Dimeco (DIMC) 10-Q 2011 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

Form 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OF 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

or

o TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT

Or the transition period from ________ to ________

Commission File Number 33-58936

Dimeco, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2250152
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	identification No.)

820 Church Street

Honesdale, PA  18431

(Address of principal executive officers)

(570) 253-1970

(Issuer’s Telephone Number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Sections 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file  such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)

Yes o No x

As of May 1, 2011 the registrant had outstanding 1,598,218 shares of its common stock, par value $.50 share.

Dimeco, Inc.

INDEX

PART I – FINANCIAL INFORMATION		Page
Item 1.	Financial Statements
	Consolidated Balance Sheet (unaudited) as of March 31, 2011
	and December 31, 2010		3
	Consolidated Statement of Income (unaudited) for the three
	months ended March 31, 2011 and 2010		4
	Consolidated Statement of Comprehensive Income (unaudited) for the three
	months ended March 31, 2011 and 2010		5
	Consolidated Statement of Changes in Stockholders' Equity (unaudited)
	for the three months ended March 31, 2011 and 2010		6
	Consolidated Statement of Cash Flows (unaudited) for the
	three months ended March 31, 2011 and 2010		7
	Notes to Consolidated Financial Statements (unaudited)		8 - 20
Item 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations		21 - 24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		24 - 26
Item 4.	Controls and Procedures		26
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		27
Item 1a.	Risk Factors		27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 3.	Defaults Upon Senior Securities		27
Item 4.	Reserved		27
Item 5.	Other Information		27
Item 6.	Exhibits		27
SIGNATURES			28

2

Dimeco, Inc.

CONSOLIDATED BALANCE SHEET (unaudited)

(in thousands)	March 31, 2011			December 31, 2010
Assets
Cash and due from banks	$	4,680		$	5,831
Interest-bearing deposits in other banks		2,660			4,821
Total cash and cash equivalents		7,340			10,652
Mortgage loans held for sale		92			-
Investment securities available for sale		82,977			79,655
Loans (net of unearned income of $16 and $25)		422,468			425,069
Less allowance for loan losses		7,115			7,741
Net loans		415,353			417,328
Premises and equipment		10,403			10,572
Accrued interest receivable		1,940			1,888
Bank-owned life insurance		9,778			9,545
Other real estate owned		3,995			960
Prepaid FDIC insurance		1,438			1,615
Other assets		10,015			9,999
TOTAL ASSETS	$	543,331		$	542,214
Liabilities
Deposits :
Noninterest-bearing	$	50,126		$	43,067
Interest-bearing		400,441			411,667
Total deposits		450,567			454,734
Short-term borrowings		17,908			13,006
Other borrowed funds		19,077			19,552
Accrued interest payable		698			679
Other liabilities		3,589			3,564
TOTAL LIABILITIES		491,839			491,535
Stockholders' Equity
Common stock, $.50 par value; 5,000,000 shares authorized;
1,652,318 shares issued		826			826
Capital surplus		6,273			6,273
Retained earnings		45,872			45,177
Accumulated other comprehensive income		588			470
Treasury stock, at cost (54,100 shares)		(2,067	)		(2,067	)
TOTAL STOCKHOLDERS' EQUITY		51,492			50,679
TOTAL LIABILITES AND STOCKHOLDERS' EQUITY	$	543,331		$	542,214

See accompanying notes to the unaudited consolidated financial statements.

3

Dimeco, Inc.

CONSOLIDATED STATEMENT OF INCOME (unaudited)

(in thousands, except per share)	For the three months ended March 31,
	2011			2010
Interest Income
Interest and fees on loans	$	5,445		$	5,481
Investment securities:
Taxable		290			296
Exempt from federal income tax		290			256
Other		15			12
Total interest income		6,040			6,045
Interest Expense
Deposits		1,139			1,796
Short-term borrowings		23			25
Other borrowed funds		219			257
Total interest expense		1,381			2,078
Net Interest Income		4,659			3,967
Provision for loan losses		425			250
Net Interest Income After Provision for
Loan Losses		4,234			3,717
Noninterest Income
Service charges on deposit accounts		271			343
Mortgage loans held for sale gains, net		82			50
Investment securities losses		(2	)		-
Brokerage commissions		181			138
Earnings on bank-owned life insurance		108			106
Other income		303			324
Total noninterest income		943			961
Noninterest Expense
Salaries and employee benefits		1,777			1,674
Occupancy expense, net		306			305
Furniture and equipment expense		105			118
Professional fees		310			152
Data processing expense		179			187
FDIC insurance		189			177
Other expense		731			587
Total noninterest expense		3,597			3,200
Income before income taxes		1,580			1,478
Income taxes		310			376
NET INCOME	$	1,270		$	1,102
Earnings per Share - basic	$	0.79		$	0.70
Earnings per Share - diluted	$	0.79		$	0.70
Average shares outstanding - basic		1,598,218			1,575,103
Average shares outstanding - diluted		1,600,252			1,575,150

See accompanying notes to the unaudited consolidated financial statements.

