Compensation 25
Item 11. Security Ownership of Certain Beneficial Owners
and Management 25
Item 12. Certain Relationships and Related Transactions 25
Item 13. Exhibits and Reports on Form 8-K 26
Signatures 27-28
<PAGE>
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, 1999, the Company had total consolidated assets,
deposits and stockholders' equity of approximately $194.7 million, $167.3
million and $17.4 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. In 1999, the Bank was
granted full trust powers and has begun offering trust services to its
customers. The Bank has four branch offices located in Honesdale Hawley,
Damascus and Greentown, Pennsylvania. Its 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.
1
<PAGE>
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.
2
<PAGE>
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.
3
<PAGE>
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 1999 and 2000,
respectively.
4
<PAGE>
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, allowing
-- ----
an interstate merger. 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 state law applies, including the following: (1) host
state law applies to operational issues relating to a branch located in a host
5
<PAGE>
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 Services Modernization Act of 1999
--------------------------------------------
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (better known as the Financial Services Modernization
Act of 1999) which will permit bank holding companies to become financial
holding companies and thereby affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature. A
bank holding company may become a financial holding company if each of its
subsidiary banks is well capitalized under the Federal Deposit Insurance
Corporation Act of 1991 prompt corrective action provisions, is well managed,
and has at least a satisfactory rating under the Community Reinvestment Act
by filing a declaration that the bank holding company wishes to become a
financial holding company. The company believes it qualifies to become a
financial holding company, but has not yet determined whether or not it will
file to become treated as one. No regulatory approval will be required for a
financial holding company to acquire a company, other than a bank or savings
association, engaged in activities that are financial in nature or incidental
to activities that are financial in nature, as determined by the Federal
Reserve Board.
The Financial Services Modernization Act defines " financial in
nature" to include:
securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies;
insurance underwriting and agency;
merchant banking activities;
and activities that the Federal reserve Board has determined to be
closely related to banking.
In addition, a financial holding company may not acquire a company that
is engaged in activities that are financial in nature unless each of the
subsidiary banks of the financial holding company has a Community Reinvestment
Act rating of satisfactory or better.
6
<PAGE>
The specific effects of the enactment of the Financial Services
Modernization Act on the banking industry in general and on the Company and
the Bank in particular have yet to be determined due to the fact that the
Financial Services Modernization Act was only recently adopted.
The United States Congress has periodically considered and adopted
legislation, such as the Gramm-Leach-Bliley Act, which has resulted in further
deregulation of both banks and other financial institutions, including mutual
funds, securities brokerage firms and investment banking firms. No assurance
can be given as to whether any additional legislation will be adopted or as to
the effect such legislation would have on the business of the Bank or the
Company.
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.
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 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.
7
<PAGE>
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 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
8
<PAGE>
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.
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, 1997, the Deposit Insurance Fund Act of 1996
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
9
<PAGE>
would set loan-to-value ("LTV") ratios for different types of real estate
loans. A LTV ratio is generally defined as the total loan amount divided by
the appraised value of the property at the time the loan is originated. If
the institution does not hold a first lien position, the total loan amount
would be combined with the amount of all senior liens when calculating the
ratio. These guidelines became effective on March 19, 1993. In addition to
establishing the LTV ratios, the guidelines require all real estate loans to
be based upon proper loan documentation and a recent appraisal of the
property.
Bank Enterprise Act of 1991. Within the overall FDICIA is a
separate subtitle called the "Bank Enterprise Act of 1991." The purpose of
this Act is to encourage banking institutions to establish "basic transaction
services for consumers" or so-called "lifeline accounts." The FDIC assessment
rate is reduced for all lifeline depository accounts. This Act establishes
ten (10) factors which are the minimum requirements to qualify as a lifeline
depository account. Some of these factors relate to minimum opening and
balance amounts, minimum number of monthly withdrawals, the absence of
discriminatory practices against low-income individuals and minimum service
charges and fees. Moreover, the Housing and Community Development Act of 1972
requires that the FDIC's risk-based assessment system include provisions
regarding life-line accounts. Assessment rates applicable to life-line
accounts are to be established by FDIC rule.
Truth in Savings Act. The FDICIA also contains the Truth in
Savings Act ("TSA"). The FRB adopted regulations ("Regulation DD") under the
TSA. The purpose of TSA is to require the clear and uniform disclosure of the
rates of interest which are payable on deposit accounts by depository
institutions and the fees that are assessable against deposit accounts, so
that consumers can make a meaningful comparison between the competing claims
of banks with regard to deposit accounts and 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.
10
<PAGE>
Regulatory Capital Requirements
-------------------------------
The following table presents the Company's consolidated capital ratios at
December 31, 1999:
(In Thousands)
Tier I Capital $ 17,669
Tier II Capital $ 1,834
Total Capital $ 19,503
Adjusted Total Average Assets $ 191,515
Total Adjusted Risk-Weighted Assets(1) $ 159,601
Tier I Risk-Based Capital Ratio(2) 11.07%
Required Tier I Risk-Based Capital Ratio 4.00%
Excess Tier I Risk-Based Capital Ratio 7.07%
Total Risk-Based Capital Ratio(3) 12.22%
Required Total Risk-Based Capital Ratio 8.00%
Excess Total Risk-Based Capital Ratio 4.22%
Tier I Leverage Ratio(4) 9.23%
Required Tier I Leverage Ratio 4.00%
Excess Tier I Leverage Ratio 5.23%
- -------------------------------
(1) Includes off-balance sheet items at credit-equivalent values.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I
Capital to Total Adjusted Risk-Weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I and
Tier II Capital to Total Adjusted Risk-Weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to
Adjusted Total Average Assets
The Company'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
11
<PAGE>
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, 1999, the Bank had total assets of $194.7
million, total stockholders' equity of $17.4 million and total deposits and
other liabilities of $177.3 million.
The Bank engages in a full-service commercial banking business,
including accepting time and demand deposits, making secured and unsecured
commercial and consumer loans, and performing trust services. 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, Citizens National Bank, LA Bank, PNC
Bank, First Union Bank, Citizen's Savings Association and First National Bank
of Jeffersonville. The Bank is generally competitive with all competing
financial institutions in its service area with respect to interest rates paid
on time and savings deposits, service charges on deposit accounts and interest
rates charged on loans.
Supervision and Regulation - Bank
---------------------------------
The operations of the Bank are subject to federal and state
statutes applicable to banks chartered under the banking laws of the
Commonwealth of Pennsylvania, whose deposits are insured by the FDIC. Bank
operations are also subject to regulations of the Federal Reserve Board.
The primary supervisory authorities of the Bank are the
Pennsylvania Department of Banking ("Department") and the FDIC, that regularly
examine the Bank. The FDIC has the authority under the Financial Institutions
Supervisory Act to prevent a state, non-member bank from engaging in an unsafe
or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, loans a bank makes and
collateral it takes, the activities of a bank with respect to mergers and
12
<PAGE>
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 stockholders of
its parent holding company, among others, and to related interests of such
principal stockholders. In addition, such legislation and regulations may
affect the terms upon which any person becoming a principal shareholder of a
holding company may obtain credit from banks with which the subsidiary bank
maintains a correspondent relationship.
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulations of, and
restrictions on, the business of the Bank. It cannot be predicted whether any
such legislation will be adopted or how such legislation would affect the
business of the Bank. As a consequence of the extensive regulation of
commercial banking activities in the United States, the Bank's business is
particularly susceptible to being affected by federal legislation and
regulations that may increase the costs of doing business.
Under the Federal Deposit Insurance Act, the FDIC possesses the
power to prohibit institutions regulated by it (such as the Bank) from
engaging in any activity that would be an unsafe and unsound banking practice
and in violation of the law. Moreover, the Financial Institutions and
Interest Rate Control Act of 1987 ("FIRA") generally expands the circumstances
under which officers or directors of a bank may be removed by the
institution's federal supervisory agency; restricts lending by a bank to its
executive officers, directors, principal stockholders 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.
13
<PAGE>
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 stockholders or related interests thereof and
by relaxing certain reporting requirements. However, the 1982 Act
strengthened FIRA provisions respecting management interlocks and
correspondent bank relationships by management personnel.
Community Reinvestment Act
--------------------------
The Community Reinvestment Act of 1977, as amended (the "CRA"), and
the regulations promulgated to implement the CRA are designed to create a
system for bank regulatory agencies to evaluate a depository institution's
record in meeting the credit needs of its community. Until May 1995, a
depository institution was evaluated for CRA compliance based upon 12
assessment factors.
The CRA regulations were completely revised as of May 4, 1995, to
establish new performance-based standards for use in examining a depository
institution's compliance with the CRA (the "revised CRA regulations"). The
revised CRA regulations establish new tests for evaluating both small and
large depository institutions' investment in the community. A "small bank" is
defined as a bank which has total assets of less than $250 million and is
independent or is an affiliate of a holding company with less than $1 billion
in assets. Pursuant to the revised CRA regulations, a depository institution
which qualifies as a "small bank" will be examined under a streamlined
procedure which emphasizes lending activities. The streamlined examination
procedures for a small bank became effective on January 1, 1996.
A large retail institution is one which does not meet the "small
bank" definition, above. A large retail institution can be evaluated under
one of two tests: (1) a three-part test evaluating the institution's lending,
service and investment performance; or (2) a "strategic plan" designed by the
institution with community involvement and approved by the appropriate federal
bank regulator. A large institution must choose one of these options prior to
July 1997, but may opt to be examined under one of these two options prior to
that time. Effective January 1, 1996, a large retail institution that opts to
be examined pursuant to a strategic plan may submit its strategic plan to the
bank regulators for approval.
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 were effective on July 1, 1997.
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.
14
<PAGE>
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. The Bank is evaluated for CRA compliance using the
streamlined procedures for a small bank/three-part, performance-based
test/strategic plan option. The Bank received a satisfactory rating in 1998.
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 subject to increases based upon changes
in the Consumer Price Index. In addition, in July 1998, 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.
Both the Honesdale and Hawley facilities are currently being
renovated to provide better utilization of the available space.
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.
15
<PAGE>
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 stockholders of the
Company may come initially from dividends paid by the Bank to the Company.
Therefore, the restrictions on the Bank's dividend payments are directly
applicable to the Company. The Federal Deposit Insurance Act generally
prohibits all payments of dividends by any bank which is in default on any
assessment to the FDIC or which would be deemed by the FDIC to be an unsafe
and unsound practice. Presently, the Bank is not in default in any assessment
to the FDIC.
The Pennsylvania Banking Code of 1965 (the "Code") provides that
cash dividends may be declared and paid only out of accumulated net earnings
and that, prior to the declaration of any dividend, if the surplus fund (as
defined in the Code) of the Bank is less than the amount of its common
capital, the Bank shall, until the surplus is equal to such an amount,
transfer to the surplus an amount which is at least 10% of the net earnings of
the Bank for the period since the end of the last fiscal year or for any
shorter period since the declaration of a dividend. If the surplus of the
Bank is less than 50% of the amount of capital, no dividend may be declared or
paid without the prior approval of the Department until such surplus is equal
to 50% of the Bank's capital.
As of December 31, 1999, there were $15,472,000 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.
16
<PAGE>
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, 1999 and 1998, the Company had
impaired loans of $841,228 and $874,277, respectively with related allowance
for loan loss of approximately $162,390 and $136,217, respectively. There
were no impaired loans without a related allowance for loan losses. For the
year ended December 31, 1999 and 1998, average impaired loans were $857,399
and $933,774, respectively.
17
<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,
1999 1998
---- ----
Loans accounted for on a non-accrual basis:
Mortgage loans $ 743 $ 248
Commercial 176 137
Consumer 138 140
-------- --------
Total 1,057 525
-------- --------
Accruing loans which are contractually past due
90 days or more:
Mortgage loans 690 627
Commercial 81 246
Consumer 61 68
-------- --------
Total 832 941
-------- --------
Renegotiated loans 61 822
-------- --------
Total nonperforming loans 2,503 2,288
-------- --------
Other real estate owned 355 275
-------- --------
Total nonperforming assets $ 2,858 $ 2,563
======== ========
Nonperforming loans as a percent of
total loans 1.82% 1.83%
Nonperforming assets as a percent of
assets 1.47% 1.45%
Amount of interest lost on
nonperforming loans $ 93 $ 103
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, 1999.
18
<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, 1999:
December 31,
(Dollars in Thousands) 1999 1998
---- ----
Loans outstanding at end of period $137,526 $124,961
======== ========
Average loans outstanding $130,869 $114,736
======== ========
Reserve for possible losses:
Balance, beginning of the period $ 1,682 $ 1,511
Loans charged off:
Commercial 196 75
Real estate 94 46
Consumer 93 192
-------- --------
Total loans charged off 383 313
-------- --------
Recoveries:
Commercial 2 2
Real estate 2 3
Consumer 27 28
-------- --------
Total recoveries 31 33
-------- --------
Net loans charged off 352 280
-------- --------
Provisions charged to expense 504 451
-------- --------
Balance, end of period $ 1,834 $ 1,682
======== ========
Ratios:
Net charge offs as a percent of average
loans outstanding 0.27% 0.24%
Reserve for loan losses as a percent of average
loans outstanding 1.40% 1.45%
19
<PAGE>
A portion of the allowance is specifically allocated to individual loans or
group of loans. As of December 31,1999 and 1998 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)
1999 1998
---- ----
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 213 13.3% $ 230 13.4%
Real estate - construction 8 .6% 11 1.1%
Real estate - mortgage 1,343 72.6% 1,235 70.5%
Installment loans to individuals 225 13.5% 197 15.0%
Unallocated 45 - 9 -
------ ----- ------ -----
$1,834 100.0% $1,682 100.0%
====== ===== ====== =====
</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.
20
<PAGE>
Loan Maturity Schedule
Following is a maturity schedule of all accruing loans at December 31, 1999:
Due 1 Due Due after Total
year or years 5 years
less
--------- -------- -------- --------
Fixed rate:
Commercial $ 679 $ 5,714 $ 1,127 $ 7,520
Real estate-construction 2,385 6,905 16,862 26,152
Other 1,203 14,497 1,074 16,774
--------- -------- -------- --------
Total $ 4,267 $ 27,116 $ 19,063 $ 50,446
========= ======== ======== ========
Reprice Reprice Total
within 1 year within 1-5
years
-------- -------- --------
Variable rate:
Commercial $ 9,507 $ 268 $ 9,775
Real estate-construction 56,804 17,261 74,065
Other 2,425 62 2,487
-------- -------- --------
Total $ 68,736 $ 17,591 $ 86,327
======== ======== ========
21
<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, 1999 the market
value of the Company's held to maturity investment securities was $15,517,000
and at December 31, 1998 was $2,968,000.
Available for Sale 1999 1998
- ------------------ ---- ----
(Dollars in thousands)
U. S. Government agency securities 13,311 9,708
Mortgage-backed securities 294 368
Obligations of states and political subdivisions 2,373 -
Corporate Securities 2,210 -
Commercial paper 12,509 25,815
Equity securities 550 470
Total $31,247 $36,361
Held to Maturity 1999 1998
- ---------------- ---- ----
Obligations of states and political subdivisions $ 692 $ 1,397
Corporate securities 14,878 1,526
Total $15,570 $ 2,923
There were no securities held for any issuer that were greater than ten
percent of stockholders' equity as of December 31, 1999.
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 Available for
Sale investment securities portfolio at December 31, 1999.
<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)
--------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <S> <C> <C>
(Dollars in thousands)
U.S. Treasury
securities $ - - - - - - - - $ - -
U.S. Government
Agency
Securities $ 1,695 5.21% $11,615 5.58% - - - - $13,310 5.53%
Mortgage-backed
securities $ - -% - - - - $ 294 5.62% $ 294 5.62%
Obligations of
states and
political
divisions - -% 630 5.88% 1,743 7.37% - -% 2,373 6.97%
Corporates - -% 2,210 7.07% - -% - -% 2,210 7.07%
Commercial
Paper $12,509 5.86% - - - - - - $12,509 5.86%
Equity
Securities - - - - - - $ 551 6.48% $ 551 6.48%
-----------------------------------------------------------------------------------------------------------------
Total $14,204 5.78% $14,455 5.81% 1,743 7.37% $ 845 6.17% $31,247 5.89%
=================================================================================================================
</TABLE>
(1) Weighted average yields have been computed on a taxable equivalent basis
assuming a federal income tax rate of 34%
23
<PAGE>
INVESTMENT MATURITY
Investment Portfolio Maturities
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's Held to
Maturity investment securities portfolio at December 31, 1999.
<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 $ 100 5.74% $ 298 9.10% $ 294 10.21% $ - - % $ 692 9.07% $ 725
Corporate
securities $7,500 5.67% $7,378 6.42% - - - - % $14,878 6.04% $14,792
-----------------------------------------------------------------------------------------------------------
Total $7,600 5.67% 7,676 6.53% $ 294 10.21% $ - - % $15,570 6.16% $15,517
============================================================================================================
</TABLE>
(1) Weighted average yields have been computed on a taxable equivalent basis
assuming a federal income tax rate of 34%
24
<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.
25
<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 4 and 5, 9 and 9 respectively) filed at
Exhibit 99A hereto is incorporated in their entirety by reference under this
Item 9.
Item 10. Executive Compensation
The captions "Executive Compensation" and "Directors Compensation"
contained in the Company's Proxy Statement (at pages 6 and 8 and 11) 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 2) 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 8)
filed as Exhibit 99A hereto is incorporated in its entirety by reference under
this Item 12.
26
<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 Stockholders for Fiscal
Year Ended December 31, 1999.
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, 1999.