4

Dimeco, Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

	For the three months ended March 31,
	2011		2010
Net income	$	1,270	$	1,102
Other comprehensive income:
Unrealized gain on available for sale securities		181		255
Reclassification adjustment for loss included in net income		2		-
Other comprehensive income before tax		179		255
Income tax expense related to other comprehensive income		61		87
Other comprehensive income, net of tax		118		168
Comprehensive income	$	1,388	$	1,270

See accompanying notes to the unaudited consolidated financial statements.

5

Dimeco, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(in thousands)	Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income		Treasury Stock			Total Stockholders' Equity
Balance, December 31, 2010	$	826	$	6,273	$	45,177		$	470	$	(2,067	)	$	50,679
Net income						1,270								1,270
Unrealized gain on available for sale securities, net of tax expense of $61									118					118
Cash dividends ($.36 per share)						(575	)							(575	)
Balance, March 31, 2011	$	826	$	6,273	$	45,872		$	588	$	(2,067	)	$	51,492

See accompanying notes to the unaudited consolidated financial statements.

6

Dimeco, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

	For the three months ended March 31,
(in thousands)	2011			2010
Operating Activities
Net income	$	1,270		$	1,102
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses		425			250
Depreciation and amortization		261			250
Amortization of premium and discount on investment securities, net		149			-
Amortization of net deferred loan origination fees		(45	)		(27	)
Investment securities losses		2			-
Origination of loans held for sale		(3,788	)		(1,722	)
Proceeds from sale of loans		3,778			1,772
Mortgage loans held for sale gains, net		(82	)		(50	)
Decrease (increase) in accrued interest receivable		(52	)		36
Increase (decrease) in accrued interest payable		19			(49	)
Deferred federal income taxes		164			(156	)
Earnings on bank owned life insurance		(108	)		(106	)
Decrease in prepaid FDIC insurance		177			165
Other, net		(783	)		(179	)
Net cash provided by operating activities		1,387			1,286
Investing Activities
Investment securities available for sale:
Proceeds from sales or mergers		22			-
Proceeds from maturities or paydowns		35,327			52,685
Purchases		(38,142	)		(71,344	)
Redemption of Federal Home Loan Bank stock		16			-
Net (decrease) increase in loans		(1,442	)		1,649
Purchase of fixed annuity		-			(1,500	)
Purchase of bank-owned life insurance		(141	)		-
Purchase of premises and equipment		(24	)		(15	)
Net cash used for investing activities		(4,384	)		(18,525	)
Financing Activities
Net (decrease) increase in deposits		(4,167	)		14,246
Increase in short-term borrowings		4,902			6,610
Repayment of other borrowed funds		(475	)		(2,455	)
Proceeds from exercise of stock options		-			600
Cash dividends paid		(575	)		(575	)
Net cash provided by (used for) financing activities		(315	)		18,426
Increase (decrease) in cash and cash equivalents		(3,312	)		1,187
Cash and cash equivalents at beginning of period		10,652			21,287
Cash and cash equivalents at end of period	$	7,340		$	22,474
Amount paid for interest	$	1,362		$	2,128
Amount paid for income taxes	$	-		$	-
Noncash investing activities:
Transfer of loans to other real estate	$	3,035		$	684
Changes in the unrealized holding gains and losses on available-for- sale securities	$	181		$	255
Investment purchases not settled	$	500		$	3,826

See accompanying notes to the unaudited consolidated financial statements.

7

Dimeco, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of Dimeco, Inc. (the "Company") and its wholly-owned subsidiary, The Dime Bank (the "Bank").  The financial statements of The Dime Bank include the consolidated financial statements of the Bank’s wholly-owned subsidiary, TDB Insurance Services, LLC.  All significant intercompany balances and transactions have been eliminated in the consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information that would be included in audited financial statements.  The information furnished reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results of operations. All such adjustments are of a normal recurring nature.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

Certain comparative amounts for prior periods have been reclassified to conform to current year presentation. The reclassifications did not affect net income or equity capital.

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.  The adoption of this guidance did not have a significant impact on the Company’s financial statements.

In July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption.  See Note 5 for the necessary disclosure.

In September, 2010, the FASB issued ASU 2010-25, Plan Accounting – Defined Contribution Pension Plans.  The amendments in this ASU require that participant loans be classified as notes receivable from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest.  The amendments in this update are effective for fiscal years ending after December 15, 2010 and did not have a significant impact on the Company’s financial statements.

In October, 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.  This ASU addresses the diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral.  The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2011 and are not expected to have a significant impact on the Company’s financial statements.

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations.  The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The amendments also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.   The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted.  This ASU did not have a significant impact on the Company’s financial statements.

In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310):  Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.  The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20, enabling public-entity creditors to provide those disclosures after the FASB clarifies the guidance for determining what constitutes a troubled debt restructuring.  The deferral in this Update will result in more consistent disclosures about troubled debt restructurings.  This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20.  In the proposed Update for determining what constitutes a troubled debt restructuring, the FASB proposed that the clarifications would be effective for interim and annual periods ending after June 15, 2011.  For the new disclosures about troubled debt restructurings in Update 2010-20, those clarifications would be applied retrospectively to the beginning of the fiscal year in which the proposal is adopted.  The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

8

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310):  A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  The amendments in this Update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring.  The amendments in this Update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption.  As a result of applying these amendments, an entity may identify receivables that are newly considered impaired.  For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011.  This ASU is not expected to have a significant impact on the Company’s financial statements.

Stock Options

The Company maintains a stock option plan for key officers and non-employee directors.  There were no options granted in 2011 or 2010.

On April 22, 2010 the Company adopted the 2010 Equity Incentive Plan in order to issue options in future periods.  No options have been granted under that plan at this time.

As of March 31, 2011 and 2010, there was no unrecognized compensation cost to unvested share-based compensation

awards granted.

NOTE 2 – EARNINGS PER SHARE

There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income (unaudited) will be used as the numerator.  The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation:

	Three months ended March 31,
	2011			2010
Weighted average common stock outstanding		1,652,318			1,629,203
Average treasury stock		(54,100	)		(54,100	)
Weighted average common stock and common stock equivalents used to calculate basic earnings per share		1,598,218			1,575,103
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		2,034			47
Weighted average common stock and common stock equivalents used to calculate diluted earnings per share		1,600,252			1,575,150

9

NOTE 3 – INVESTMENTS

The amortized cost and estimated market value of investment securities are summarized as follows (in thousands):

	March 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
AVAILABLE FOR SALE
U.S. government agencies	$	12,649	$	88	$	(19	)	$	12,718
Mortgage-backed securities of government-sponsored entities		24,816		247		(63	)		25,000
Obligations of states and political subdivisions:
Taxable		1,195		39		(1	)		1,233
Tax-exempt		31,125		410		(278	)		31,257
Corporate securities		3,255		423		-			3,678
Commercial paper		8,497		-		-			8,497
Total debt securities		81,537		1,207		(361	)		82,383
Equity securities of financial institutions		549		113		(68	)		594
Total	$	82,086	$	1,320	$	(429	)	$	82,977

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
AVAILABLE FOR SALE
U.S. government agencies	$	12,696	$	107	$	(29	)	$	12,774
Mortgage-backed securities of government-sponsored entities		24,104		218		(48	)		24,274
Obligations of states and political subdivisions:
Taxable		1,197		13		(11	)		1,199
Tax-exempt		28,026		361		(408	)		27,979
Corporate securities		4,265		466		(1	)		4,730
Commercial paper		8,099		-		-			8,099
Total debt securities		78,387		1,165		(497	)		79,055
Equity securities of financial institutions		557		114		(71	)		600
Total	$	78,944	$	1,279	$	(568	)	$	79,655

10

The following table shows the Company’s fair value and gross unrealized losses, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position (in thousands):

	March 31, 2011
	Less than Twelve Months				Twelve Months or Greater				Total
	Estimated Market Value		Gross Unrealized Losses		Estimated Market Value		Gross Unrealized Losses		Estimated Market Value		Gross Unrealized Losses
U.S. Government agencies	$	1,959	$	18	$	470	$	1	$	2,429	$	19
Mortgage-backed securities of government-sponsored entities		6,766		63		-		-		6,766		63
Obligations of states and political subdivisions		8,062		255		223		24		8,285		279
Corporate securities		-		-		-		-		-		-
Total debt securities		16,787		336		693		25		17,480		361
Equity securities of financial
institutions		13		1		133		67		146		68
Total	$	16,800	$	337	$	826	$	92	$	17,626	$	429