27
<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:
------------------------
Joseph J. Murray
President
Date: March 27, 2000
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:
----------------------------
Maureen H. Beilman
Chief Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
Date: March 27, 2000
28
<PAGE>
By: By:
-------------------------- --------------------------
Robert E. Genirs William E. Schwarz
Director Chairman of the Board
Date: March 27, 2000 and Director
Date: March 27, 2000
By: By:
-------------------------- --------------------------
Barbara Jean Genzlinger Henry M. Skier
Director Director
Date: March 27, 2000 Date: March 27, 2000
By: By:
-------------------------- --------------------------
John S. Kiesendahl John F. Spall
Director Director
Date: March 27, 2000 Date: March 27, 2000
By: By:
-------------------------- --------------------------
Joseph J. Murray Gerald J. Weniger
President, Chief Executive Secretary and Director
Officer and Director Date: March 27, 2000
(Chief Executive Officer)
Date: March 27, 2000
By:
--------------------------
Thomas A. Peifer
Director
Date: March 27, 2000
29
<PAGE>
INDEX TO EXHIBITS
Item Number Description Page
- ----------- ----------- ----
13 Annual Report to Stockholders for
Fiscal Year Ended December 31, 1999 30
22 List of Subsidiaries of the
Company 31
27 Financial Data Schedule 33
99A Proxy Statement, Notice of Annual Meetin
and Form of Proxy for the Annual
Meeting of Shareholders to be held
April 27, 2000 34
30
Exhibit 13
----------
ANNUAL REPORT TO STOCKHOLDERS
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
<PAGE>
MISSION STATEMENT
The mission of Dimeco, Inc. is the operation of a fully integrated financial
services institution through its subsidiary The Dime Bank in a market that is
defined by the institution's ability to provide services consistent with
sound, prudent principles, and to fulfill the social, economic, moral, and
political considerations ordinarily associated with a responsible, well-run
financial institution.
CONSOLIDATED FINANCIAL HIGHLIGHTS
% increase
1999 1998 (decrease)
-------------------------------------------------
(amounts in thousands, except per share)
[S] [C] [C] [C]
PERFORMANCE
Net income $ 2,177 $ 2,117 2.86%
Return on average asset 1.16% 1.29% (10.08%)
Return on average equit 12.97% 13.75% (5.67%)
STOCKHOLDERS' VALUE (PER SHARE)
Net income $ 2.97 $ 2.90 2.41%
Dividends $ 1.05 $ 0.95 10.53%
Book value $ 23.76 $ 22.11 7.44%
Market value $ 29.00 $ 42.00 (30.95%)
Market value/book value ratio 122.07% 189.95% (35.74%)
Price/earnings multiple 9.8 x 14.5 x (32.41%)
Dividend yield 4.14% 2.38% 52.10%
SAFETY AND SOUNDNESS
Stockholders' equity/asset ratio 8.95% 9.15% (2.19%)
Dividend payout ratio 35.28% 32.76% 7.81%
Nonperforming assets/total assets 1.47% 1.45% 1.38%
Allowance for loan loss as a % of loans 1.33% 1.35% (1.48%)
Net charge-offs/average loans 0.27% 0.24% 12.50%
Allowance for loan loss/nonaccrual
loans 109.71% 124.84% (12.12%)
Allowance for loan loss/nonperforming
loans 64.14% 65.62% (2.26%)
Risk-based capital 12.22% 12.21% 0.08%
BALANCE SHEET HIGHLIGHTS
Total assets $ 194,667 $ 176,474 10.31%
Investment securities $ 46,817 $ 39,284 19.18%
Loans, net unearned $ 137,526 $ 124,961 10.06%
Allowance for loan losses $ 1,834 $ 1,682 9.04%
Deposits $ 167,294 $ 154,893 8.01%
Stockholders' equity $ 17,423 $ 16,153 7.87%
Trust assets under management $ 14,084 $ 13,016 8.21%
<PAGE>
TABLE OF CONTENTS
Consolidated Financial Highlights 1
Letter to the Shareholders 3
Dimeco, Inc. and The Dime Bank
Board of Directors 4
Dimeco, Inc. and The Dime Bank Officers 5
Locations 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>
1999 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, 1999 and 1998. This information should be
read in conjunction with the consolidated financial statements and
accompanying notes to the financial statements. Dimeco, Inc. is the
one-bank holding company of The Dime Bank ("the Bank"), which is wholly-owned
by the Company. Both the Company and the Bank derive their primary income
from the operation of a commercial bank, including earning interest on loans
and investment securities. In addition, the Bank was granted full trust
powers in 1999 and has begun to develop this line of business. The Bank incurs
interest expense in relation to deposits and other borrowings. The Bank
operates four full service branches in Honesdale, Hawley, Damascus and
Greentown, Pennsylvania and two off-site automatic teller machines, one in
Wayne County and one in Pike County, Pennsylvania. Principal market areas
include Wayne and Pike Counties, Pennsylvania and Sullivan County, New York.
The Bank employed 67 full time employees and 23 part time employees at
December 31, 1999.
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
release the results of any revisions to those forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
STATEMENT OF CONDITION
Total assets increased $18,193,000 or 10.3% from December 31, 1998 to December
31, 1999. Increases in both deposits and borrowed funds on the liability side
fueled this growth of assets which was evidenced in both the loan and
investment portfolios.
At December 31, 1999, cash and cash equivalents decreased $1,479,000 or 24.2%.
The components of this category of assets showed larger swings with an
increase of $963,000 in cash and due from banks and a decrease of $2,437,000
or 67.0% in interest-bearing deposits in other banks. The large increase in
cash and due from banks is mainly attributable to excess cash on hand at the
millennium mark to fund possible deposit withdrawals over the year-end. This
excess cash on hand was not withdrawn by our customers and was redistributed
into earning assets as soon as possible in 2000. The decrease in
interest-bearing deposits in other banks is partly attributable to the
increase cited in cash on hand and also to the purchase in December 1999 of
several investments that carried higher interest rates than were available in
interest-bearing deposits.
Investment securities increased $7,534,000 or 19.2% from December 31, 1998 to
December 31, 1999. Of that net increase, investment securities available for
sale decreased $5,114,000 or 14.1% during the period as a result of the
maturity of commercial paper, which was a large part of
6
<PAGE>
this portfolio at December 31, 1998. Management did not generally reinvest
in commercial paper during the second half of 1999 due to the availability of
other investments yielding higher rates. During that time, the Company
began to purchase investments with longer maturities than previously owned in
order to take advantage of the rising slope of the interest yield curve. In
previous periods, management did not believe that there was enough interest rate
benefit in longer-term investments to include them in our purchase decisions.
With the yield curve beginning to improve in relation to longer-term maturity
investments, management took advantage of this change and did extend
maturities of some purchases of corporate bonds, municipal bonds and U.S.
Government agencies.
Investment securities held to maturity increased $12,647,000 or 432.7% during
the same period due entirely to the purchase of the above mentioned corporate
bonds with higher interest rates and somewhat longer-term maturities.
Loans increased in 1999, continuing a trend that has existed for the past
several years. Net loans were $137,526,000 on December 31, 1999 compared to
$124,961,000 on December 31, 1998, representing an increase of $12,566,000 or
10.1%. This growth was primarily centered in the categories of commercial
real estate and residential mortgages. Commercial mortgages expanded by
$7,402,000 or 16.8%, bringing this segment of the portfolio to $51,576,000 at
December 31, 1999. The related category of commercial loans increased by
$1,349,000 or 8.3% during 1999. These loans, both commercial real estate and
other commercial loans, were originated for existing and new clients with
businesses spread across a number of industries including children's camps,
resorts, manufacturers, contractors and retailers. While the majority of
these loans were written to expand or purchase a business, a number of loans
were granted for the purpose of construction of additional facilities,
acquisition of machinery, equipment and inventory. Residential mortgages of
one-to-four family homes were the next largest loan portfolio segment that
experienced growth in 1999. This type of loan increased $4,385,000 or 10.8%,
reflecting the growth of the local real estate market in light of historically
low borrowing rates during the period.
Deposits increased $12,401,000 or 8.0% from December 31, 1998 to December 31,
1999. The greatest increase was in time deposits. Time deposits less than
$100,000 increased $4,444,000 or 7.9% during the period while time deposits of
$100,000 or greater increased $3,955,000 or 15.6%. Management has assumed a
competitive stance in pricing these deposits in light of aggressive pricing on
the part of other institutions in our
7
<PAGE>
market areas. In addition, the Company instituted a special pricing strategy
in late November 1999 in an effort to maintain deposits, which may have been
lost to Year 2000 concerns or to the attractive returns shown in the stock
market during 1999. Interest-bearing demand accounts increased $2,543,000 or
11.2% during the year due to heavier market penetration at the branches along
with competitive pricing of these products.
Short-term borrowings increased $4,572,000 or 126.6% from December 31, 1998 to
December 31, 1999. The main component of this change was in borrowings from
the Federal Home Loan Bank (FHLB). Management took advantage of the ability
to borrow from FHLB in order to fund the purchase of securities in December
1999. The interest rates available on the investments that were purchased
were attractive as compared to those that had previously been available. The
Company anticipated the ability to repay these borrowings with the maturity
of investments in the first quarter of 2000.
CAPITAL RESOURCES
Total Stockholders' Equity increased $1,271,000 or 7.9% in 1999. This growth
is primarily attributable to earnings retention. A common ratio used to
determine the effective use of capital is the return on average equity. For
the year ended December 31, 1999, this ratio was 13.0% as compared to 13.8% at
December 31, 1998. The Company has continued to adhere to its policy of
maintaining a strong capital position. The capital to asset ratio at December
31, 1999 was 9.0% and was 9.2% at December 31, 1998. Management has begun to
re-assess the optimal level of capital and believes that the Company should
better utilize its capital by maintaining a capital to asset ratio closer to
8.0%. By cautiously taking advantage of opportunities to leverage its capital
position, the Company can increase earning assets while continuing to exceed
regulatory capital guidelines.
The primary source of capital is earnings retention. Net income increased
Stockholders' Equity by $2,177,000 while dividends declared offset this growth
by $768,000. The return to stockholders was 35.3% of the earnings for 1999,
an increase over the 32.7% for 1998. An important component of the increase
in Stockholders' Equity each year is the participation of our shareholders in
the Dividend Reinvestment Plan. This program added an additional $286,000 in
1999. Management took advantage of opportunities to purchase stock in the
open market to fund the Dividend Reinvestment Plan over the past few years.
In 1999, a total of 5,000 shares were purchased, with 2,144 remaining at
December 31, 1999 to be used in the future.
The following table represents the Company's capital position as it compares
to regulatory guidelines at December 31, 1999:
"Well- Minimum
Dimeco, Inc. Capitalized" Requirements
Leverage Ratio 9.23% 5.00% 4.00%
"Tier 1"
Capital Ratio 11.07% 6.00% 4.00%
"Total"
Capital Ratio 12.22% 10.00% 8.00%
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 and maintain regulatory reserve requirements; in
general, to conduct banking business. Simply stated, additional liquidity is
obtained by either increasing liabilities or decreasing assets. The Company's
primary source for increasing liabilities is the generation of additional
deposit accounts, which we manage through our branch system. In addition,
loan payments on existing loans or sales of loans held for sale or investments
available for sale generate additional liquidity. Other sources of liquidity
include income from operations, decreases in federal funds sold or
interest-bearing deposits in other banks, additional securities sold under
agreements to repurchase and borrowings from the FHLB. The Bank had a
borrowing capacity of approximately $31,700,000 at December 31, 1999. A
further indicator of the sources
8
<PAGE>
of liquidity is the Consolidated Statement
of Cash Flows. During 1999, maturities of investments and increases of
deposits and short-term borrowings provided the majority of additional cash
with operating activities also contributing to liquidity. The funds were
primarily used to grant loans to our customers and purchase additional
investment securities along with paying dividends to our stockholders.
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. The Company has given
responsibility for monitoring interest rate sensitivity and policy decisions
to the Asset/Liability Committee (ALCO). The main tools used to monitor
sensitivity are the Statement of Interest Sensitivity Gap and interest rate
shock analysis. The Statement of Interest Sensitivity Gap is a good
assessment of current position and is a very useful tool to the ALCO in
performing its job. This report is monitored in an effort to "match"
maturities or repricing opportunities of assets and liabilities in order to
attain maximum income within risk tolerance policy guidelines. The statement
does, though, have inherent limitations in that certain assets and liabilities
may react to changes in interest rates in different ways with some categories
reacting in advance of changes and some lagging behind the changes. In
addition, there are estimates used in determining the actual propensity to
change of certain items, such as deposits with no set maturity date.
Following is the statement at December 31, 1999:
<TABLE>
<CAPTION>
STATEMENT OF INTEREST SENSITIVITY GAP
90 days >90 days 1 5
or less but<1 year years >5 years Total
--------- --------- --------- --------- ---------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold $ 940 $ $ $ $ 940
Interest-bearing deposits 1,199 1,199
Mortgage loans held for sale 237 237
Investment securities
available-for-sale (1) 12,509 1,695 14,455 2,588 31,247
Investment securities
held-to-maturity (1) 7,600 7,676 294 15,570
Loans (1) 12,705 60,298 44,944 18,827 136,774
--------- --------- --------- --------- ---------
Rate sensitive assets $ 27,590 $ 69,593 $ 67,075 $ 21,709 $ 185,967
========= ========= ========= ========= =========
Liabilities:
Interest-bearing deposits:
Interest-bearing demand (2) $ 25,285 $ $ $ $ 25,285
Money market 2,816 2,816
Savings (3) 25,125 9,585 34,710
Time deposits 28,981 42,364 18,510 89,855
Short-term borrowings 8,185 8,185
--------- --------- --------- --------- ---------
Rate sensitive liabilities $ 90,392 $ 51,949 $ 18,510 $ $ 160,851
========= ========= ========= ========= =========
Interest sensitivity gap $ (62,802) $ 17,644 $ 48,565 $ 21,709 $ 25,116
Cumulative gap $ (62,802) $ (45,158) $ 3,407 $ 25,116
Cumulative gap to total assets (32.26%) (23.20%) 1.75% 12.90%
(1)Investments and loans are included in the earlier of the period in which
interest rates are next scheduled to adjust or in which they are due. No
adjustment has been made for scheduled repayments or for anticipated
prepayments.
(2)Interest-bearing demand deposits are recorded as immediately repricing
and/or maturing. Historically, these liabilities have been shown to have
a greater maturity based on retention experience of such deposits in
changing rate environments. Management has consistently used this time
period in their analysis in order to make the information comparable.
(3)Passbook savings accounts have been included in the >90 days but
< one-year period even though they have also been shown to have a greater
effective maturity in changing rate environments. The placement in this
category is done consistently to maintain comparability.
9
<PAGE>
Interest rate shock analysis is a model that applies a shift of 200 basis
points up or down in market interest rates to our balance sheet. The
analysis at December 31, 1999 shows a variation in income of minus .9% and a
variation of minus 9.2% in total equity. Both of these measurements are
within internal risk tolerance guidelines.
ALLOWANCE FOR LOAN LOSSES
The balance in the allowance for loan losses is based upon management's
assessment of risk in the loan portfolio. Allocations to specific
commercial loans are made in adherence to SFAS 114, Accounting by Creditors
for Impairments of a Loan. These allocations are based upon the present
value of expected future cash flows or the fair value of the underlying
collateral. In addition, management reviews the other components of the loan
portfolio through the loan review function and assigns internal grades to
loans based upon the perceived risk inherent in each loan. In determining
risk, management reviews a number of factors including historical analysis of
similar credits, delinquency reports, ratio analysis as compared to 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 by the Board of Directors. At
December 31, 1999 management believes that the allowance for loan loss was
adequate to absorb potential losses in the loan portfolio, however this
judgement is subjective and a significant degradation of loan quality could
require a change in the estimates and therefore a change in net income.
Following is a summary of loans charged-off and recoveries to the allowance
for loan losses at December 31, 1999 and 1998:
SUMMARY OF LOAN LOSS EXPERIENCE
1999 1998
----------- -----------
(amounts in thousands)
Balance January 1, $ 1,682 $ 1,511
Charge-offs:
Commercial 196 75
Real estate 94 46
Installment 93 192
----------- -----------
Total charge-offs 383 313
----------- -----------
Recoveries:
Commercial 2 2
Real estate 2 3
Installment 27 28
----------- -----------
Total recoveries 31 33
----------- -----------
Net charge-offs 352 280
Additions charged to operations 504 451
----------- -----------
Balance December 31, $ 1,834 $ 1,682
----------- -----------
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.27% 0.24%
Allowance for loan loss as a % of average
loans outstanding 1.40% 1.45%
10
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential
The following is an analysis of the average balance sheets and net interest
income for each of the three years ended December 31, 1999, 1998 and
1997:
(amounts in thousands)
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------- ------------------------------- ---------------------------
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) $129,356 $ 11,251 8.70% $114,303 $ 10,372 9.07% $103,637 $ 9,471 9.14%
Investment securities:
Taxable 38,892 2,174 5.59% 27,035 1,584 5.86% 21,009 1,298 6.18%
Exempt from federal income
tax (2) 1,674 129 7.71% 3,088 226 7.31% 5,130 373 7.27%
Interest-bearing deposits 5,309 139 2.62% 5,187 154 2.97% 2,336 22 0.94%
Federal funds sold and
securities
purchased under agreements
to resell 4,718 232 4.92% 6,540 357 5.46% 3,168 176 5.56%
-------- -------- ----- -------- -------- ----- -------- ------- -----
Total interest-earning
assets/interest income 179,949 13,925 7.74% 156,153 12,693 8.13% 135,280 11,340 8.38%
Cash and due from banks 1,548 1,340 1,244
Premises and equipment, net 3,712 3,130 3,000
Other assets, less allowance
for loan losses 3,164 3,303 3,090
-------- -------- --------
Total Assets $188,373 $163,926 $142,614
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings $ 35,281 $ 972 2.76% $ 32,980 $ 1,006 3.05% $ 32,706 $ 1,030 3.15%
Interest-bearing checking 28,523 547 1.92% 25,446 622 2.44% 22,482 583 2.59%
Time deposits 84,861 4,339 5.11% 71,959 3,895 5.41% 59,539 3,225 5.42%
Securities sold under
agreements to repurchase 4,478 133 2.97% 2,551 85 3.33% 430 15 3.49%
Federal Home Loan Bank
advances 1,176 63 5.36% 71 3 4.23% 112 7 6.25%
-------- -------- ----- -------- -------- ----- -------- ------- -----
Total interest-bearing
liabilities/interest expense 154,319 6,054 3.92% 133,007 5,611 4.22% 115,269 4,860 4.22%
Noninterest-bearing deposits 15,580 14,039 13,149
Other liabilities 1,685 1,490 1,031
Total liabilities 171,584 148,536 129,449
Stockholders' Equity 16,789 15,390 13,165
-------- -------- --------
Total Liabilities and
Stockholders' Equity $188,373 $163,926 $142,614
======== -------- ======== -------- ======== -------
Net interest income/
interest spread $ 7,871 3.82% $ 7,082 3.91% $ 6,480 4.16%
======== ===== ======== ===== ======= =====
Margin Analysis:
Interest income/earning
assets $ 13,925 7.74% $ 12,693 8.13% $11,340 8.38%
Interest expense/earning
assets 6,054 3.36% 5,611 3.59% 4,860 3.59%
-------- ----- -------- ----- ------- -----
Net interest income/earning
assets $ 7,871 4.38% $ 7,082 4.54% $ 6,480 4.79%
======== ===== ======== ===== ======= =====
Ratio of average interest-earning assets
to average interest-bearing liabilities 116.61% 117.40% 117.36%
</TABLE>
(1) Nonaccrual loans are not included.