	December 31, 2010
	Less than Twelve Months				Twelve Months or Greater				Total
	Estimated Market Value		Gross Unrealized Losses		Estimated Market Value		Gross Unrealized Losses		Estimated Market Value		Gross Unrealized Losses
U.S. Government agencies	$	2,892	$	28	$	474	$	1	$	3,366	$	29
Mortgage-backed securities of government-sponsored entities		7,446		48		-		-		7,446		48
Obligations of states and political subdivisions		10,864		395		223		24		11,087		419
Corporate securities		999		1		-		-		999		1
Total debt securities		22,201		472		697		25		22,898		497
Equity securities of financial institutions		22		1		138		70		160		71
Total	$	22,223	$	473	$	835	$	95	$	23,058	$	568

The Company reviews its position quarterly and has asserted that at March 31, 2011, the declines outlined in the above tables represent temporary declines and the Company does not intend to sell and does not believe they will be required to sell these securities before recovery of their cost basis, which may be at maturity. There were 46 and 55 positions that were temporarily impaired at March 31, 2011 and December 31, 2010, respectively. The Company has concluded that the unrealized losses disclosed above are not other than temporary, but are the result of interest rate changes, sector credit ratings changes or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period in consideration for debt securities.  Determination of other than temporary losses in the financial services equity portfolio includes consideration of the length of time in a loss position, analysis of the capital structure of the entity and review of publicly available regulatory actions and published financial reports.

The Company received proceeds of $17 and recorded a gain of $1 in 2011 from the sales of securities.  In addition, the Company received proceeds of $5 and recorded a loss of $3 on a merger transaction.  The Company had no security sales or merger activity in the first quarter of 2010.

11

The amortized cost and estimated market value of debt securities at March 31, 2011, 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 prepay penalties (in thousands):

	Available for Sale
	Amortized		Fair
	Cost		Value
Due in one year or less	$	17,286	$	17,380
Due after one year through five years		25,407		25,768
Due after five years through ten years		17,452		17,603
Due after ten years		21,392		21,632
Total debt securities	$	81,537	$	82,383

NOTE 4 – LOANS

Major classifications of loans at March 31, 2011 and December 31, 2010 are as follows (in thousands):

	March 31, 2011		December 31, 2010
Loans secured by real estate:
Construction and development	$	12,885	$	12,472
Secured by farmland		3,453		2,590
Secured by 1-4 family residential properties:
Revolving, open-end loans		9,670		9,935
All other 1-4 family		81,449		81,665
Secured by non-farm, non-residential properties		252,434		255,851
Commercial and industrial loans		45,417		44,850
Loans to individuals for household, family and other personal expenditures:
Ready credit loans		580		582
Other consumer loans		9,944		10,190
Other loans:
Agricultural loans		1,429		1,771
All other loans		5,207		5,163
Total loans	$	422,468	$	425,069

12

NOTE 5 – ALLOWANCE FOR LOAN LOSSES

The total allowance reflects management's estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $7,115 adequate to cover loan losses inherent in the loan portfolio.  The following table presents by portfolio segment, the allowance for loan losses as of March 31, 2011 and December 31, 2010 (in thousands):

	March 31, 2011
Allowance for loan losses:	Commercial			Construction & Development		Commercial Real Estate			Consumer			Residential Real Estate		Total
Beginning balance	$	634		$	223	$	5,719		$	194		$	971	$	7,741
Charge-offs		(250	)		-		(746	)		(70	)		-		(1,066	)
Recoveries		-			-		-			14			1		15
Provision		230			-		(73	)		63			205		425
Ending Balance	$	614		$	223	$	4,900		$	201		$	1,177	$	7,115
Ending allowance balance:
Loans individually evaluated for impairment	$	-		$	-	$	1,122		$	-		$	-	$	1,122
Loans collectively evaluated for impairment		614			223		3,778			201			1,177		5,993
Total Balance	$	614		$	223	$	4,900		$	201		$	1,177	$	7,115
Ending loan balance:
Loans individually evaluated for impairment	$	-		$	-	$	12,375		$	-		$	-	$	12,375
Loans collectively evaluated for impairment		52,053			12,885		243,512			10,524			91,119		410,093
Total	$	52,053		$	12,885	$	255,887		$	10,524		$	91,119	$	422,468

	December 31, 2010
Allowance for loan losses:	Commercial			Construction & Development		Commercial Real Estate		Consumer			Residential Real Estate			Total
Allowance for loan losses:
Beginning balance	$	626		$	-	$	4,548	$	171		$	908		$	6,253
Charge-offs		(35	)		-		-		(144	)		(138	)		(317	)
Recoveries		10			-		-		45			-			55
Provision		33			223		1,171		122			201			1,750
Ending Balance	$	634		$	223	$	5,719	$	194		$	971		$	7,741
Ending allowance balance:
Loans individually evaluated for impairment	$	-		$	-	$	1,774	$	-		$	-		$	1,774
Loans collectively evaluated for impairment		634			223		3,945		194			971		$	5,967
Total Balance	$	634		$	223	$	5,719	$	194		$	971		$	7,741
Ending loan balance:
Loans individually evaluated for impairment	$	-		$	-	$	15,529	$	-		$	-		$	15,529
Loans collectively evaluated for impairment		51,784			12,472		242,912		10,772			91,600			409,540
Total	$	51,784		$	12,472	$	258,441	$	10,772		$	91,600		$	425,069

13

Credit Quality Information

The following tables represent credit exposures by assigned grades as of March 31, 2011 and December 31, 2010. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company's internal credit risk grading system is based on experiences with similarly graded loans.

The Company's internally assigned grades are as follows:

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset.  In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss – loans classified as a loss are considered uncollectable, or of such value that continuance as an asset is not warranted.

Loans are graded by either independent loan review or internal review.  Internally reviewed loans were assigned a risk weighting by the loan officer and approved by the loan committee, but have not undergone a formal loan review by an independent party.  These loans are typically smaller dollar balances that have not experienced delinquency issues. Balances include gross loan value before unearned income and excluding overdrafts as of March 31, 2011 and December 31, 2010 (in thousands):

	March 31, 2011
	Commercial		Construction & Development		Commercial Real Estate		Consumer		Residential Real Estate		Total
Loans Independently Reviewed:
Pass	$	18,415	$	2,324	$	123,546	$	72	$	6,715	$	151,072
Special Mention		645		138		9,667		34		545		11,029
Substandard		2,755		3,271		35,252		25		2,072		43,375
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Ending Balance	$	21,815	$	5,733	$	168,465	$	131	$	9,332	$	205,476
Loans Internally Reviewed:
Pass	$	30,227	$	7,164	$	88,327	$	10,368	$	81,838	$	217,924
Special Mention		-		-		-		37		173		210
Substandard		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Ending Balance	$	30,227	$	7,164	$	88,327	$	10,405	$	82,011	$	218,134

	December 31, 2010
	Commercial		Construction & Development		Commercial Real Estate		Consumer		Residential Real Estate		Total
Loans Independently Reviewed:
Pass	$	17,454	$	3,034	$	128,114	$	54	$	6,457	$	155,113
Special Mention		307		-		10,806		31		333		11,477
Substandard		2,370		1,774		35,715		8		2,057		41,924
Doubtful		-		-		-		1		-		1
Loss		-		-		-		-		-		-
Ending Balance	$	20,131	$	4,808	$	174,635	$	94	$	8,847	$	208,515
Loans Internally Reviewed:
Pass	$	31,496	$	7,693	$	84,709	$	10,634	$	82,798	$	217,330
Special Mention		-		-		-		45		176		221
Substandard		-		-		-		13		-		13
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Ending Balance	$	31,496	$	7,693	$	84,709	$	10,692	$	82,974	$	217,564

14

Age Analysis of Past Due Loans by Class

The following is a table which includes an aging analysis of the recorded investment of past due loans as of March 31, 2011 and December 31, 2010 including loans which are in nonaccrual status (in thousands):

	March 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment >90 Days and Accruing
Commercial	$	531	$	44	$	101	$	676	$	51,377	$	52,053	$	99
Construction &development		1,177		-		-		1,177		11,708		12,885		-
Commercial real estate		7,358		322		1,734		9,414		246,473		255,887		375
Consumer		136		12		34		182		10,342		10,524		14
Residential real estate		511		566		366		1,443		89,676		91,119		321
Total	$	9,713	$	944	$	2,235	$	12,892	$	409,576	$	422,468	$	809

	December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment >90 Days and Accruing
Commercial	$	487	$	139	$	580	$	1,206	$	50,578	$	51,784	$	580
Construction & development		-		-		-		-		12,472		12,472		-
Commercial real estate		55		2,712		16,044		18,811		239,630		258,441		952
Consumer		128		30		59		217		10,555		10,772		44
Residential real estate		221		241		547		1,009		90,591		91,600		512
Total	$	891	$	3,122	$	17,230	$	21,243	$	403,826	$	425,069	$	2,088

Impaired Loans

Management considers commercial loans and commercial real estate loans which are 90 days or more past due as impaired, and if warranted, includes the entire customer relationship in that status.  These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement.  If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

15

The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, as of March 31, 2011 and December 31, 2010 (in thousands):