(2) Income on interest-earning assets is based on a taxable equivalent basis
using a federal income tax rate of 34%.
(3) Average balances are calculated using average daily balances.
(4) Interest on loans includes fee income.
11
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the main source of the Company's income. It 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
"Rate/Volume Analysis of Changes in Net Interest Income."
Net interest income on loans increased $879,000 from 1998 to 1999. This
increase was mainly attributable to a larger loan portfolio in 1999 than in
1998. Interest rates on adjustable rate loans decreased during the first
half of the year due to the timing of their annual rate adjustment. Prime
rate was 7.75% during the first half of 1999 as compared to 8.50% for the
first half of 1998. Prime did increase over the course of 1999 to end at
8.50%.
Interest income on taxable investments increased $590,000 from 1998 to 1999
due to an increase of $11,857,000 in the average balances. The average
interest rate received on these investments decreased from 5.86% in 1998 to
5.59% in 1999. In light of the relatively flat interest yield curve during
most of 1999 combined with the need to maintain liquidity in the investment
portfolio, management emphasized investment in short-term securities for the
majority of 1998 and 1999. In the fourth quarter of 1999, management did
take the opportunity to extend terms and increase the interest yields on
purchases of some investments when the yield curve showed opportunity in this
area.
Rate / Volume Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
----------------------------- -----------------------------
Total Caused by Total Caused by
Variance Rate (1) Volume Variance Rate(1) Volume
------ ------ ------ ------ ------ ------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Total loans $ 879 $ (487) $1,366 $ 901 $ (74) $ 975
Investment securities:
Taxable 590 (105) 695 286 (86) 372
Exempt from federal income tax (97) 6 (103) (147) 1 (148)
Interest-bearing deposits (15) (19) 4 132 105 27
Federal funds sold and securities
purchased under agreements to resell (125) (26) (99) 181 (6) 187
------ ------ ------ ------ ------ ------
Total interest income 1,232 (631) 1,863 1,353 (60) 1,413
------ ------ ------ ------ ------ ------
Interest expense:
Savings (34) (104) 70 (24) (33) 9
Interest-bearing checking (75) (150) 75 39 (38) 77
Time deposits 444 (254) 698 670 (3) 673
Securities sold under agreements
to repurchase 48 (16) 64 70 (4) 74
Federal Home Loan Bank advances 60 13 47 (4) (1) (3)
------ ------ ------ ------ ------ ------
Total interest expense 443 (511) 954 751 (79) 830
------ ------ ------ ------ ------ ------
Net change in net interest income $ 789 $ (120) $ 909 $ 602 $ 19 $ 583
====== ====== ====== ====== ====== ======
</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.
12
<PAGE>
Interest income on tax-exempt securities decreased in 1999 from 1998 as a
result of maturities in the portfolio during 1998 and 1999. The proceeds of
these maturities were not reinvested in similar securities based on
management's review of rates offered in this type of security in the time
frames for which the Asset/Liability Committee wanted to purchase
investments. Other types of investments offered more attractive after-tax
interest yields. Beginning in the second half of 1999, management did begin
to purchase tax exempt securities when the interest yields offered became
more attractive.
Average interest income of federal funds sold and securities purchased under
agreements to resell decreased from 1998 to 1999 due to both a decrease in
the volume of this type of investment and lower rates on the investments.
With lower rates offered in the federal funds sold category, management
invested in short-term commercial paper to provide liquidity rather than
federal funds sold.
Interest expense increased $443,000 from 1998 to 1999, based mainly on
increased balances in every category. The largest increase was in the area
of time deposits with that category showing an increase of $12,902,000 in the
average balance from 1998 to 1999. During 1998 and continuing in 1999,
management aggressively priced municipal time deposits and special
certificate of deposit products. While the average dollar balances in time
deposits increased, which accounted for $698,000 of additional expense, the
average interest rate paid for these deposits decreased, thereby decreasing
interest paid by $254,000.
Of the $443,000 total increase in interest expense on liabilities, there was
an increase of $954,000 based on larger balances, which was offset by a
decrease of $511,000 attributable to lower average interest rates paid.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $52,000 or 11.6% from 1998 to 1999.
The loan portfolio concurrently increased 10.1%. Provision for loan losses
expense is directly related to management's analysis of the adequacy of the
Allowance for Loan Losses. An internal model is used which classifies all
loans in the portfolio according to management's judgement of risk.
According to this analysis, the Allowance for Loan Losses was adequate at
December 31, 1999. Net loans charged off during 1999 were $352,000, which
represents an increase of 25.7% over the loans charged off during 1998.
Nonperforming loans increased $274,000 or 11.4% from 1998 to 1999. The
Allowance for Loan Losses represented 1.33% of total loans at December 31,
1999. During 1998 the Company expensed $451,000, which resulted in the
Allowance for Loan Losses representing 1.35% of total loans at December 31,
1998. This compares to a provision expense of $520,000 in 1997, which
resulted in the Allowance for Loan Losses to represent 1.39% of total loans
at December 31, 1997.
NONINTEREST INCOME
Noninterest income includes items that 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 single largest item in this category and represents fees related to
deposit accounts including overdraft fees, minimum balance fees and
transaction fees. This category increased $38,000 or 16.4% from 1998 to
1999, while deposits increased 8.0% over the period. Several service fee
charges on deposit accounts were increased during the year accounting for the
remaining change.
Gains (losses) on the sale of mortgage loans decreased $195,000 or 123.3%
from 1998 to 1999. Market interest rates have a direct bearing on this
category of income. In 1998 and 1997 the Company was able to generate gains
on loan sales due to the timing from origination to sale in a declining
interest rate environment. During 1999 residential mortgage interest rates
decreased slightly for a period of time and then rebounded. Loans that were
originated during the period of lower interest rates were sold at losses when
interest rates returned to previous rates. Management has employed processes
that allow for
13
<PAGE>
quicker turnover of these loans in order to minimize the opportunity for losses
in the future and did show a slight gain on sales of loans in the fourth
quarter of 1999.
Other noninterest income was $549,000 in 1999, an increase of $18,000 or
3.4% over 1998. The increase from 1997 to 1998 was $67,000 or 14.4% with
several new fees charged during 1998. This item includes a collection of
many other types of fee income including trust fees, fees received for
servicing loans which have been sold in the secondary market, credit card
merchant fees, debit card fees and ATM fees. In 1999, the Bank was granted
full trust powers from the Pennsylvania Department of Banking and entered
into an alliance with Tompkins County Trust Company to provide a full range
of trust services to our customers. The Company expects that over time the
trust business will generate additional noninterest income as the customer
base of this service increases.
NONINTEREST EXPENSE
Noninterest expense includes all other expenses associated with the Company.
Compensation and related benefits is the largest expense in this category and
increased $217,000 or 10.4% from 1998 to 1999. Annual salary increases
averaged 6.3% and several new employees were hired to handle the increased
workflow resulting from loan and deposit growth over the past few years.
From 1997 to 1998 this category had an increase of $72,000 based on average
salary increases of 3.6%.
Occupancy expenses increased $84,000 or 22.4% from 1998 to 1999 mainly as a
result of the opening of the Operations Center in October 1998. From 1997
to 1998, occupancy expenses increased $36,000, which was also mainly
attributable to expenses in the Operations Center. Additionally, the Company
incurred extra expense in the Honesdale office related to HVAC units and in
all offices due to increased snowplowing expenses in 1999 as compared to
1998.
Furniture and equipment expenses increased $49,000 or 13.3% from 1998 to 1999
due to increased expenses in relation to the Operation Center and new
technology for deposit operations, which was implemented during late 1998 and
1999. In July 1999 the Company began to return deposit statements containing
check images rather than the original checks to our customers. Image
technology is less costly in regard to postage and increases employee
productivity as manual tasks are eliminated from the deposit statement
process. The Company recognizes the need to maintain our competitive
advantage by researching new banking technology when available and
implementing that technology when possible and profitable. The Company
expects to continue to expand technological product offerings including
internet banking and a voice response system during 2000 along with
researching the possibility of implementing document imaging to make our
systems more efficient and to enhance customer service.
Professional fees increased $95,000 or 45.4% from 1998 to 1999 due to the use
of additional outside consultants. Following are the largest items included
in this change: outsourcing the loan review and compliance functions,
$35,000; Y2K project, $28,000; profit improvement project, $19,000; website
design and hosting, $7,000 and marketing and implementation of the conversion
to image statements for our customers, $6,000. Management is pleased with
the results of outsourcing specialized services such as internal audit and
expects to continue utilizing resources of this nature as appropriate.
The caption other expense, which increased $60,000 or 4.5% from 1998 to 1999,
includes a variety of expenses incurred in the operation of a commercial
bank. The largest items of change from 1998 to 1999 are specifically
discussed here. Amortization of computer software increased $34,000 or 45.0%
during the period and was mainly attributable to full implementation of the
loan platform software and software purchased in 1998 to operate the check
processing equipment. Bank supplies increased $33,000 or 23.0% based on a
number of different items including: greater usage associated with growth of
the Company, lower purchases in 1998 in order to deplete inventory before the
move to the Operations Center in Fall 1998, a change in telephone area codes
which required reprinting many supplies and new supplies used for returning
check images to our customers. Correspondent bank expenses increased $25,000
or 48.6% from 1998 to 1999 due to the increased number of services used and to
the maintenance of lower balances in the correspondent bank account. The
Company receives earnings credits for balances maintained which offset
charges for services rendered by the correspondent bank. When these balances
decrease, charges for the correspondent's services increase. Directors' fees
increased $17,000 or 24.1% due to the addition of two more directors in 1999.
Pennsylvania shares tax, which is based on assets rather than income,
increased $16,000 or 12.3% due to growth of the Company and fewer tax-exempt
assets. Two categories of other expense showed large decreases from 1998 to
1999. Expenses associated with the operation and sale of other real estate
owned decreased $65,000 or 59.2%, due to better management of this function
in 1999. In addition, advertising expenses decreased $32,000 or 19.0% due
to fewer advertising campaigns during 1999. Advertising expenses are
expected to return to 1998 levels in future periods with the expansion of
marketing efforts.
The increase of $134,000 or 11.1% from 1997 to 1998 was mainly due to
increased advertising expenses, one-time telephone charges and additional
travel expenses related to training for the new mortgage platform system.
14
<PAGE>
YEAR 2000
The Company relies on computers to conduct its business and information
systems processing. Industry experts were concerned that on January 1, 2000,
some computers might not be able to interpret the new year properly, causing
computer malfunctions. Some banking experts remain concerned that some
computers may not be able to interpret additional dates in the year 2000
properly. The Company has operated and evaluated its computer operating
systems following January 1, 2000 and has not identified any errors or
experienced any computer system malfunctions. Nevertheless, the Company
continues to monitor its information systems to assess whether its systems
are at risk of misinterpreting any future dates and will develop, if needed,
appropriate contingency plans to prevent any potential system malfunction or
correct any system failures. The Company has not been informed of any such
problems experienced by its vendors or its customers.
The Company will continue to monitor its significant vendors of goods and
services and customers with respect to any Year 2000 problems they may
encounter, as those issues may effect its ability to continue operations, or
might adversely affect the Company's financial position, results of
operations and cash flows. At this time, the Company does not believe that
these potential problems will materially impact the ability to continue
operations. However, no assurance can be given that this will be the case.
MARKET PRICES OF STOCK/DIVIDENDS DECLARED
The Company's stock is listed on the OTC Bulletin Board under the symbol
DIMC; the cusip number is 25432W104. The Company, and previously the Bank,
has paid dividends for over fifty 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 common stock at December 31, 1999 was $23.76 and was $22.11 at
December 31, 1998. The Company had approximately 691 holders of record of
the Company's common stock.
MARKET PRICES OF STOCK/DIVIDENDS DECLARED
<TABLE>
<CAPTION>
1999 1998
----------------------------- ----------------------------
Dividend Dividend
High Low Declared High Low Declared
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
First Quarter $42.50 $32.00 $0.25 $42.00 $31.00 $0.20
Second Quarter $39.50 $34.50 $0.25 $51.50 $41.00 $0.25
Third Quarter $39.00 $32.00 $0.25 $50.75 $40.00 $0.25
Fourth Quarter $35.50 $29.00 $0.30 $44.00 $42.00 $0.25
</TABLE>
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>
<TABLE>
<CAPTION>
SUMMARY OF SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
------------------------------------------------------------
(amounts in thousands, except per share)
Summary of operations
<S> <C> <C> <C> <C> <C>
Interest income $ 13,882 $ 12,616 $ 11,213 $ 10,267 $ 9,491
Interest expense $ 6,054 $ 5,611 $ 4,860 $ 4,447 $ 4,116
Net interest income $ 7,828 $ 7,005 $ 6,353 $ 5,820 $ 5,375
Provision for possible loan losses $ 504 $ 451 $ 520 $ 549 $ 382
Net interest income after provision
for possible loan losses $ 7,324 $ 6,554 $ 5,833 $ 5,271 $ 4,993
Other income $ 783 $ 930 $ 878 $ 735 $ 645
Other expenses $ 4,860 $ 4,356 $ 4,065 $ 3,695 $ 3,394
Income before income taxes $ 3,247 $ 3,128 $ 2,646 $ 2,311 $ 2,244
Income taxes $ 1,070 $ 1,011 $ 821 $ 699 $ 677
Net Income $ 2,177 $ 2,117 $ 1,825 $ 1,612 $ 1,567
Per common share
Net income $ 2.97 $ 2.90 $ 2.52 $ 2.24 $ 2.24
Cash dividends $ 1.05 $ 0.95 $ 0.74 $ 0.60 $ 0.54
Book value $ 23.76 $ 22.11 $ 20.04 $ 18.21 $ 16.58
Shares outstanding at year end 733 731 727 722 708
Balance sheet data end of year
Total assets $194,667 $176,474 $153,421 $140,284 $124,808
Loans, net $137,526 $124,961 $107,303 $ 98,647 $ 88,409
Loans held for sale $ 237 $ 923 $ 157 207 $ 465
Investment securities available for sale $ 31,247 $ 36,361 $ 30,702 $ 13,715 $ 11,453
Investment securities held to maturity $ 15,570 $ 2,923 $ 4,542 $ 14,792 $ 9,267
Deposits $167,294 $154,893 $135,101 $126,003 $109,878
Stockholders' equity $ 17,423 $ 16,153 $ 14,521 $ 13,147 $ 11,743
Performance ratios
Return on average assets 1.16% 1.29% 1.28% 1.22% 1.31%
Return on average equity 12.97% 13.75% 13.86% 12.92% 14.37%
Dividend payout ratio 35.28% 32.76% 29.33% 26.79% 24.11%
Average equity to average
assets ratio 8.91% 9.39% 9.23% 9.44% 9.12%
</TABLE>
<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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
February 11, 2000
S.R. Snodgrass, A.C.