	March 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	7,056	$	7,056	$	-	$	7,189	$	78
With an allowance recorded:
Commercial real estate		5,319		5,319		1,122		4,646		-
Total:
Commercial real estate	$	12,375	$	12,375	$	1,122	$	11,835	$	78

	December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	5,775	$	5,775	$	-	$	444	$	-
With an allowance recorded:
Commercial real estate		9,754		9,754		1,774		9,822		-
Total:
Commercial real estate	$	15,529	$	15,529	$	1,774	$	10,266	$	-

Nonaccrual Loans

Loans are considered nonaccrual upon reaching 90 days delinquency, although he Company may be receiving partial payments if interest and partial repayments of principal on such loans.  Loans that are well secured and in the process of collection may not be placed on nonaccrual status based on management’s review of the specific loan.  When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income.

In the following table are loans, presented by class, on nonaccrual status as of March 31, 2011 and December 31, 2010 (in thousands):

	03/31/11		12/31/10
Commercial	$	2	$	-
Commercial real estate		12,472		15,626
Consumer		19		15
Residential real estate		45		35
Total	$	12,538	$	15,676

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NOTE 6 – FAIR VALUE MEASUREMENTS

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels defined by U.S. generally accepted accounting principles are as follows:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:	Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III:	Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

This hierarchy requires the use of observable market data when available. 

The following is a description of the valuation methodologies the Company uses for financial instruments recorded at fair value on either a recurring or nonrecurring basis:

Securities Available for Sale

Securities available for sale consists of both debt and equity securities.  These securities are recorded at fair value on a recurring basis.  At March 31, 2011 and December 31, 2010, all of these securities used valuation methodologies involving market based or market derived information, collectively Level I and Level II measurements, to measure fair value.

The Company closely monitors market conditions involving assets that have become less actively traded.  If the fair value measurement is based upon recent observable market activity of such assets or comparable assets (other than forced or distressed transactions) that occur in sufficient volume, and do not require significant adjustment using unobservable inputs, those assets are classified as Level I or Level II; if not, they are classified as Level III.  Making this assessment requires significant judgment.

The Company uses prices from independent pricing services and, to a lesser extent, indicative (non-binding) quotes from independent brokers to measure securities.

The following tables present the assets reported on the consolidated statements of financial condition at their fair value as of March 31, 2011 and December 31, 2010 by level within the fair value hierarchy.  As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands).

	March 31, 2011
	Level I		Level II		Level III		Total
Assets:
U.S. government agencies	$	-	$	12,718	$	-	$	12,718
Mortgage-backed securities of government-sponsored entities		-		25,000		-		25,000
Obligations of states and political subdivisions:
Taxable		-		1,233		-		1,233
Tax-exempt		-		31,257		-		31,257
Corporate securities		-		3,678		-		3,678
Commercial paper		8,497		-		-		8,497
Total debt securities		8,497		73,886		-		82,383
Equity securities of financial institutions		594		-		-		594
Total	$	9,091	$	73,886	$	-	$	82,977

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	December 31, 2010
	Level I		Level II		Level III		Total
Assets:
U.S. government agencies	$	-	$	12,774			$	12,774
Mortgage-backed securities of government-sponsored entities		-		24,274		-		24,274
Obligations of states and political subdivisions:
Taxable		-		1,199				1,199
Tax-exempt		-		27,979				27,979
Corporate securities		-		4,730				4,730
Commercial paper		8,099		-				8,099
Total debt securities		8,099		70,956				79,055
Equity securities of financial institutions		600		-				600
Total	$	8,699	$	70,956	$	-	$	79,655

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The following table presents the assets measured on a nonrecurring basis on the consolidated statements of financial condition at their fair value as of March 31, 2011 and December 31, 2010, by level within the fair value hierarchy.  Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loan include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs.  In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs (in thousands).

	March 31, 2011
	Level I		Level II		Level III		Total
Assets measured on a nonrecurring basis:
Impaired loans	$	-	$	-	$	11,253	$	11,253
Other real estate owned	$	-	$	-	$	3,995	$	3,995
Mortgage servicing rights	$	-	$	-	$	536	$	536

	December 31, 2010
	Level I		Level II		Level III		Total
Assets measured on a nonrecurring basis:
Impaired loans	$	-	$	13,756	$	-	$	13,756
Other real estate owned	$	-	$	960	$	-	$	960
Mortgage servicing rights	$	-	$	-	$	549	$	549

NOTE 7 – FAIR VALUE DISCLOSURE

The estimated fair values of the Company’s financial instruments are as follows (in thousands):

	March 31, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Cash and cash equivalents	$	7,340	$	7,340	$	10,652	$	10,652
Mortgage loans held for sale	$	92	$	92	$	-	$	-
Investment securities	$	82,977	$	82,977	$	79,655	$	79,655
Fixed annuity	$	1,534	$	1,534	$	1,500	$	1,500
Net loans	$	415,353	$	428,603	$	417,328	$	434,472
Accrued interest receivable	$	1,940	$	1,940	$	1,888	$	1,888
Regulatory stock	$	1,709	$	1,709	$	1,725	$	1,725
Bank-owned life insurance	$	9,778	$	9,778	$	9,545	$	9,545
Mortgage servicing rights	$	536	$	536	$	549	$	549
Financial liabilities:
Deposits	$	450,567	$	452,412	$	454,734	$	456,991
Short-term borrowings	$	17,908	$	17,907	$	13,006	$	13,006
Other borrowed funds	$	19,077	$	20,262	$	19,552	$	20,923
Accrued interest payable	$	698	$	698	$	679	$	679

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 that 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.

19

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, Regulatory Stock, and Accrued Interest Payable

The fair value is equal to the current carrying value.

Investment Securities

The fair value of investment securities available 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.

Fixed Annuity

The fair value is equal to the current carrying value.

Loans and Mortgage Servicing Rights

The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality.  Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.

Deposits, Short Term Borrowings and Other Borrowed Funds

The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows.  The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.  Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of period-end.

Bank-Owned Life Insurance

The fair value is equal to the cash surrender value of the life insurance policies.

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.

20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Forward Looking Statement

The Private Securities Litigation Act of 1995 contains safe harbor provisions regarding forward-looking statements.  When used in this discussion, the words, "believes," "anticipates," "contemplated," "expects," and similar expressions are intended to identify forward-looking statements.  Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected.  Those risks and uncertainties include changes in interest rates, the ability to control costs and expenses, and general economic conditions.  The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Financial Condition

Total assets at March 31, 2011 increased slightly from balances at December 31, 2010, ending the period at $543,331,000 or .2% greater. As deposit balances declined during the quarter, asset growth came from retained earnings and short-term borrowings in the form of securities sold under agreement to repurchase.

Total cash and cash equivalents declined $3,312,000 or 31.1% due to a decline of $1,081,000 or 25.9% in balances needed for check clearing at the Federal Reserve Bank of Philadelphia (the “Fed”) and the transfer of $2,161,000 or 44.8% from interest-bearing balances due from other banks to higher yielding assets.   We are required to maintain noninterest-bearing balances at the Fed based upon the dollar amount of checks that are processed on a daily basis.

Investment securities available for sale increased $3,322,000 or 4.2 % from balances at December 31, 2010.  During the first quarter of 2011 we purchased $3,278,000 in tax-exempt municipal bonds as opportunities arose to increase the yield in this type of security.  Smaller variances in other types of investments were responsible for the remaining change.

Total loans decreased $2,601,000 or .6% during the first quarter of 2011 as compared to balances at December 31, 2010.  We completed foreclosure action in relation to a $3,746,000 commercial real estate loan relationship in the first quarter of 2011.  Although we continued to receive loan requests, many of those requests did not meet our underwriting standards and were denied.  We have not changed our underwriting standards but economic conditions are having a negative impact on many of the requests received.

The addition of the commercial real estate property noted above increased the balance of other real estate owned by $3,000,000 along with foreclosure of a residential property in the amount of $35,000.  Management is actively negotiating with potential buyers for the sale of these properties.  We have entered into an agreement for sale of a commercial restaurant property which is valued at $683,000. We expect that sale to be closed by the end of the second quarter 2011.

Total deposits declined $4,167,000 or .9% during the first quarter of 2011.   Noninterest-bearing deposits increased $7,059,000 or 16.4%. This growth included temporary seasonal increases for several commercial customers which we acknowledge will be drawn down as the year progresses.  At the same time, interest-bearing deposits decreased $11,226,000 or 2.7%.   Certificates of deposit decreased $17,269,000 or 6.6% from year end balances with $9,475,000 in municipal tax deposits that matured in conjunction with the customer’s cash flow requirements.   Balance draw downs are consistent with our experience in previous years.  As an additional source of liquidity, the Bank participates in the Certificate of Deposit Account Registry Service.  During the first quarter of 2011, we allowed $4,945,000 of these balances to mature as we did not have need for the additional cash during the quarter.  Customers are more apt to return funds to the stock and bond markets and several customers with certificates of deposit moved their funds to our wealth management division during the quarter.  Simultaneously, we are seeing an increase in balances of interest-bearing checking accounts of $4,618,000 or 10.2% with attraction of new commercial relationships along with development of new retail customers.