1000 Stonewood Drive
Suite 200
Wexford, PA 15090-8399
Phone: 724-934-0344
Facsimile: 724-934-0345
17
<PAGE>
DIMECO, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999 1998
----------------- -----------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 2,491,460 $ 1,528,650
Interest-bearing deposits in other banks 1,199,210 3,636,326
Federal funds sold 940,000 945,000
----------------- -----------------
Total cash and cash equivalents 4,630,670 6,109,976
Mortgage loans held for sale (market value of $237,000
and $923,449) 237,000 923,449
Investment securities available for sale 31,246,921 36,360,618
Investment securities held to maturity (market value
of $15,516,823 and $2,967,741) 15,570,500 2,923,222
Loans (net of unearned income of $702,421 and
$807,570) 137,526,437 124,960,697
Less allowance for loan losses 1,833,615 1,681,735
----------------- -----------------
Net loans 135,692,822 123,278,962
Premises and equipment 3,598,780 3,820,704
Other real estate 355,436 274,894
Accrued interest receivable 1,386,655 910,750
Other assets 1,947,855 1,871,109
----------------- -----------------
TOTAL ASSETS $ 194,666,639 $ 176,473,684
================= =================
LIABILITIES
Deposits:
Noninterest-bearing $ 14,627,337 $ 14,378,252
Interest-bearing 152,666,444 140,514,277
----------------- -----------------
Total deposits 167,293,781 154,892,529
Short-term borrowings 8,184,933 3,612,876
Accrued interest payable 962,542 902,614
Other liabilities 802,167 913,074
----------------- -----------------
TOTAL LIABILITIES 177,243,423 160,321,093
----------------- -----------------
STOCKHOLDERS' EQUITY
Common stock, $.50 par value; 3,000,000 shares authorized;
735,565 and 730,518 shares issued 367,782 365,259
Capital surplus 3,004,439 2,823,152
Retained earnings 14,378,134 12,969,112
Accumulated other comprehensive loss (245,830) (4,932)
Treasury stock, at cost (2,144 shares) (81,309) -
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 17,423,216 16,152,591
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 194,666,639 $ 176,473,684
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
DIMECO, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
--------------- --------------- --------------
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 11,251,457 $ 10,371,556 $ 9,471,235
Interest-bearing deposits in other banks 139,491 154,120 22,198
Federal funds sold and securities purchased
under agreements to resell 231,884 356,711 176,020
Investment securities:
Taxable 2,173,970 1,584,397 1,297,590
Exempt from federal income tax 85,009 148,721 245,779
--------------- --------------- --------------
Total interest income 13,881,811 12,615,505 11,212,822
--------------- --------------- --------------
INTEREST EXPENSE
Deposits 5,858,100 5,522,955 4,838,505
Short-term borrowings 195,631 87,553 21,820
--------------- --------------- --------------
Total interest expense 6,053,731 5,610,508 4,860,325
--------------- --------------- --------------
NET INTEREST INCOME 7,828,080 7,004,997 6,352,497
Provision for loan losses 503,750 451,400 519,500
--------------- --------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,324,330 6,553,597 5,832,997
--------------- --------------- --------------
Noninterest Income
Service charges on deposit accounts 270,626 232,470 223,975
Mortgage loans held for sale gains (losses), net (36,865) 157,860 195,794
Investment securities gains (losses), net - 8,900 (5,650)
Other income 549,429 531,218 464,340
--------------- --------------- --------------
Total noninterest income 783,190 930,448 878,459
--------------- --------------- --------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,292,207 2,075,353 2,003,280
Occupancy expense, net 456,273 372,663 337,159
Furniture and equipment expense 415,613 366,973 314,419
Professional fees 302,661 208,121 211,099
Other expense 1,393,361 1,333,072 1,199,528
--------------- --------------- --------------
Total noninterest expense 4,860,115 4,356,182 4,065,485
--------------- --------------- --------------
Income before income taxes 3,247,405 3,127,863 2,645,971
Income taxes 1,070,258 1,011,235 820,759
--------------- --------------- --------------
NET INCOME $ 2,177,147 $ 2,116,628 $ 1,825,212
=============== =============== ==============
Earnings Per Share $ 2.97 $ 2.90 $ 2.52
=============== =============== ==============
Average Shares Outstanding 732,304 728,913 723,518
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
DIMECO, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Capital Retained Comprehensive Treasury Stockholders' Comprehensive
Stock Surplus Earnings Income (Loss) Stock Equity Income
--------- ----------- ------------ ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 360,952 $ 2,558,151 $ 10,257,053 $ (28,881) $ - $ 3,147,275
Net income 1,825,212 1,825,212 $ 1,825,212
Other comprehensive income:
Unrealized gain on available for
sale securities, net of taxes
of $8,909 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
taxes of $3,427 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
Net income 2,177,147 2,177,147 $ 2,177,147
Other comprehensive income:
Unrealized loss on available
for sale securities, net of
tax benefit of $124,098 (240,898) (240,898) (240,898)
Comprehensive income $ 1,936,249
===========
Dividend reinvestment plan 2,523 181,287 102,191 286,001
Purchase treasury stock (183,500) (183,500)
Cash dividends ($1.05 per share) (768,125) (768,125)
--------- ----------- ------------ ---------- ---------- ------------
BALANCE, DECEMBER 31, 1999 $ 367,782 $ 3,004,439 $ 14,378,134 $ (245,830) $ (81,309) $ 17,423,216
========= =========== ============ ========== ========== ============
1999 1998 1997
-------------- ---------- -----------
Components of other comprehensive income (loss):
Change in net unrealized gain (loss) on
investment securities available for sale $ (240,898) $ 12,528 $ 13,566
Realized (gains) losses included in net income,
net of taxes (benefit) of $0, $3,026, and ($1,921) - (5,874) 3,729
-------------- ---------- -----------
Total $ (240,898) $ 6,654 $ 17,295
============== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
DIMECO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------------- ------------- -------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 2,177,147 $ 2,116,628 $ 1,825,212
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 503,750 451,400 519,500
Depreciation 388,972 348,748 329,526
Amortization of premium and discount on
investment securities, net (716,124) (995,180) (330,791)
Amortization of net deferred loan origination fees (39,399) (34,969) (67,653)
Deferred income taxes (9) 29,900 73,620
Investment securities (gains) losses, net - (8,900) 5,650
Net decrease (increase) in loans held for sale 687,393 (766,578) 49,942
Decrease (increase) in accrued interest receivable (475,905) (51,573) 144,388
Increase in accrued interest payable 59,928 201,515 179,870
Other, net (49,109) 122,819 128,486
------------- ------------- -------------
Net cash provided by operating activities 2,536,644 1,413,810 2,857,750
------------- ------------- -------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales - 389,900 72,650
Proceeds from maturities or paydown 68,137,058 113,039,238 36,071,760
Purchases (62,541,995) (118,086,772) (52,741,229)
Investment securities held to maturity:
Proceeds from maturities or paydown 2,290,000 4,644,000 12,711,001
Purchases (15,067,515) (3,011,368) (2,500,235)
Net increase in loans (13,069,381) (16,445,490) (9,330,941)
Purchase of premises and equipment (167,048) (1,224,149) (208,679)
Proceeds from the sale of other real estate owned 94,866 349,926 -
------------- ------------- -------------
Net cash used for investing activities (20,324,015) (20,344,715) (15,925,673)
------------- ------------- -------------
Financing Activities
Net increase in deposits 12,401,252 19,791,143 9,098,879
Increase in short-term borrowings 4,572,057 1,222,832 2,390,044
Proceeds from dividend reinvestment and
stock purchase plan 286,001 288,517 214,331
Purchase of treasury stock (183,500) (87,000) (148,400)
Cash dividends paid (767,745) (655,161) (520,073)
------------- ------------- -------------
Net cash provided by financing activities 16,308,065 20,560,331 11,034,781
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (1,479,306) 1,629,426 (2,033,142)
Cash and cash equivalents at beginning of year 6,109,976 4,480,550 6,513,692
------------- ------------- -------------
Cash and cash equivalents at end of year $ 4,630,670 $ 6,109,976 $ 4,480,550
============= ============= =============
</TABLE>
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 and operates from four locations in Northeastern 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, commercial, and consumer
financings as well as interest earnings on investment securities. The Company
provides deposit services including checking, savings, and certificate of
deposit accounts and trust services. 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 inter-company items have been eliminated in
preparing the consolidated financial statements. The investment subsidiary on
the parent company financial statements is carried at the parent company's
equity in the underlying net assets of the Bank.
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 represents 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>
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
consolidated 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 as 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 by dividing net income by the weighted average number of shares
of stock outstanding during the year.
23
<PAGE>
COMPREHENSIVE INCOME
- --------------------
The Company is required to present comprehensive income in a full set of
general purpose financial statements for all periods presented. Other
comprehensive income is comprised exclusively of unrealized holding gains
(losses) on the available for sale securities portfolio. The Company has
elected to report the effects of other comprehensive income 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,
1999 $ 5,993,803 $ 1,128,278
1998 5,408,993 905,384
1997 4,680,455 700,000
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, 2000. Earlier adoption is permitted
for any fiscal quarter that begins after the issue date of this Statement.
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:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Government agency
securities $ 13,612,683 $ - $ (302,340) $ 13,310,343
Mortgage-backed securities 305,158 - (11,277) 293,881
Obligations of states and
political subdivisions 2,418,208 - (45,338) 2,372,870
Corporate securities 2,209,990 319 - 2,210,309
Commercial paper 12,523,000 253 (14,085) 12,509,168
--------------- ------------- --------------- ---------------
Total debt securities 31,069,039 572 (373,040) 30,696,571
Equity securities 550,350 - - 550,350
--------------- ------------- --------------- ---------------
Total $ 31,619,389 $ 572 $ (373,040) $ 31,246,921
=============== ============= =============== ===============
</TABLE>
9
<PAGE>
NOTE 2 - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
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
=============== ============= =============== ===============
1999
----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- ------------- --------------- ---------------
HELD TO MATURITY
Obligations of states and
political subdivisions $ 692,129 $ 32,823 $ (352) $ 724,600
Corporate securities 14,878,371 7,201 (93,349) 14,792,223
--------------- ------------- --------------- ---------------
Total $ 15,570,500 $ 40,024 $ (93,701) $ 15,516,823
=============== ============= =============== ===============
25
<PAGE>
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
=============== ============= =============== ===============
</TABLE>
NOTE 2 - INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market values of debt securities at December
31, 1999, by contractual maturity, are shown below. Expected maturities of
mortgage-backed securities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
---------------------------------- ---------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Due in one year or less $ 14,228,000 $ 14,204,345 $ 7,600,027 $ 7,577,413
Due after one year through
five years 14,757,673 14,455,158 7,676,140 7,617,910
Due after five years through
ten years 1,778,208 1,743,187 294,333 321,500
Due after ten years 305,158 293,881 - -
--------------- --------------- --------------- ---------------
Total debt securities $ 31,069,039 $ 30,696,571 $ 15,570,500 $ 15,516,823
=============== =============== =============== ===============
</TABLE>
The following is a summary of proceeds received, gross gains, and gross
losses realized on the sale of investment securities:
1999 1998 1997
------------- --------------- --------------
Proceeds from sales $ - $ 389,900 $ 72,650
Gross gains $ - $ 20,100 $ -
Gross losses $ - $ 11,200 $ 5,650
Investment securities with an amortized cost of $25,232,694 and $21,885,599
and estimated market values of $24,949,103 and $21,928,901 at December 31,
1999 and 1998, 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:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Loans secured by real estate:
Construction and development $ 840,147 $ 1,383,758
Secured by farmland 2,630,481 2,485,621
Secured by 1 - 4 family residential properties:
Revolving, open-end loans secured by 1 - 4 family
residential properties 1,183,444 1,359,899
All other loans secured by 1 - 4 family residential properties 45,013,193 40,628,489
Secured by non-farm, non-residential properties 51,576,198 44,174,518
Commercial and industrial loans 17,523,560 16,174,960
Loans to individuals for household, family, and other
personal expenditures:
Ready credit loans 103,347 95,369
Other installment loans 18,177,034 18,457,317
Other loans:
Agricultural loans 832,744 644,605
All other loans 348,710 363,731
-------------- --------------
Total loans 138,228,858 125,768,267
Less unearned income 702,421 807,570
-------------- --------------
Loans, net of unearned income $ 137,526,437 $ 124,960,697
============== ==============
</TABLE>
Real estate loans serviced for others which are not included in the
consolidated balance sheet totaled $43,142,498 and $41,417,648 at December
31, 1999 and 1998, 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:
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
Ninety days or more past due and accruing interest $ 832,255 $ 940,740
Nonaccrual 1,000,071 584,292
Impaired loans 841,228 874,277
-------------- ---------------
Total nonperforming loans $ 2,673,554 $ 2,399,309
============== ===============
</TABLE>
The Company had impaired loans of $841,228 and $874,277 as of December 31,
1999 and 1998, respectively, with related allowance for loan losses of
$162,390 and $136,217, respectively. There were no impaired loans without a
related allowance for loan losses. For the years ended December 31, 1999 and
1998, average impaired loans were $857,399 and $933,774, respectively.
Interest recognized on impaired loans for the years ended December 31, 1999,
1998, and 1997, was $6,020, $8,706, and $12,927, respectively.
27
<PAGE>
NOTE 3 - LOANS (Continued)
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,681,735 $ 1,511,123 $ 1,366,006
Provision charged to operations 503,750 451,400 519,500
Recoveries credited to allowance 31,533 32,475 54,110
Losses charged to allowance (383,403) (313,263) (428,493)
---------------- ---------------- ----------------
Balance, end of year $ 1,833,615 $ 1,681,735 $ 1,511,123
================ ================ ================
</TABLE>
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, 1999 is as follows:
Amounts
1998 Additions Collected 1999
---------- --------- --------- ----------
$3,263,850 $729,840 $559,379 $3,434,311
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. At December 31, 1999 and 1998,
the Company had approximately $15,000,000 and $10,800,000, respectively, of
outstanding loans to summer camps and recreational facilities in the
northeastern United States. Although the Company has a diversified loan
portfolio at December 31, 1999 and 1998, 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:
1999 1998
-------------- ---------------
Land $ 277,044 $ 277,044
Premises and improvements 3,776,822 3,742,858
Furniture and equipment 2,472,426 2,345,199
-------------- ---------------
Total, at cost 6,526,292 6,365,101
Less accumulated depreciation 2,927,512 2,544,397
-------------- ---------------
Net premises and equipment $ 3,598,780 $ 3,820,704
============== ===============
Depreciation expense was $388,972, $348,748, and $329,526 in 1999, 1998, and
1997, respectively.
Occupancy expenses were reduced by rental income received in the amounts of
$13,772, $8,266, and $11,267 for the years ended December 31, 1999, 1998, and
1997, respectively.
28
<PAGE>
NOTE 5 - DEPOSITS
Deposits are summarized as follows:
1999 1998
----------------- ------------------
Demand - noninterest-bearing $ 14,627,337 $ 14,378,252
Demand - interest-bearing 25,285,390 22,742,701
Money market 2,815,855 2,939,310
Savings 34,709,839 33,375,592
Time deposits of $100,000 or more 29,259,169 25,304,403
Other time deposits 60,596,191 56,152,271
----------------- ------------------
Total $ 167,293,781 $ 154,892,529
================= ==================
The following table summarizes the maturity distribution of certificates of
deposit of $100,000 or more:
1999
-----------------
Three months or less $ 13,859,484
Four through six months 7,883,235
Seven through twelve months 3,551,259
Over twelve months 3,965,191
-----------------
Total $ 29,259,169
=================
Interest expense on certificates of deposit of $100,000 or more amounted to
$1,372,545, $1,075,303, and $633,138 for the years ended December31, 1999,
1998, and 1997, respectively.
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings consist of borrowings from the Federal Home Loan Bank
of Pittsburgh ("FHLB") and securities sold under agreements to repurchase.
Average amounts outstanding during the year represent daily average balances,
and average interest rates represent interest expense divided by the related
average balance.
The outstanding balances and related information for short-term borrowings
are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ----------------------------
Amount Rate Amount Rate
-------------- -------- -------------- -------
<S> <C> <C> <C> <C>
Balance at year-end $ 8,184,933 4.50 % $ 3,612,876 2.75 %
Average balance outstanding
during the year $ 5,652,984 3.46 % $ 2,622,292 3.34 %
Maximum amount outstanding
at any month-end $ 12,895,446 $ 5,017,194
</TABLE>
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, 1999, the Bank's
remaining borrowing capacity with the FHLB was approximately $27.5 million.
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 $10,927,882
and $10,914,160, respectively, at December 31, 1999 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 (the
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 7,916 shares in 1999 and 7,834
shares in 1998 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 1999, 1998, and
1997, 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 1999, 1998, and 1997 to this plan amounted to $113,554,
$109,252, and $110,838, respectively.
NOTE 9 - INCOME TAXES
Federal income tax expense consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- --------------
<S> <C> <C> <C>
Currently payable $ 1,070,267 $ 981,335 $ 747,139
Deferred taxes (9) 29,900 73,620
---------------- --------------- --------------
Total provision $ 1,070,258 $ 1,011,235 $ 820,759
================ =============== ==============
</TABLE>
The components of the net deferred tax assets and liabilities at December 31,
are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 491,577 $ 438,515
Deferred compensation 26,595 30,960
Allowance for loss on other real estate 720 9,050
Unrealized loss on investment securities 126,639 2,540
Capital loss carryforward 13,872 -
Other, net - 321
-------------- ---------------
Total 659,403 481,386
-------------- ---------------
Deferred tax liabilities:
Premises and equipment 249,364 232,927
Deferred loan origination fees, net 107,440 69,968
-------------- ---------------
Total 356,804 302,895
-------------- ---------------
Net deferred tax assets $ 302,599 $ 178,491
============== ===============
</TABLE>
No valuation allowance was established at December 31, 1999 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>
A reconciliation between the expected statutory income tax rate and the
effective income tax rate follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ----------------------------
% 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 $ 1,104,118 34.0 % $ 1,063,473 34.0 % $ 899,630 34.0 %
Tax-exempt income (29,774) (0.9) (53,571) (1.7) (83,904) (3.2)
Non-deductible interest 6,150 0.2 14,164 0.4 39,869 1.5
Other, net (10,236) (0.4) (12,831) (0.4) (34,836) (1.3)
------------- ------- ------------- ------- -------------- --------
Effective income tax
and rate $ 1,070,258 32.9 % $ 1,011,235 32.3 % $ 820,759 31.0 %
============= ======= ============= ======= ============== ========
</TABLE>
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
consolidated 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 consolidated balance sheet. 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:
1999 1998
----------------- ------------------
Commitments to extend credit $ 17,758,713 $ 16,050,818
Standby letters of credit 1,639,516 725,090
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, 1999, the minimum rental commitments for all non-cancelable
leases are as follows:
2000 $ 199,153
2001 170,847
2002 98,951
2003 94,144
2004 92,853
2005 and thereafter 624,332
-----------
Total $ 1,280,280
===========
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
- -----------------------
The district Federal Reserve Bank requires the Bank to maintain certain
average reserve balances. As of December 31, 1999 and 1998, the Bank had
required reserves of $1,136,000 and $999,000, respectively, comprised of
vault cash and a depository amount held 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, 1999, the balance in the capital surplus account
totaling approximately $1,756,000 is unavailable for dividends.
NOTE 12 - REGULATORY CAPITAL REQUIREMENTS
Federal regulations require the Company and the Bank to maintain minimum
amounts of capital. Specifically, each is required to maintain certain
minimum dollar amounts and ratios of Total and Tier I capital to
risk-weighted assets and of Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital categories
ranging from "well capitalized" to "critically undercapitalized." Should any
institution fail to meet the requirements to be considered "adequately
capitalized," it would become subject to a series of increasingly restrictive
regulatory actions.
As of December 31, 1999 and 1998, the FDIC categorized the Company and the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be classified as a well capitalized financial institution, Total
risk-based, Tier 1 risk-based, and Tier 1 Leverage capital ratios must be at
least ten percent, six percent, and five percent, respectively.
The Company's actual capital ratios are presented in the following table,
which shows the Company met all regulatory capital requirements. The capital
position of the Bank does not differ significantly from the Company's.
<TABLE>
<CAPTION>
1999 1998
------------------------------- --------------------------------
Amount Ratio Amount Ratio
----------------- --------- ----------------- ---------
<S> <C> <C> <C> <C>
Total Capital
(to Risk-weighted Assets)
- ---------------------------
Actual $ 19,502,661 12.22 % $ 17,839,258 12.21 %
For Capital Adequacy Purposes $ 12,778,230 8.00 % $ 11,686,989 8.00 %
To Be Well Capitalized $ 15,972,788 10.00 % $ 14,608,736 10.00 %
Tier I Capital
(to Risk-weighted Assets)
- ---------------------------
Actual $ 17,669,046 11.07 % $ 16,157,523 11.06 %
For Capital Adequacy Purposes $ 6,389,115 4.00 % $ 5,843,494 4.00 %
To Be Well Capitalized $ 9,583,673 6.00 % $ 8,765,242 6.00 %
Tier I Capital
(to Average Assets)
- ---------------------
Actual $ 17,669,046 9.23 % $ 16,157,523 9.10 %
For Capital Adequacy Purposes $ 7,675,908 4.00 % $ 7,100,530 4.00 %
To Be Well Capitalized $ 9,594,886 5.00 % $ 8,875,663 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>
1999 1998
-------------------------------------- ----------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,630,670 $ 4,630,670 $ 6,109,976 $ 6,109,976
Mortgage loans held for sale 237,000 237,000 923,449 923,449
Investment securities:
Available for sale 31,246,921 31,246,921 36,360,618 36,360,618
Held to maturity 15,570,500 15,516,823 2,923,222 2,967,741
Net loans 135,692,822 136,353,778 123,278,962 128,216,340
Accrued interest receivable 1,386,655 1,386,655 910,750 910,750
---------------- ----------------- ----------------- -----------------
Total $ 188,764,568 $ 189,371,847 $ 170,506,977 $ 175,488,874
================ ================= ================= =================
Financial liabilities:
Deposits $ 167,293,781 $ 166,871,345 $ 154,892,529 $ 155,702,881
Short-term borrowings 8,184,933 8,184,933 3,612,876 3,612,876
Accrued interest payable 962,542 962,542 902,614 902,614
---------------- ----------------- ----------------- -----------------
Total $ 176,441,256 $ 176,018,820 $ 159,408,019 $ 160,218,371
================ ================= ================= =================
</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 CASH EQUIVALENTS, 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>
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 fair value for loans is 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:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
December 31,
1999 1998
------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 83,063 $ 16,606
Investment in bank subsidiary 17,315,695 16,119,115
Other assets 244,485 199,500
------------- --------------
TOTAL ASSETS $ 17,643,243 $ 16,335,221
============= ==============
LIABILITIES
Dividends payable $ 220,027 $ 182,630
Stockholders' equity 17,423,216 16,152,591
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,643,243 $ 16,335,221
============= ==============
Year Ended December 31,
1999 1998 1997
-------------- --------------- ---------------
Dividends from bank subsidiary $ 766,000 $ 574,000 $ 483,000
Other noninterest expense 39,931 51,369 45,571
-------------- --------------- ---------------
Net income before undistributed earnings
of bank subsidiary and income taxes 726,069 522,631 437,429
Undistributed earnings of bank subsidiary 1,437,478 1,576,497 1,371,977
Income tax benefit (13,600) (17,500) (15,806)
-------------- --------------- ---------------
NET INCOME $ 2,177,147 $ 2,116,628 $ 1,825,212
============== =============== ===============
</TABLE>
34
<PAGE>
NOTE 14 - PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,177,147 $ 2,116,628 $ 1,825,212
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed earnings of bank subsidiary (1,437,478) (1,576,497) (1,371,977)
Other, net (34,135) (100,090) 15,735
------------- -------------- -------------
Net cash provided by operating activities 705,534 440,041 468,970
------------- -------------- -------------
INVESTING ACTIVITIES
Purchases of investment securities available
for sale (10,850) - -
------------- -------------- -------------
Net cash used for investing activities (10,850) - -
------------- -------------- -------------
FINANCING ACTIVITIES
Dividends paid (730,728) (655,161) (520,073)
Purchase of treasury stock (183,500) (87,000) (148,400)
Proceeds from dividend reinvestment
and stock purchase plan 286,001 288,517 214,331
------------- -------------- -------------
Net cash used for financing activities (628,227) (453,644) (454,142)
------------- -------------- -------------
Increase (decrease) in cash and cash equivalents 66,457 (13,603) 14,828
CASH AT BEGINNING OF YEAR 16,606 30,209 15,381
------------- -------------- -------------
CASH AT END OF YEAR $ 83,063 $ 16,606 $ 30,209
============= ============== =============
</TABLE>
35
<PAGE>
The following firms are known to handle Dimeco, Inc. stock transactions:
Tucker Anthony, Inc.
2101 Oregon Pike
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
F.J. Morrissey & Co., Inc. *
Suite 1420
1700 Market Street
Philadelphia, PA 19103 3913
215 563 8500
Hill, Thompson, Magid & Co., Inc. *
8th Floor
15 Exchange Place
Jersey City, NJ 07302
201 434 8100
Monroe Securities, Inc. *
407 State Street
Rochester, NY 14614
716 546 1520
Transfer Agent:
The Dime Bank
820 Church Street
P.O. Box 509
Honesdale, PA 18431
570 253 1970
888 469 3463
* Market Maker
36
EXHIBIT 22
----------
LIST OF SUBSIDIARIES OF THE COMPANY
The Dime Bank, 820-822 Church Street, Honesdale, Pennsylvania
18431, a Pennsylvania state-chartered banking institution.
32
<PAGE>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
33
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1999
<CASH> 2,491,460
<INT-BEARING-DEPOSITS> 1,199,210
<FED-FUNDS-SOLD> 940,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,246,921
<INVESTMENTS-CARRYING> 15,570,500
<INVESTMENTS-MARKET> 15,516,823
<LOANS> 137,526,437
<ALLOWANCE> 1,833,615
<TOTAL-ASSETS> 194,666,639
<DEPOSITS> 167,293,781
<SHORT-TERM> 8,184,933
<LIABILITIES-OTHER> 1,764,709
<LONG-TERM> 0
0
0
<COMMON> 367,782
<OTHER-SE> 17,055,434
<TOTAL-LIABILITIES-AND-EQUITY> 194,666,639
<INTEREST-LOAN> 11,251,457
<INTEREST-INVEST> 2,258,979
<INTEREST-OTHER> 371,375
<INTEREST-TOTAL> 13,881,811
<INTEREST-DEPOSIT> 5,858,100
<INTEREST-EXPENSE> 6,053,731
<INTEREST-INCOME-NET> 7,828,080
<LOAN-LOSSES> 503,750
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,860,115
<INCOME-PRETAX> 3,247,405
<INCOME-PRE-EXTRAORDINARY> 3,247,405
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,177,147
<EPS-BASIC> 2.97
<EPS-DILUTED> 2.97
<YIELD-ACTUAL> 4.31
<LOANS-NON> 1,057,000
<LOANS-PAST> 832,255
<LOANS-TROUBLED> 614,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,681,735
<CHARGE-OFFS> 383,403
<RECOVERIES> 31,533
<ALLOWANCE-CLOSE> 1,833,615
<ALLOWANCE-DOMESTIC> 1,789,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 45,000
</TABLE>
EXHIBIT 99 A
PROXY STATEMENT, NOTICE OF ANNUAL MEETING AND
FORM OF PROXY FOR THE ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD APRIL 27, 2000
34
<PAGE>
DIMECO, INC.
PROXY
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 27, 2000
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 27, 2000, at 2:00 p.m. Eastern Standard Time, and at any adjournment or
postponement of the meeting as follows:
1. ELECTION OF CLASS B DIRECTORS
JOHN S. KIESENDAHL BARBARA J. GENZLINGER JOHN F. SPALL
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY
above (except as provided to vote for all
to the contrary below) nominees 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. APPROVAL AND ADOPTION OF THE DIMECO, INC. 2000 STOCK INCENTIVE PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
- ------------------------------------------------------------------------------
3. APPROVAL AND ADOPTION OF THE DIMECO, INC. 2000 INDEPENDENT DIRECTORS STOCK
OPTION PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
- ------------------------------------------------------------------------------
4. 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, 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
- ------------------------------------------------------------------------------
5. 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 BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR ALL NOMINEES LISTED ABOVE AND FOR PROPOSALS 2, 3 AND 4.
Dated , 2000
----------------------------
----------------------------------------
----------------------------------------
Signature(s)
Number of Shares Held of
Record on March 17, 2000:
---------------
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>
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 7, 2000, at the Operations Center of The Dime Bank, 120 Sunrise Avenue,
Honesdale, Pennsylvania 18431, for the following purposes:
1. To elect three Class B Directors to serve for a three-year term and
until their successors are properly elected and qualified.
2. To approve and adopt the Dimeco, Inc. 2000 Stock Incentive Plan.
3. To approve and adopt the Dimeco, Inc. 2000 Independent Directors
Stock Option Plan.
4. 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, 2000.
5. 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 Friday, March 17, 2000, may vote at the Annual Meeting.
A copy of the Company's Annual Report for the fiscal year ended
December 31, 1999, 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
Honesdale, Pennsylvania
April 1, 2000
<PAGE>
PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD APRIL 27, 2000
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 27, 2000, 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, 2000.
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 B Director named below;
FOR the approval and adoption of the Dimeco, Inc. 2000 Stock Incentive
Plan;
FOR the approval and adoption of the Dimeco, Inc. 2000 Independent
Directors Stock Option Plan; 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, 2000.
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 17, 2000, the Company had outstanding
735,728 shares of common stock, $.50 par value per share.
1
<PAGE>
Only holders of common stock on the Company's records as of the close of
business on March 17, 2000, 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 provides 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, approval and adoption of the Dimeco,
Inc. 2000 Stock Incentive Plan and the Dimeco, Inc. 2000 Independent Directors
Stock Option Plan each requires the affirmative vote of a majority of all
shares entitled to vote (meaning, a majority of the number of shares
outstanding on the record date). 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.
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, 2000. 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.
PRINCIPAL BENEFICIAL OWNERS OF THE COMPANY'S STOCK
PRINCIPAL OWNERS
As of March 17, 2000 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.
2
<PAGE>
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 17, 2000. All
shares reported have been rounded to the nearest whole share and are
individually owned by the reporting person unless otherwise indicated.
Name of Individual Amount and Nature of Percent of
or Identity of Group Beneficial Ownership(1)(2) Class(3)
- -------------------- -------------------------- ----------
Robert E. Genirs(4) 1,000 -----
Barbara Jeanne Genzlinger(5) 457 -----
John S. Kiesendahl(5)(8) 11,270 1.53%
Joseph J. Murray(4)(9) 1,471 -----
Thomas A. Peifer(4)(7) 7,259 -----
William E. Schwarz(6) 5,550 -----
Henry M. Skier(6) 35,267 4.79%
John F. Spall(5)(7) 11,459 1.56%
Gerald J. Weniger(6) 2,696 -----
All Officers and Directors as a
Group (11 persons in total) 78,268 10.64%
- ------------------------------
(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 17, 2000. 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 2002.
(5) A Class B Director whose term expires in 2000 and a nominee for Class B
Director whose term expires in 2003.
(6) A Class C Director whose term expires in 2001.
(7) All shares are held jointly with his spouse.
(8) Includes 1,638 shares held individually by Mr. Kiesendahl, 2,456 shares
held by his stepson who resides with Mr. Kiesendahl and 7,176 shares
held by Woodloch Pines, Inc., of which Mr. Kiesendahl is the President.
(9) Includes 1,459 shares held jointly by Mr. Murray with his spouse and 12
shares held by his son who resides with Mr. Murray.
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, 1999 through December 31, 1999 all filing requirements applicable
to its officers, directors and greater than ten-percent shareholders were
complied with.
3
<PAGE>
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 2000 Annual Meeting of Shareholders, successors to the
current Class B directors whose terms expire in 2000 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 B
directors to serve as Class B directors for the next three-year term of
office. The nominees for re-election this year are as follows:
John S. Kiesendahl, director of the Company since 1992
Barbara J. Genzlinger, director of the Company since 1998
John F. Spall, director of the Company since 1999
Each nominee has consented to serve a three year term of office and until
his/her 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 B 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 number of directors may not be less than
three.
INFORMATION AS TO NOMINEES AND DIRECTORS
The following table contains certain information with respect to the
current Class A directors, the current Class B directors who are also the
nominees for Class B director and Class C directors. The terms of office for
class A, B and C directors expire in 2002, 2000 and 2001, respectively.
Position Held with
Company and Bank
Age as of and Principal Occupation Director Since
Name March 17, 2000 for Past Five Years Company/Bank
- ---- -------------- ------------------------ --------------
CLASS A DIRECTORS WHOSE TERM EXPIRES IN 2002
- --------------------------------------------
Joseph J. Murray 60 President and Chief Executive 1992/1991
Officer of the Company and
the Bank
Thomas A. Peifer 57 Superintendent of the 1992/1987
Wallenpaupack Area
School District
Robert E. Genirs 64 Retired 1998; prior 1998/1998
Chief Financial Officer-
Lehman Brothers
4
<PAGE>
Position Held with
Company and Bank
Age as of and Principal Occupation Director Since
Name March 17, 2000 for Past Five Years Company/Bank
- ---- -------------- ------------------------ --------------
CURRENT CLASS B DIRECTORS WHOSE TERM EXPIRES IN 2000 AND NOMINEES FOR CLASS B
- -----------------------------------------------------------------------------
DIRECTORS WHOSE TERM WILL EXPIRE IN 2003
- ----------------------------------------
John S. Kiesendahl 53 President -Woodloch 1992/1985
Pines, Inc. (resort)
Barbara J. Genzlinger 48 Owner - Settlers Inn 1998/1998
(bed & breakfast)
John F. Spall 53 Attorney-at-Law 1999/ 1999
CLASS C DIRECTORS WHOSE TERM EXPIRES IN 2001
- --------------------------------------------
William E. Schwarz 57 Chairman of the Board of 1992/1971
the Company and the Bank
President - Edw. J. Schwarz, Inc.
(automobile dealership)
Henry M. Skier 59 President and Treasurer - 1992/1982
A. M. Skier Agency, Inc.
(independent insurance agency)
Gerald J. Weniger 69 Secretary of the Company
Assistant Secretary of the Bank 1992/1986
Retired - 1998; prior
President - Weniger Electronics,
Inc. (retail electronic equipment)
During 1999, 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 27 meetings.
Each of the Directors, with the exception of Mr. Genirs and Mr. Skier,
attended at least 75% of the total number of meetings of the Company. Each of
the Directors, with the exception of Mr. Genirs and Mr. Skier, 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. The Company does not have a nominating committee. A shareholder
who desires to propose an individual for consideration by the Board of
Directors as a nominee 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.
5
<PAGE>
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 1999, 1998 and 1997 to the
Company's and the Bank's President and Chief Executive Officer. No other
officer of the Company and the Bank had total annual salary and bonus that
exceeded $100,000 during 1999, 1998 or 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE(1)
Annual Compensation
-------------------------------------------------------
Name and Fiscal Other Annual All Other
Principal Position Year Salary($) Bonus($) Compensation($) Compensation($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <S>
Joseph J. Murray, President 1999 131,017 3,878 77,123(2) -
and Chief Executive Officer 1998 130,179 8,650 55,203(3) -
of the Company and Bank 1997 132,592 8,000 45,132(4) -
=================================================================================================
</TABLE>
(1) From January 1, 1997 through December 31, 1999, 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 set forth above.
(2) Includes $56,702 vested benefit in salary continuation plan, a $9,198
contribution to Mr. Murray's 401(k) profit sharing plan, $10,086 as the
incremental costs for an automobile made available to Mr. Murray and
$1,137 representing various medical, disability and life insurance
premiums.
(3) Includes $40,377 vested benefit in salary continuation plan, a $7,688
contribution to Mr. Murray's 401(k) profit sharing plan, $6,210 as the
incremental costs for an automobile made available to Mr. Murray 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, $7,351 as the
incremental costs for an automobile made available to Mr. Murray and
$2,052 representing various medical, disability and life insurance
premiums.
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 from
1997 until 1999, the Company's Assistant Secretary since 1997, as Chief
Financial Officer of the Company and the Bank since 1999 and Controller of the
Bank from 1988 until 1999. Gary C. Beilman has served as Vice President of
the Company from 1993 to 1999, as Vice President of the Bank from 1989 until
1999 and as Senior Vice President of the Company and the Bank since 1999. 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 sixty-five (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 sixty-five (65)
years of age, but dies before receiving all of the guaranteed monthly payments
or dies before age sixty-five (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 1999, the Bank accrued $49,768 as an expense for the Salary
Continuation Plan. Income realized from increases in the cash surrender
values of the life insurance policies in 1999 was $57,342.
6
<PAGE>
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
compensation program is administered by a Compensation Committee comprised of
all outside directors. The objectives of the Committee are to establish a
fair compensation policy to govern executive officers' base salaries and
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 compensation of the Company's and Bank's top executive officers is
reviewed and approved annually by the Board of Directors. The top executives
whose compensation is determined by the committee include the President and
Chief Executive Officer, the Senior Vice President and the Chief Financial
Officer and Treasurer and all other Vice Presidents. As a guideline for
review in determining base salaries, the committee uses information composed
of a Pennsylvania peer group, "L.R. Webber Associates, Inc. Survey Report"
which includes peer group banks with assets of $100,000,000 to $199,999,000.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Board of Directors has determined that the CEO's 1999 compensation of
$131,017 is appropriate in light of the following Company performance
accomplishments over the past five years:
sixty-eight percent (68%) increase in net income
seventy percent (70%) increase in net loans
sixty-three percent (63%) increase in deposits
sixty-nine percent (69%) increase in total assets
In addition, the Company, through its Bank subsidiary, has introduced a number
of new products over this time frame and expanded its role in the camping
industry, a profitable sector for the Company. Mr. Murray introduced the team
management style which has proven to be a very effective method of including
all levels of management in the operation 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 committee to any of the above specific individual criteria. Such increase
in the CEO's compensation is based on the committee's subjective determination
after review of all information that it deems relevant, including the above.
EXECUTIVE OFFICERS COMPENSATION
The Board of Directors establishes the compensation of the Company's and
the Bank's executive officers. Compensation increases were determined by the
committee 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. In addition, the expansion of the Company's
penetration in the camping industry and implementation of the team management
style was considered. Although performance and increases in compensation
were measured in light of these factors, there is no direct correlation
between any such criteria in the committee's analysis. The determination by
the committee is subjective after review of all information, including the
above, it deems relevant.
7
<PAGE>
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
John F. Spall
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. Spall,
received $11,000 for his or her services as a Director in 1999. Mr. Spall
received $10,083; he was appointed to serve on the Board of Directors in
February 1999 and his compensation was prorated accordingly. In 1999, the
Directors of the Bank received $87,083, in the aggregate, for attendance at
Board meetings. Directors received no remuneration for attendance at meetings
of the Board of Directors of the Company.
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"). Mr. Skier is deferring substantially all of the payment of his
directors' fees described above. The plan is equal to a sum of money measured
by the collateral assignment portion 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 Director'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 is fully funded by a split dollar life
insurance policy on the life of Mr. Skier. 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 1999. 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no material transactions since January 1, 1999, 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 any associate thereof, respectively), 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 the Bank and
their respective associates on comparable terms and with similar interest
rates 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, 1999, to the Company's and the Bank's officers and
directors as a group and members of their immediate families and companies
8
<PAGE>
in which they had an ownership interest of 10% or more was $3,486,369 or 20.0%
of the Bank's total equity capital accounts. This was the largest amount of
indebtedness outstanding at any time during fiscal year 1999 to the above
identified group. 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 sets forth selected information about the principal
officers of the Company, each
of whom is selected 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>
Number of
Bank Company Shares Age as of
Office/Position Held Employee Beneficially March 17,
Name With Company Since Since Owned 2000
- ---- --------------- ----- ------- -------------- ---------
<S> <S> <C> <C> <C> <C>
William E. Schwarz Chairman 1993 (1) 5,550 57
Joseph J. Murray(2) President and CEO 1993 1986 1,471 60
Gerald J. Weniger Secretary 1993 (1) 2,696 69
Maureen H. Beilman(2) CFO, Treasurer
and Asst. Secretary 1999 1988 900 44
Gary C. Beilman(2) Sr. Vice President 1999 1989 939 45
</TABLE>
- ----------------------------------------------
(1) Messrs. Schwarz and Weniger have never been full-time employees of the
Bank.
(2) Messrs. Murray and Beilman and Ms. Beilman are full-time employees of the
Bank. Mr. Beilman is Ms. Beilman's brother-in-law.
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>
Number of
Bank Company Shares Age as of
Office/Position Held Employee Beneficially March 17,
Name With Company Since Since Owned 2000
- ---- --------------- ----- ------- -------------- ---------
<S> <S> <C> <C> <C> <C>
William E. Schwarz Chairman 1986 (1) 5,550 57
Joseph J. Murray President and CEO 1993 1986 1,471 60
Gary C. Beilman(2) Sr. Vice President 1999 1989 939 45
Maureen H. Beilman(2) CFO and Treasurer 1999 1988 900 44
L. Jill George Vice President 1999 1983 313 38
</TABLE>
- ----------------------------------------------
(1) Messrs. Schwarz and Weniger have never been full-time employees of the
Bank.
(2) Mr. Beilman is Ms. Beilman's brother-in-law.
9
<PAGE>
APPROVAL AND ADOPTION OF THE
DIMECO, INC.
2000 STOCK INCENTIVE PLAN
On March 16, 2000, the Board of Directors adopted the Dimeco, Inc. 2000
Stock Incentive Plan, subject to approval by the shareholders at the annual
meeting. The Board of Directors reserved 60,000 shares of common stock for
issuance under the Stock Incentive Plan subject to future adjustment for stock
splits and stock dividends. The terms and effect of the Stock Incentive Plan
are summarized below. This summary highlights selected information from the
2000 Stock Incentive Plan and may not contain all of the information that is
important to an individual shareholder. To understand the plan fully, and for
more complete descriptions of the terms of the plan, you should carefully read
the 2000 Stock Incentive Plan that is attached to this proxy statement as
"Exhibit A". "Exhibit A" is deemed to be an integral part of this proxy
statement.
The purposes of the Stock Incentive Plan are as follows:
to advance the Company's and the Bank's development, growth and
financial condition by providing additional incentives to key
officers and other employees by encouraging them to acquire stock
ownership in the Company;
to secure, retain and motivate personnel who may be responsible for
the Company's and the Bank's operation and management; and
to encourage employees to contribute to enhanced corporate
performance.
TERM
The Stock Incentive Plan became effective on the date the Board of
Directors adopted it, subject to shareholder approval and will remain
effective until all awards under the plan either have lapsed, been exercised,
satisfied or canceled. The Board may amend, suspend, or terminate the plan at
any time and under no circumstances can awards be granted after the 10th
anniversary of the plan's effective date, or March 16, 2010.
ADMINISTRATION
The Board of Directors or a committee of at least two members of the
Board administers and interprets the plan. The committee also determines
which key officers and other Company and Bank employees qualify for awards
under the Stock Incentive Plan and their associated terms and conditions. A
person's eligibility to receive an award will not exclude him or her from
participation in any other Company or Bank incentive or benefit plan or
program.
AWARDS
The committee may issue awards under the Stock Incentive Plan in the form
of:
Qualified Options -- options to purchase stock intended to qualify
for tax treatment as incentive stock options under Internal Revenue
Code Sections 421 and 422; these options have specific tax benefits
to recipients; or
Non-Qualified Options -- options to purchase stock not intended to
qualify for tax treatment under Internal Revenue Code Sections 421
through 424; or
Stock Appreciation Rights -- rights that entitle its holder, upon
exercise of the right, to receive from the issuer, in cash or
common stock, an amount equal to the excess of the market value of
the underlying common stock over the exercise price of the right;
or
Restricted Stock -- stock that is restricted as to transferability
and subject to forfeiture for a set period of time unless certain
conditions are met.
The committee, in its sole discretion, determines the awards and their
terms and conditions. Generally, awards may be exercised in whole or in part.
The Company will use funds received from the exercise of awards for its
general corporate purposes. The committee may permit the acceleration of any
award's exercise terms when the situation warrants. However, the committee
may impose other requirements and conditions consistent with the objective of
the plan. In addition, the Stock Incentive Plan provides for acceleration of
the exercise terms of all outstanding awards if a change of control of the
corporation occurs.
10
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
An employee who receives qualified options will not recognize taxable
income on the grant or the exercise of the option. If the stock acquired by
the exercise of a qualified option is held until the later of (i) 18 months
from the award's grant date, and (ii) one year from the award's exercise date,
any gain (or loss) recognized on the stock's sale or exchange will be treated
as long-term capital gain (or loss), and the corporation will not receive any
income tax deduction. If stock acquired by the exercise of a qualified option
is sold or exchanged before the expiration of the required holding period, the
employee recognizes ordinary income in the year the disposition occurred in an
amount equal to the difference between the option price and the lesser of the
stock's fair market value on the exercise date, or the selling price. In the
event of a disqualifying disposition, the corporation is entitled to an income
tax deduction in the year the disposition occurred in an amount equal to the
amount of ordinary income the employee recognized.
An employee who receives a non-qualified option will not recognize
taxable income on the grant of the award. However, upon exercise, he or she
will recognize ordinary income in an amount equal to the excess of the fair
market value of the stock on the date that the option is exercised over the
purchase price paid for the stock. The corporation is entitled to an income
tax deduction in the year of exercise in an amount equal to the amount of
income the employee recognized.
An employee who receives a stock appreciation right will not recognize
taxable income on the grant of the award. However, upon the exercise of the
stock appreciation right, the employee will recognize ordinary income in an
amount equal to the cash or the fair market value of the stock received. The
corporation is entitled to an income tax deduction in the year the employee
exercises the stock appreciation in an amount equal to the amount of income
the employee recognized.
An employee who receives restricted stock will not recognize taxable
income on the grant of the award if the restricted stock is non-transferable
and subject to a substantial risk of forfeiture. The employee will recognize
taxable income the first time that the rights in the restricted stock are
transferable, or are not subject to a substantial risk of forfeiture,
whichever occurs earlier. The employee will recognize taxable income in an
amount equal to the excess of the fair market value of the restricted stock at
that time, over the amount paid for the restricted
stock. However, an employee may elect to include in his or her taxable income
for the tax year when the stock is deemed transferred to the employee, the
excess of the fair market value of the restricted stock at the time of the
award, over the amount paid for the restricted stock. The corporation is
entitled to an income tax deduction, in an amount equal to the taxable income
the employee recognized, for the corporation's taxable year in which the
employee recognizes taxable income.
This tax discussion is a summary and provided for the shareholders'
convenience. The federal income tax consequences to any plan recipient and to
the Company may vary from those described above, depending upon individual
actions and circumstances.
As of March 16, 2000, fifteen executive officers and employees were
eligible to participate in the Stock Incentive Plan. No awards have been made
under the plan as of the date of this proxy statement. Future grants by the
committee are not presently determinable, nor is it possible to predict the
benefits that may be granted or allocated to particular individuals or groups
for 2000 and beyond. Currently, the Board of Directors has no definite plans
to issue any benefits under the Stock Incentive Plan.
The Board of Directors recommends a vote FOR the following resolution
that will be presented at the annual meting:
"RESOLVED, that the Dimeco, Inc. 2000 Stock
Incentive Plan, the text of which is set forth
in its entirety in "Exhibit A" to the proxy
statement for the 2000 Annual Meeting of
Shareholders, is hereby approved, adopted,
ratified and confirmed by the shareholders
of the Company."
A majority of shareholders entitled to vote must vote in the affirmative
to approve and adopt the Stock Incentive Plan. The proxy holders will vote
FOR the above resolution unless shareholders specify otherwise on their proxy
cards.
The Board of Directors recommends a vote FOR the proposal to approve and
adopt the Dimeco, Inc. 2000 Stock Incentive Plan.
11
<PAGE>
APPROVAL AND ADOPTION OF
DIMECO, INC.'S
2000 INDEPENDENT DIRECTORS STOCK OPTION PLAN
On March 16, 2000, the Board of Directors adopted the Dimeco, Inc. 2000
Independent Directors Stock Option Plan, subject to shareholder approval at
the annual meeting. The Board of Directors reserved 25,000 shares of common
stock for issuance under the plan subject to future adjustments due to stock
splits, payments of stock dividends or other changes in the Company's capital
structure. The terms and effect of the plan are summarized below. This
summary highlights selected information from the 2000 Independent Directors
Stock Option Plan and may not contain all of the information that is important
to an individual shareholder. To understand the plan fully, and for more
complete descriptions of the terms of the plan, shareholders should carefully
read the 2000 Independent Directors Stock Option Plan, attached to this proxy
statement as "Exhibit B". "Exhibit B" is deemed to be an integral part of
this proxy statement.
The purposes of the 2000 Independent Directors Stock Option Plan are as
follows:
to secure, retain and motivate non-employee Company directors;
to advance the Company's and the Bank's development, growth and
financial condition by providing additional incentives to non-
employee directors by encouraging them to acquire stock ownership in
the Company; and
to align the interests of non-employee directors with the interests
of shareholders, including the interest in the appreciation of the
Company's common stock.
TERM
The 2000 Independent Directors Stock Option Plan became effective on the
date the Board of Directors adopted it, subject to shareholder approval and
will remain effective until all awards under the plan either have lapsed, been
exercised, satisfied or canceled. The Board may amend, suspend, or terminate
the plan at any time and under no circumstances can awards be granted after
the 10th anniversary of the plan's effective date, or March 16, 2010.
ADMINISTRATION
The Board of Directors or a committee of at least two members of the
Board administers and interprets the plan. The committee also determines the
number of stock options to be awarded under the plan and their associated
terms and conditions. A director's eligibility to receive an award will not
exclude him or her from participation in any other Company or Bank incentive
or benefit plan or program.
ELIGIBILITY AND GRANTS
Only directors who are not officers or employees of the Company or the
Bank are eligible to receive awards under the plan. Each non-employee
director will be granted stock options annually on the first business day of
January, with the exception of the first annual award of options. The first
annual stock option awards will be made at the organizational meeting of the
Board following the Company's 2000 Annual Meeting of Shareholders. The
purchase price of a share of common stock subject to a stock option will be
the fair market value, as defined in the plan, on the grant date. The
recipient may exercise his or her stock options for ten years after the grant
date.
If a director ceases to be a director for any reason, the remaining
portion of that director's unexercised stock options terminates one year after
the director's termination date. If a director dies prior to the expiration
of that director's stock options without having fully exercised his or her
stock options, then, to the extent that the stock options were exercisable at
the time of death, the deceased director's legal representative or beneficiary
may exercise the stock options within one year after the director's death.
12
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The options issued pursuant to the plan will not qualify as incentive
stock options within the meaning of Sections 421 and 422 of the Internal
Revenue Code. Under the provisions of the Code as in effect on the date of
this proxy statement, a director who receives a non-qualified option will not
recognize taxable income on the grant of the option. However, upon exercise,
he or she will recognize ordinary income in an amount equal to the excess of
the fair market value of the stock on the exercise date over the purchase
price paid for the stock. The Company is entitled to an income tax deduction
in the year the option was exercised in an amount equal to the amount of
income the director recognized.
The Board of Directors recommends a vote FOR the following resolution
which will be presented at the annual meeting:
"RESOLVED, that the Dimeco, Inc. 2000 Independent
Directors Stock Option Plan, the text of which is
set forth in its entirety in "Exhibit B" to the proxy
statement for the 2000 Annual Meeting of Shareholders,
is hereby approved, adopted, ratified and confirmed by
the shareholders of the Company."
A majority of shareholders entitled to vote must vote in the affirmative
to approve and adopt the Stock Incentive Plan. The proxy holders will vote
FOR the above resolution unless shareholders specify otherwise on their proxy
cards.
The Board of Directors recommends a vote FOR the proposal to approve and
adopt the Dimeco, Inc. 2000 Independent Directors Stock Option Plan.
RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
Unless instructed to the contrary, it is intended that votes will be cast
pursuant to the 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, 2000. 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 shares of
Common Stock represented at the Annual Meeting. Snodgrass served as the
Company's independent public accountants for the Company's 1999 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. These non-audit services were approved by the Company's
and the Bank's Board of Directors, after due consideration of the effect of
the performance thereof 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. Snodgrass was engaged by
the Bank's Board of Directors to perform internal audit, compliance and loan
review services in 1999 and has been hired to perform the same services in
2000. The issue of independence as it pertains to the external audit services
provided by Snodgrass has been reviewed by the Board of Directors. 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 2000 fiscal
year, another accounting firm will be chosen to provide independent public
accountant audit services for the 2000 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,
2000.
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.
13
<PAGE>
LEGAL PROCEEDINGS
In the opinion of the management of the Company, there are no proceedings
pending to which the Company and the Bank is a party or to which its 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. There are no 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.
ANNUAL REPORT
A copy of the Company's Annual Report for its fiscal year ended December
31, 1999, 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.
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 2001 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 Wednesday, December 1,
2000.
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, it is the
intention of the persons named in the accompanying Proxy to vote on such
matters in accordance with their judgment.
ADDITIONAL INFORMATION
Upon written request of any shareholder, a copy of the Company's report
on Form 10-KSB for its fiscal year ended December 31, 1999, including the
financial statements and the schedules thereto, required to be filed with the
SEC, may be obtained, without charge, from Maureen H. Beilman, Chief
Financial Officer, Dimeco, Inc., 120 Sunrise Avenue, P.O. Box 509, Honesdale,
Pennsylvania 18431, telephone: (570) 253-1970.
In addition, a copy of the Annual Disclosure Statement of The Dime Bank
may also be obtained, without charge, from Maureen H. Beilman, Chief Financial
Officer.
14
<PAGE>
EXHIBIT A
DIMECO, INC.
2000 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this Stock Incentive Plan (the "Plan") is to
------- advance the development, growth and financial condition of Dimeco,
Inc. (the "Corporation") and each subsidiary thereof, as defined in
Section 424 of the Internal Revenue Code of 1986, as amended (the "Code"),
by providing incentives through participation in the appreciation of the
common stock of the Corporation to secure, retain and motivate personnel
who may be responsible for the operation and for management of the affairs
of the Corporation and any subsidiary now or hereafter existing
("Subsidiary").
2. Term. The Plan shall become effective as of the date it is adopted by the
---- Corporation's Board of Directors (the "Board"), and shall be
presented for approval at the next meeting of the Corporation's
shareholders. Any and all options and rights awarded under the Plan (the
"Awards") before it is approved by the Corporation's shareholders shall be
conditioned upon, and may not be exercised before, receipt of shareholder
approval, and shall lapse upon failure to receive such approval. Unless
previously terminated by the Board, the Plan shall terminate on, and no
options shall be granted after the tenth anniversary of the effective date
of the Plan.
3. Stock. Shares of the Corporation's common stock (the "Stock"), that may
----- be issued under the Plan shall not exceed, in the aggregate, 60,000
shares, as may be adjusted pursuant to Section 19 hereof. Shares may be
either authorized and unissued shares, or authorized shares, issued by and
subsequently reacquired by the Corporation as treasury stock. Under no
circumstances shall any fractional shares be awarded under the Plan.
Except as may be otherwise provided in the Plan, any Stock subject to an
Award that, for any reason, lapses or terminates prior to exercise, shall
again become available for grant under the Plan. While the Plan is in
effect, the Corporation shall reserve and keep available the number of
shares of Stock needed to satisfy the requirements of the Plan. The
Corporation shall apply for any requisite governmental authority to issue
shares under the Plan. The Corporation's failure to obtain any such
governmental authority, deemed necessary by the Corporation's legal
counsel for the lawful issuance and sale of Stock under the Plan, shall
relieve the Corporation of any duty, or liability for the failure to issue
or sell the Stock.
4. Administration. The ability to control and manage the operation and
-------------- administration of the Plan shall be vested in the Board or
in a committee of two or more members of the Board, selected by the Board
(the "Committee"). The Committee shall have the authority and discretion
to interpret the Plan, to establish, amend and rescind any rules and
regulations relating to the Plan, to determine the terms and provisions of
any agreements made pursuant to the Plan, and to make any and all
determinations that may be necessary or advisable for the administration
of the Plan. Any interpretation of the Plan by the Committee and any
decision made by the Committee under the Plan is final and binding.
The Committee shall be responsible and shall have full, absolute and final
power of authority to determine what, to whom, when and under what facts
and circumstances Awards shall be made, and the form, number, terms,
conditions and duration thereof, including but not limited to when
exercisable, the number of shares of Stock subject thereto, and the stock
option exercise prices. The Committee shall make all other determinations
and decisions, take all actions and do all things necessary or appropriate
in and for the administration of the Plan. No member of the Committee or
of the Board shall be liable for any decision, determination or action
made or taken in good faith by such person under or with respect to the
Plan or its administration.
5. Awards. Awards may be made under the Plan in the form of: (a) "Qualified
------ Options" to purchase Stock, which are intended to qualify for
certain tax treatment as incentive stock options under Sections 421 and
422 of the Code, (b) "Non-Qualified Options" to purchase Stock, which are
not intended to qualify under Sections 421 through 424 of the Code, (c)
Stock Appreciation Rights ("SARs"), or (d) "Restricted Stock". More than
one Award may be granted to an eligible person, and the grant of any Award
shall not prohibit the grant of another Award, either to the same person
or otherwise, or impose any obligation to exercise on the participant.
All Awards and the terms and conditions thereof shall be set forth in
written agreements, in such form and content as approved by the Committee
from time to time, and shall be subject to the provisions of the Plan
whether or not contained in such agreements.
15
<PAGE>
Multiple Awards for a particular person may be set forth in a single
written agreement or in multiple agreements, as determined by the
Committee, but in all cases each agreement for one or more Awards
shall identify each of the Awards thereby represented as a Qualified
Option, Non-Qualified Option or Stock Appreciation Right, as the case
may be.
6. Eligibility. Persons eligible to receive Awards shall be those key
----------- officers and other employees of the Corporation and each
Subsidiary, as determined by the Committee. A person's eligibility to
receive an Award shall not confer upon him or her any right to receive an
Award. Except as otherwise provided, a person's eligibility to receive,
or actual receipt of an Award under the Plan shall not limit or affect his
or her benefits under or eligibility to participate in any other incentive
or benefit plan or program of the Corporation or of its affiliates.
7. Qualified Options. In addition to other applicable provisions of the
----------------- Plan, all Qualified Options and Awards thereof shall be
under and subject to the following terms and conditions:
(a) The maximum number of shares of Stock that may be issued by options
intended to be Qualified Options shall be 60,000 shares.
(b) No Qualified Option shall be awarded more than ten (10) years after
the date the Plan is adopted by the Board or the date the Plan is
approved by the Corporation's shareholders, whichever is earlier;
(c) The time period during which any Qualified Option is exercisable, as
determined by the Committee, shall not commence before the expiration
of six (6) months or continue beyond the expiration of ten (10) years
after the date the Qualified Option is awarded;
(d) If a participant, who was awarded a Qualified Option, ceases to be
employed by the Corporation or any Subsidiary for any reason other
than his or her death, the Committee may permit the participant
thereafter to exercise the option during its remaining term for a
period of not more than three (3) months after cessation of
employment to the extent that the Qualified Option was then and
remains exercisable, unless such employment cessation was due to the
participant's disability, as defined in Section 22(e)(3) of the Code,
in which case the three (3) month period shall be twelve (12) months;
if the participant dies while employed by the Corporation or a
Subsidiary, the Committee may permit the participant's qualified
personal representatives, or any persons who acquire the Qualified
Option pursuant to his or her Will or laws of descent and
distribution, to exercise the Qualified Option during its remaining
term for a period of not more than twelve (12) months after the
participant's death to the extent that the Qualified Option was then
and remains exercisable; the Committee may impose terms and
conditions upon and for the exercise of a Qualified Option after the
cessation of the participant's employment or his or her death;
(e) The purchase price of Stock subject to any Qualified Option shall not
be less than the Stock's fair market value at the time the Qualified
Option is awarded and shall not be less than the Stock's par value;
and
(f) Qualified Options may not be sold, transferred or assigned by the
participant except by will or the laws of descent and distribution.
8. Non-Qualified Options. In addition to other applicable provisions of the
--------------------- Plan, all Non-Qualified Options and Awards thereof
shall be under and subject to the following terms and conditions:
(a) The time period during which any Non-Qualified Option is exercisable
shall not commence before the expiration of six (6) months or
continue beyond the expiration of ten (10) years after the date the
Non-Qualified Option is awarded;
(b) If a participant, who was awarded a Non-Qualified Option, ceases to
be eligible under the Plan, before lapse or full exercise of the
option, the Committee may permit the participant to exercise the
option during its remaining term, to the extent that the option was
then and remains exercisable, or for such time period and under such
terms and conditions as may be prescribed by the Committee;
(c) The purchase price of a share of Stock subject to any Non-Qualified
Option shall not be less than the Stock's par value; and
16
<PAGE>
(d) Except as otherwise provided by the Committee, Non-Qualified Stock
Options granted under the Plan are not transferable except as
designated by the participant by Will and the laws of descent and
distribution.
9. Stock Appreciation Rights. In addition to other applicable provisions of
------------------------- the Plan, all SARs and Awards thereof shall be
under and subject to the following terms and conditions:
(a) SARs may be granted either alone, or in connection with another
previously or contemporaneously granted Award (other than another
SAR) so as to operate in tandem therewith by having the exercise of
one affect the right to exercise the other, as and when the Committee
may determine; however, no SAR shall be awarded in connection with a
Qualified Option more than ten (10) years after the date the Plan is
adopted by the Board or the date the Plan is approved by the
Corporation's stockholders, whichever date is earlier;
(b) Each SAR shall entitle the participant to receive upon exercise of
the SAR all or a portion of the excess of (i) the fair market value
at the time of such exercise of a specified number of shares of Stock
as determined by the Committee, over (ii) a specified price as
determined by the Committee of such number of shares of Stock that,
on a per share basis, is not less than the Stock's fair market value
at the time the SAR is awarded, or if the SAR is connected with
another Award, such lesser percentage of the Stock purchase price
thereunder as may be determined by the Committee;
(c) Upon exercise of any SAR, the participant shall be paid either in
cash or in Stock, or in any combination thereof, as the Committee
shall determine; if such payment is to be made in Stock, the number
of shares thereof to be issued pursuant to the exercise shall be
determined by dividing the amount payable upon exercise by the
Stock's fair market value at the time of exercise;
(d) The time period during which any SAR is exercisable, as determined by
the Committee, shall not commence before the expiration of six (6)
months; however, no SAR connected with another Award shall be
exercisable beyond the last date that such other connected Award may
be exercised;
(e) If a participant holding a SAR, before its lapse or full exercise,
ceases to be eligible under the Plan, the Committee may permit the
participant thereafter to exercise such SAR during its remaining
term, to the extent that the SAR was then and remains exercisable,
for such time period and under such terms and conditions as may be
prescribed by the Committee;
(f) No SAR shall be awarded in connection with any Qualified Option
unless the SAR (i) lapses no later than the expiration date of such
connected Option, (ii) is for not more than the difference between
the Stock purchase price under such connected Option and the Stock's
fair market value at the time the SAR is exercised, (iii) is
transferable only when and as such connected Option is transferable
and under the same conditions, (iv) may be exercised only when such
connected Option may be exercised, and (v) may be exercised only when
the Stock's fair market value exceeds the Stock purchase price under
such connected Option.
10. Restricted Stock. In addition to other applicable provisions of the
---------------- Plan, all Restricted Stock and Awards thereof shall be
under and subject to the following terms and conditions:
(a) Restricted Stock shall consist of shares of Stock that may be
acquired by and issued to a participant at such time, for such or no
purchase price, and under and subject to such transfer, forfeiture
and other restrictions, conditions or terms as shall be determined by
the Committee, including but not limited to prohibitions against
transfer, substantial risks of forfeiture within the meaning of
Section 83 of the Code, and attainment of performance or other goals,
objectives or standards, all for or applicable to such time periods
as determined by the Committee;
(b) Except as otherwise provided in the Plan or the Restricted Stock
Award, a participant holding shares of Restricted Stock shall have
all the rights as does a holder of Stock, including without
limitation the right to vote such shares and receive dividends with
respect thereto; however, during the time period of any restrictions,
conditions or terms applicable to such Restricted Stock, the shares
thereof and the right to vote the same and receive dividends thereon
shall not be sold, assigned, transferred, exchanged, pledged,
hypothecated, encumbered or otherwise disposed of except as permitted
by the Plan or the Restricted Stock Award;
17
<PAGE>
(c) Each certificate issued for shares of Restricted Stock shall be
deposited with the Secretary of the Corporation, or the office
thereof, and shall bear a legend in substantially the following form
and content:
THIS CERTIFICATE AND THE SHARES OF STOCK HEREBY REPRESENTED ARE
SUBJECT TO THE PROVISIONS OF THE CORPORATION'S 2000 STOCK
INCENTIVE PLAN AND A CERTAIN AGREEMENT ENTERED INTO BETWEEN THE
HOLDER AND THE CORPORATION PURSUANT TO THE PLAN. THE RELEASE OF
THIS CERTIFICATE AND THE SHARES OF STOCK HEREBY REPRESENTED FROM
SUCH PROVISIONS SHALL OCCUR ONLY AS PROVIDED BY THE PLAN AND
AGREEMENT, A COPY OF WHICH ARE ON FILE IN THE OFFICE OF THE
SECRETARY OF THE CORPORATION.
Upon the lapse or satisfaction of the restrictions, conditions and
terms applicable to the Restricted Stock, a certificate for the
shares of Stock free of restrictions and without the legend shall be
issued to the participant;
(d) If a participant's employment with the Corporation or a Subsidiary
ceases for any reason prior to the lapse of the restrictions,
conditions or terms applicable to his or her Restricted Stock, all
of the participant's Restricted Stock still subject to unexpired
restrictions, conditions or terms shall be forfeited absolutely by
the participant to the Corporation without payment or delivery of any
consideration or other thing of value by the Corporation or its
affiliates, and thereupon and thereafter neither the participant nor
his or her heirs, personal or legal representatives, successors,
assigns, beneficiaries, or any claimants under the participant's
Last Will or laws of descent and distribution, shall have any rights
or claims to or interests in the forfeited Restricted Stock or any
certificates representing shares thereof, or claims against the
Corporation or its affiliates with respect thereto.
11. Exercise. Except as otherwise provided in the Plan, Awards may be
-------- exercised in whole or in part by giving written notice thereof
to the Secretary of the Corporation, or his or her designee, identifying
the Award to be exercised, the number of shares of Stock with respect
thereto, and other information pertinent to exercise of the Award. The
purchase price of the shares of Stock with respect to which an Award is
exercised shall be paid with the written notice of exercise, either in
cash or in securities of the Corporation, including securities issuable
hereunder, at its then current fair market value, or in any combination
thereof, as the Committee shall determine. Funds received by the
Corporation from the exercise of any Award shall be used for its general
corporate purposes.
The number of shares of Stock subject to an Award shall be reduced
by the number of shares of Stock with respect to which the
participant has exercised rights under the Award. If a SAR is
awarded in connection with another Award, the number of shares of
Stock that may be acquired by the participant under the other
connected Award shall be reduced by the number of shares of Stock
with respect to which the participant has exercised his or her SAR,
and the number of shares of Stock subject to the participant's SAR
shall be reduced by the number of shares of Stock acquired by the
participant pursuant to the other connected Award.
The Committee may permit an acceleration of previously established
exercise terms of any Awards as, when, under such facts and
circumstances, and subject to such other or further requirements and
conditions as the Committee may deem necessary or appropriate.
In addition:
(a) if the Corporation or its shareholders execute an agreement to
dispose of all or substantially all of the Corporation's assets or
stock by means of sale, merger, consolidation, reorganization,
liquidation or otherwise, as a result of which the Corporation's
shareholders, immediately before the transaction, will not own at
least fifty percent (50%) of the total combined voting power of all
classes of voting stock of the surviving entity (be it the
Corporation or otherwise) immediately after the consummation of the
transaction, then any and all outstanding Awards shall immediately
become and remain exercisable or, if the transaction is not
consummated, until the agreement relating to the transaction expires
or is terminated, in which case, all Awards shall be treated as if
the agreement was never executed;
(b) if there is an actual, attempted or threatened change in the
ownership of at least twenty-five percent (25%) of all classes of
voting stock of the Corporation through the acquisition of, or an
offer to acquire such percentage of the Corporation's voting stock by
any person or entity, or persons or entities acting in concert or as
a group, and such acquisition or offer has not been duly approved by
the Board, then any and all outstanding awards shall immediately
become and remain exercisable; or
18
<PAGE>
(c) if during any period of two (2) consecutive years, the individuals
who at the beginning of such period constituted the Board cease, for
any reason, to constitute at least a majority of the Board (unless
the election of each director of the Board, who was not a director of
the Board at the beginning of such period, was approved by a vote of
at least two-thirds of the directors then still in office who were
directors at the beginning of such period) then any and all Awards
shall immediately become and remain exercisable.
12. Right of First Refusal. Each written agreement for an Award may contain a
---------------------- provision that requires as a condition to
exercising a Qualified Option or a Non Qualified Option that the
participant agree prior to selling, transferring or otherwise disposing of
any shares of Stock obtained through the exercise of the Award to first
offer such shares of Stock to
the Corporation for purchase. The terms and conditions of such right of
first refusal shall be determined by the Committee in its sole and
absolute discretion, provided that the purchase price shall be at least
equal to the Stock's fair market value as determined under paragraph 14
below, and shall be subject to all applicable federal and state laws,
rules and regulations.
13. Withholding. When a participant exercises a stock option or Stock
----------- Appreciation Right awarded under the Plan, the Corporation, in
its discretion and as required by law, may require the participant to
remit to the Corporation an amount sufficient to satisfy fully any
federal, state and other jurisdictions' income and other tax withholding
requirements prior to the delivery of any certificates for shares of
Stock. At the Committee's discretion, remittance may be made in cash,
shares already held by the participant or by the withholding by the
Corporation of sufficient shares issuable pursuant to the option to
satisfy the participant's withholding obligation.
14. Value. Where used in the Plan, the "fair market value" of Stock or any
----- options or rights with respect thereto, including Awards, shall mean
and be determined by (a) the average of the highest and lowest reported
sales prices thereof on the principal established domestic securities
exchange on which listed, and if not listed, then (b) the average of the
dealer "bid" and "ask" prices thereof on the over-the-counter market, as
reported by the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"), in either case as of the specified or
otherwise required or relevant time, or if not traded as of such
specified, required or relevant time, then based upon such reported sales
or "bid" and "ask" prices before and/or after such time in accordance with
pertinent provisions of and principles under the Code and the regulations
promulgated thereunder.
15. Amendment. To the extent permitted by applicable law, the Board may
--------- amend, suspend, or terminate the Plan at any time. The
amendment or termination of this Plan shall not, without the consent of
the participants, alter or impair any rights or obligations under any
Award previously granted hereunder.
From time to time, the Committee may rescind, revise and add to any
of the terms, conditions and provisions of the Plan or of an Award as
necessary or appropriate to have the Plan and any Awards thereunder
be or remain qualified and in compliance with all applicable laws,
rules and regulations, and the Committee may delete, omit or waive
any of the terms conditions or provisions that are no longer required
by reason of changes of applicable laws, rules or regulations,
including but not limited to, the provisions of Sections 421 and 422
of the Code, Section 16 of the Securities Exchange Act of 1934, as
amended, (the "1934 Act") and the rules and regulations promulgated
by the Securities and Exchange Commission. Without limiting the
generality of the preceding sentence, each Qualified Option shall be
subject to such other and additional terms, conditions and provisions
as the Committee may deem necessary or appropriate in order to
qualify as a Qualified Option under Section 422 of the Code,
including, but not limited to, the following provisions:
(a) At the time a Qualified Option is awarded, the aggregate fair
market value of the Stock subject thereto and of any Stock or
other capital stock with respect to which incentive stock
options qualifying under Sections 421 and 422 of the Code are
exercisable for the first time by the participant during any
calendar year under the Plan and any other plans of the
Corporation or its affiliates, shall not exceed $100,000.00; and
(b) No Qualified Option, shall be awarded to any person if, at the
time of the Award, the person owns shares of the stock of the
Corporation possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation
or its affiliates, unless, at the time the Qualified Option is
awarded, the exercise price of the Qualified Option is at least
one hundred and ten percent (110%) of the fair market value of
the Stock on the date of grant and the option, by its terms, is
not exercisable after the expiration of five (5) years from the
date it is awarded.
19
<PAGE>
16. Continued Employment. Nothing in the Plan or any Award shall confer upon
-------------------- any participant or other persons any right to
continue in the employ of, or maintain any particular relationship with,
the Corporation or its affiliates, or limit or affect any rights, powers
or privileges that the Corporation or its affiliates may have to
supervise, discipline and terminate the participant. However, the
Committee may require, as a condition of making and/or exercising any
Award, that a participant agree to, and in fact provide services, either
as an employee or in another capacity, to or for the Corporation or any
Subsidiary for such time period as the Committee may prescribe. The
immediately preceding sentence shall not apply to any Qualified Option, to
the extent such application would result in disqualification of the option
under Sections 421 and 422 of the Code.
17. General Restrictions. If the Committee or Board determines that it is
-------------------- necessary or desirable to: (a) list, register or
qualify the Stock subject to the Award, or the Award itself, upon any
securities exchange or under any federal or state securities or other
laws, (b) obtain the approval of any governmental authority, or (c) enter
into an agreement with the participant with respect to disposition of any
Stock (including, without limitation, an agreement that, at the time of
the participant's exercise of the Award, any Stock thereby acquired is and
will be acquired solely for investment purposes and without any intention
to sell or distribute the Stock), then such Award shall not be consummated
in whole or in part unless the listing, registration, qualification,
approval or agreement, as the case may be, shall have been appropriately
effected or obtained to the satisfaction of the Committee and legal
counsel for the Corporation.
18. Rights. Except as otherwise provided in the Plan, participants shall have
------ no rights as a holder of the Stock unless and until one or more
certificates for the shares of Stock are issued and delivered to the
participant.
19. Adjustments. In the event that the shares of common stock of the
----------- Corporation, as presently constituted, shall be changed into
or exchanged for a different number or kind of shares of common stock or
other securities of the Corporation or of other securities of the
Corporation or of another corporation (whether by reason of merger,
consolidation, recapitalization, reclassification, split-up, combination
of shares or otherwise) or if the number of such shares of common stock
shall be increased through the payment of a stock dividend, stock split or
similar transaction, then, there shall be substituted for or added to each
share of common stock of the Corporation that was theretofore
appropriated, or which thereafter may become subject to an option under
the Plan, the number and kind of shares of common stock or other
securities into which each outstanding share of the common stock of the
Corporation shall be so changed or for which each such share shall be
exchanged or to which each such shares shall be entitled, as the case may
be. Each outstanding Award shall be appropriately amended as to price
and other terms, as may be necessary to reflect the foregoing events.
If there shall be any other change in the number or kind of the
outstanding shares of the common stock of the Corporation, or of any
common stock or other securities in which such common stock shall
have been changed, or for which it shall have been exchanged, and if
a majority of the disinterested members of the Committee shall, in
its sole discretion, determine that such change equitably requires an
adjustment in any Award that was theretofore granted or that may
thereafter be granted under the Plan, then such adjustment shall be
made in accordance with such determination.
The grant of an Award under the Plan shall not affect in any way the
right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or
business structure, to merge, to consolidate, to dissolve, to
liquidate or to sell or transfer all or any part of its business or
assets.
Fractional shares resulting from any adjustment in Awards pursuant to
this Section 19 may be settled as a majority of the members of the
Board of Directors or of the Committee, as the case may be, shall
determine.
To the extent that the foregoing adjustments relate to common stock
or securities of the Corporation, such adjustments shall be made by a
majority of the members of the Board or of the Committee, as the case
may be, whose determination in that respect shall be final, binding
and conclusive. Notice of any adjustment shall be given by the
Corporation to each holder of an Award that is so adjusted.
20. Forfeiture. Notwithstanding anything to the contrary in this Plan, if the
---------- Committee finds, after full consideration of the facts
presented on behalf of the Corporation and the involved participant, that
he or she has been engaged in fraud, embezzlement, theft, commission of a
felony, or dishonesty in the course of his or her employment by the
Corporation or by any Subsidiary and such action has damaged the
Corporation or the Subsidiary, as the case may be, or that the participant
has disclosed trade secrets of the Corporation or its affiliates, the
participant shall forfeit all rights
under and to all unexercised Awards, and under and to all exercised
Awards under which the Corporation has not yet delivered payment or
certificates for shares of Stock (as the case may be), all of which
Awards and rights shall be automatically canceled. The decision of the
Committee as to the cause of the participant's discharge from employment
with the Corporation or any Subsidiary and the damage thereby suffered
shall be final for purposes of the Plan, but shall not affect the
finality of the participant's discharge by the Corporation or
Subsidiary for any other purposes. The preceding provisions of this
paragraph shall not apply to any Qualified Option to the extent such
application would result in disqualification of the option as an incentive
stock option under Sections 421 and 422 of the Code.
21. Indemnification. In and with respect to the administration of the Plan,
--------------- the Corporation shall indemnify each member of the
Committee and/or of the Board, each of whom shall be entitled, without
further action on his or her part, to indemnification from the Corporation
for all damages, losses, judgments, settlement amounts, punitive damages,
excise taxes, fines, penalties, costs and expenses (including without
limitation attorneys' fees and disbursements) incurred by the member in
connection with any threatened, pending or completed action, suit or other
proceedings of any nature, whether civil, administrative, investigative or
criminal, whether formal or informal, and whether by or in the right or
name of the Corporation, any class of its security holders, or otherwise,
in which the member may be or may have been involved, as a party or
otherwise, by reason of his or her being or having been a member of the
Committee and/or of the Board, whether or not he or she continues to be a
member of the Committee or of the Board. The provisions, protection and
benefits of this Section shall apply and exist to the fullest extent
permitted by applicable law to and for the benefit of all present and
future members of the Committee and/or of the Board and their respective
heirs, personal and legal representatives, successors and assigns, in
addition to all other rights that they may have as a matter of law, by
contract, or otherwise, except (a) to the extent there is entitlement to
insurance proceeds under insurance coverages provided by the Corporation
on account of the same matter or proceeding for which indemnification
hereunder is claimed, or (b) to the extent there is entitlement to
indemnification from the Corporation, other than under this Section, on
account of the same matter or proceeding for which indemnification
hereunder is claimed.
22. Taxes. The issuance of shares of Common Stock under the Plan shall be
----- subject to any applicable taxes or other laws or regulations of the
United States of America and any state or local authority having
jurisdiction there over.
23. Miscellaneous. (a) Any reference contained in this Plan to particular
------------- section or provision of law, rule or regulation, including
but not limited to the Code and the 1934 Act, shall include any
subsequently enacted or promulgated section or provision of law, rule or
regulation, as the case may be. With respect to persons subject to
Section 16 of the 1934 Act, transactions under this Plan are intended to
comply with all applicable conditions of Section 16 and the rules and
regulations promulgated thereunder, or any successor rules and regulations
that may be promulgated by the Securities and Exchange Commission, and to
the extent any provision of this Plan or action by the Committee fails to
so comply, it shall be deemed null and void, to the extent permitted by
applicable law and deemed advisable by the Committee.
(b) Where used in this Plan: the plural shall include the singular,
and unless the context otherwise clearly requires, the singular
shall include the plural; and the term "affiliates" shall mean
each and every Subsidiary and any parent of the Corporation.
(c) The captions of the numbered Sections contained in this Plan are
for convenience only, and shall not limit or affect the meaning,
interpretation or construction of any of the provisions of the
Plan.
21
<PAGE>
EXHIBIT B
DIMECO, INC.
2000 INDEPENDENT DIRECTORS STOCK OPTION PLAN
1. Purpose. The 2000 Independent Directors Stock Option Plan (the "Plan")
------- was established to advance the development, growth and financial
condition of Dimeco, Inc. (the "Corporation") and its subsidiaries, by
providing an incentive, through participation in the appreciation of the
capital stock of the Corporation, and thereby securing, retaining and
motivating members of the Corporation's Board of Directors who are not
officers or employees of the Corporation or any subsidiary thereof ( the
"non-employee directors").
2. Term. The Plan shall become effective as of the date it is adopted by the
---- Corporation's Board of Directors (the "Board"), and shall be
presented for approval at the next meeting of the Corporation's
shareholders. Any and all options awarded under the Plan before it is
approved by the Corporation's shareholders shall be conditioned upon, and
may not be exercised before, receipt of shareholder approval, and shall
lapse upon failure to receive such approval. Unless previously terminated
by the Board, the Plan shall terminate on, and no options shall be granted
after the tenth anniversary of the effective date of the Plan.
3. Stock. The shares of the Corporation's common stock (the "Common Stock")
----- issuable under the Plan shall not exceed 25,000 shares. The amount
of Common Stock issuable under the Plan may be adjusted pursuant to
Section 10 hereof. The Common Stock issuable hereunder may be either
authorized and unissued shares of Common Stock, or authorized shares of
Common Stock issued by the Corporation and subsequently reacquired by it
as treasury stock, or shares purchased in open market transactions. Under
no circumstances shall fractional shares be issued under the Plan. The
Corporation's failure to obtain any governmental authority deemed
necessary by the Corporation's legal counsel for the proper grant of the
stock options under this Plan and/or the issuance of Common Stock under
the Plan shall relieve the Corporation of any duty or liability for the
failure to grant stock options under the Plan and/or issue Common Stock
under the Plan as to which such authority has not been obtained.
4. Stock Options. Stock options shall be granted under the Plan to each non-
------------- employee director of the Corporation, annually, on the first
business day of January, with the exception of the first annual award of
options. The first annual award of options to be made hereunder shall be
made at the first organizational meeting of the Board immediately
following the 2000 annual meeting of shareholders. Each non-employee
director who is a member of the Corporation's Board of Directors on the
grant date shall be awarded stock options to purchase shares of Common
Stock (the "Stock Options") as may from time to time be determined in the
sole discretion of the Board of Directors or the Committee and shall be
subject to the following terms and conditions:
(a) The time period during which any Stock Option is exercisable shall be
ten (10) years after the date of grant.
(b) If a director, who has received an award pursuant to the Plan,
ceases to be a member of the Board of Directors for any reason and is
not designated as "Director Emeritus" by the remaining members of the
Board of Directors at the time of such cessation, then the director
may exercise the Stock Option not more than twelve (12) months after
such cessation. If a director, who has received an award pursuant to
the Plan dies, the director's qualified personal representative, or
any person who acquires a Stock Option pursuant to the director's
Will or the laws of descent and distribution, may exercise such Stock
Option during its remaining term for a period of not more than twelve
(12) months after the director's death to the extent that the Stock
Option would then be and remains exercisable.
(c) The purchase price of a share of Common Stock subject to a Stock
Option shall be the fair market value of the Common Stock on the date
of grant, as determined under Section 6 hereof.
(d) The Stock Option shall be made by a written agreement in the form,
attached hereto as Exhibit "A," with such changes therein as may be
determined by the Committee ( as such term is defined in Section 12
hereof) (the "Stock Option Agreement").
22
<PAGE>
5. Exercise. Except as otherwise provided in the Plan, a Stock Option may be
-------- exercised in whole or in part by giving written notice thereof to
the Secretary of the Corporation, or his designee, identifying the Stock
Option being exercised, the number of shares of Common Stock with respect
thereto, and other information pertinent to the exercise of the Stock
Option. The purchase price of the shares of Common Stock with respect to
which a Stock Option is exercised shall be paid with the written notice of
exercise, either in cash or in Common Stock, including Common Stock
issuable hereunder, at its then current fair market value, or any
combination of cash or Common Stock. Funds received by the Corporation
from the exercise of any Stock Option shall be used for its general
corporate purposes. The number of shares of Common Stock subject to a
Stock Option shall be reduced by the number of shares of Common Stock with
respect to which the director has exercised rights under the related Stock
Option Agreement.
If the Corporation or its shareholders execute an agreement to dispose of all
or substantially all of the Corporation's assets or capital stock by means of
sale, merger, consolidation, reorganization, liquidation or otherwise, as a
result of which the Corporation's shareholders as of immediately before such
transaction will not own at least fifty percent (50%) of the total combined
voting power of all classes of voting capital stock of the surviving entity
(be it the Corporation or otherwise) immediately after the consummation of
such transaction, thereupon any and all outstanding Stock Options shall
immediately become exercisable until the consummation of such transaction, or
if not consummated, until the agreement therefor expires or is terminated, in
which case thereafter all Stock Options shall be treated as if the agreement
never had been executed. If during any period of two (2) consecutive years,
the individuals, who at the beginning of such period, constituted the Board of
Directors, cease for any reason to constitute at least a majority of the Board
of Directors (unless the election of each director of the Board of Directors,
who was not a director of the Board of Directors at the beginning of such
period, was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of such period) thereupon
any and all outstanding Stock Options shall immediately become exercisable.
If there is an actual, attempted or threatened change in the ownership of at
least twenty-five percent (25%) of any class of voting stock of the
Corporation through the acquisition of, or an offer to acquire, such
percentage of the Corporation's voting stock by any person or entity, or
persons or entities acting in concert or as a group, and such acquisition or
offer has not been duly approved by the Board of Directors, thereupon any and
all outstanding Stock Options shall immediately become exercisable.
6. Value. Where used in the Plan, the "fair market value" of Stock or any
----- options or rights with respect thereto, including Awards, shall
mean and be determined by (a) the average of the highest and lowest
reported sales prices thereof on the principal established domestic
securities exchange on which listed, and if not listed, then (b) the
average of the dealer "bid" and "ask" prices thereof on the over-the-
counter market, as reported by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), in either case as of the
specified or otherwise required or relevant time, or if not traded as of
such specified, required or relevant time, then based upon such reported
sales or "bid" and "ask" prices before and/or after such time in
accordance with pertinent provisions of and principles under the Code and
the regulations promulgated thereunder.
7. Continued Relationship. Nothing in the Plan or in any Stock Option shall
---------------------- confer upon any director any right to continue his
relationship with the Corporation as a director, or limit or affect any
rights, powers or privileges that the Corporation or its affiliates may
have to supervise, discipline and terminate such director, and the
relationships thereof.
8. General Restrictions. The Board of Directors may require, in its
-------------------- discretion, (a) the listing, registration or
qualification of the Common Stock issuable pursuant to the Plan on any
securities exchange or under any federal or state securities or other
laws, (b) the approval of any governmental authority, or (c) an execution
of an agreement by any director with respect to disposition of any Common
Stock (including, without limitation, that at the time of the director's
exercise of the Stock Option, any Common Stock thereby acquired is being
and will be acquired solely for investment purposes and without any
intention to sell or distribute the Common Stock). If the Board of
Directors so requires, then Stock Options shall not be exercised, in
whole or in part, unless such listing, registration, qualification,
approval or agreement has been appropriately effected or obtained to the
satisfaction of the Board of Directors and legal counsel for the
Corporation. Notwithstanding anything to the contrary herein, a director
shall not sell, transfer or otherwise dispose of any shares of Common
Stock acquired pursuant to a Stock Option unless at least six (6) months
have elapsed from the date the Stock Option was granted and, in any event,
the transfer or disposition is made in accordance with Section 16 of the
Securities Exchange Act of 1934, as amended, and as the same may be
amended from time to time.
9. Rights. Except as otherwise provided in the Plan, a director shall have
------ no rights as a holder of the Common Stock subject to a Stock Option
unless and until one or more certificates for the shares of Common Stock
are issued and delivered to the director. No Stock Option, or the grant
thereof, shall limit or affect the right or power of the Corporation or
its affiliates to adjust, reclassify, recapitalize, reorganize or
otherwise change its or their capital or business structure, or to merge,
consolidate, dissolve, liquidate or sell any or all of its or their
business, property or assets.
23
<PAGE>
10. Adjustments. In the event that the shares of Common Stock of the
----------- Corporation, as presently constituted, shall be changed into
or exchanged for a different number or kind of shares of Common Stock or
other securities of the Corporation or of other securities of the
Corporation or of another corporation (whether by reason of merger,
consolidation, recapitalization, reclassification, split-up, combination
of shares or otherwise) or if the number of such shares of Common Stock
shall be increased through the payment of a stock dividend, stock split or
similar transaction, then, there shall be substituted for or added to each
share of Common Stock of the Corporation that was theretofore
appropriated, or that thereafter may become subject to a Stock Option
under the Plan, the number and kind of shares of Common Stock or other
securities into which each outstanding share of the Common Stock of the
Corporation shall be so changed or for which each such share shall be
exchanged or to which each share shall be entitled, as the case may be.
Each outstanding Stock Option shall be appropriately amended as to price
and other terms, as may be necessary to reflect the foregoing events.
If there shall be any other change in the number or kind of the outstanding
shares of Common Stock of the Corporation, or of any Common Stock or other
securities into which such Common Stock shall have been changed, or for which
it shall have been exchanged, and if a majority of the members of the Board of
Directors shall, in their sole discretion, determine that the change equitably
requires an adjustment in any Stock Option that was theretofore granted or
that may thereafter be granted under the Plan, then such adjustment shall be
made in accordance with the determination.
The grant of a Stock Option pursuant to the Plan shall not affect, in any way,
the right or power of the Corporation to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, to merge, to
consolidate, to dissolve, to liquidate or to sell or transfer all or any part
of its business or assets.
Fractional shares resulting from any adjustment in a Stock Option pursuant to
this Section 10 may be settled as a majority of the members of the Board of
Directors or of the Committee, as the case may be, shall determine.
To the extent that the foregoing adjustments relate to Common Stock or
securities of the Corporation, such adjustments shall be made by a majority of
the members of the Board of Directors or of the Committee, as the case may be,
whose determination in that respect shall be final, binding and conclusive.
Notice of any adjustment shall be given by the Corporation to each holder of a
Stock Option that is so adjusted.
11. Forfeiture. Notwithstanding anything to the contrary in this Plan, if an
---------- option holder is engaged in fraud, embezzlement, theft,
commission of a felony, or dishonesty in the course of his relationship
with the Corporation or its affiliates, or has disclosed trade secrets of
the Corporation or its affiliates, the option holder shall forfeit all
rights under and to all unexercised Stock Options, and all exercised
Stock Options for which the Corporation has not yet delivered certificates
for shares of Common Stock, and all rights to receive Stock Options shall
be automatically canceled.
12. Administration. The ability to control and manage the operation and
-------------- administration of the Plan shall be vested in the Board of
Directors or in a committee of two or more members of the Board of
Directors, selected by the Board of Directors (the "Committee"). The
Committee shall have the authority and discretion to interpret the Plan,
to establish, amend and rescind any rules and regulations relating to the
Plan, to determine the terms and provisions of any agreements made
pursuant to the Plan, and to make any and all determinations that may be
necessary or advisable for the administration of the Plan. Any
interpretation of the Plan by the Committee and any decision made by it
under the Plan is final and binding.
13. Miscellaneous. Any reference contained in this Plan to a particular
------------- section or provision of law, rule or regulation shall
include any subsequently enacted or promulgated section or provision of
law, rule or regulation, as the case may be. With respect to persons
subject to Section 16 of the Securities Exchange Act of 1934, as amended,
transactions under this Plan are intended to comply with all applicable
conditions of the Rule and the regulations promulgated thereunder or any
successor rule that may be promulgated by the Securities and Exchange
Commission. To the extent any provision of this Plan fails to so comply,
it shall be deemed null and void, to the extent permitted by applicable
law, subject to the provisions of Section 15, below. Where used in this
Plan, the plural shall include the singular, and, unless the context
otherwise clearly requires, the singular shall include the plural and the
masculine shall include the feminine. The captions of the numbered
Sections contained in this Plan are for convenience only, and shall not
limit or affect the meaning, interpretation or construction of any of the
provisions of the Plan.
14. Transferability. Except as otherwise provided by the Board of Directors,
--------------- Stock Options granted under the Plan are not transferable
except as designated by the participant by will and the laws of descent
and distribution.
15. Amendment. The Plan may be amended, suspended or terminated, without
--------- notice, by a majority vote of the Board of Directors of the
Corporation.
16. Taxes. The issuance of shares of Common Stock under the Plan shall be
----- subject to any applicable taxes or other laws or regulations of the
United States of America and any state or local authority having
jurisdiction there over.
24