Short-term borrowings consist of securities sold under agreement to repurchase.  These balances at March 31, 2011 increased $4,902,000 or 37.7% from balances at year end 2010.   Commercial customers maintain a balance of $30,000 in a noninterest-bearing deposit account and all amounts greater than that are swept into repurchase accounts.  Many of these deposit customers businesses are in the summer camping industry and accept deposits in advance for the upcoming camping season, serving to temporarily increase these balances at the end of the first quarter.

Stockholders’ equity increased $813,000 or 1.6% during the first quarter of 2011.  Net income of $1,270,000 was offset by dividends declared of $575,000.   In addition, we recognized an increase in the market value of our investment portfolio of $118,000 net of income taxes in the first three months of 2011, serving to increase the balance of accumulated other comprehensive income.  Regulatory capital ratios remain strong with 12.4% total risk-based capital, 11.1% Tier I capital and a Tier I leverage ratio of 9.4%.  The regulatory minimums to be well capitalized for these ratios are 10.0%, 6.0% and 5.0%, respectively.

21

Results of Operations

Comparison of the three months ended March 31, 2011 and 2010

The Company reported net income of $1,270,000 for the quarter ended March 31, 2011, representing an increase of $168,000 or 15.2% over the first quarter of 2010.

Net interest income, the largest portion of income, was $4,659,000 for the first quarter of 2011, an increase of $692,000 or 17.4% greater than recorded for the first quarter of 2010.

Total interest income remained stable in 2011 as compared to 2010, showing a decrease of $5,000 or .1%.  Interest and fees earned on loans declined $36,000 or .7% in 2011 over 2010although the average balance of the loan portfolio increased by $12,462,000 or 3.0%.  At the same time, the average interest rate of the portfolio declined by .2%, resulting in the average rate earned of 5.2% during the first quarter of 2011.  Interest rate declines on variable interest rate loans have slowed significantly as compared to previous periods although we will continue to see a small amount of loans repricing to lower rates as long as market rates remain at current levels.   We have implemented interest rate floors on new financing and on renewal of any lines of credit as they mature.  Compounding the decline in interest earned were $12,538,000 of loans in nonaccrual status at March 31, 2011.  We were able to recognize income of $78,000 of interest income on $5,661,000 of nonaccrual loans for which payments were current while we did not recognize income on $6,877,000 of those loans which would have earned an additional $76,000 of income if they were performing.  At March 31, 2010, the balance of nonaccrual loans was $7,701,000 which would have earned $104,000 of additional interest income if performing.

Interest earned on tax exempt investments increased $34,000 or 13.3% in 2011 as compared to a year earlier.   The average balance of these investments increased $2,849,000 or 10.7% in the first quarter of 2011 as compared to the same period last year while the average tax equivalent interest rate earned on the portfolio in 2011 was 6.1% as compared to 5.9% in 2010.  We continued to invest in tax exempt bonds during the past year because we believed they were the most appropriate investment for our portfolio.  We understand that these investments have extended the duration of our investment portfolio but are comfortable with the choices made since we have found additional liquidity sources and don’t necessarily need quicker maturity schedules.

Interest expense declined $697,000 or 33.5% in the first quarter of 2011 as compared to the same period of 2010.  Interest paid on deposits declined $657,000 or 36.6% as balances of higher costing certificates of deposit declined $38,386,000 or 13.2% on average from the first quarter of 2010 to the same period in 2011.  Simultaneously, the average interest rate paid on those deposits decreased by .7% over the period.  This decline in both the interest rate paid and balances invested in certificates of deposit came as the successful result of the strategy implemented in 2010 to decrease our cost of funds.   The deposit mix shifted from these highest-costing accounts to money market and interest-bearing checking accounts.  Balances of money market accounts increased $23,343,000 or 55.6% and interest-bearing checking balances increased $8,763,000 or 22.3% in 2011 as compared to 2010.  The average interest rate paid on money market accounts declined .4% while the average interest rate paid on interest-bearing checking accounts increased 3 basis points due to having greater balances in the higher tiered accounts.    Interest paid on other borrowed funds declined $38,000 or 14.8% as FHLB borrowings were repaid over the past year through both regularly scheduled payments on amortizing borrowings and the maturity of $1,000,000 during the past twelve months resulting in a decrease in the average balance of $3,785,000 or 16.4%.

The provision for loan losses is charged to operations to bring the total allowance for loan losses to a level that represents management’s best estimates of the losses inherent in the portfolio, based on:

● historical experience;

●  volume;

●  type of lending conducted by the Bank;

●  industry standards;

●  the level and status of past due and non-performing loans;

●  the general economic conditions in the Bank’s lending area along with national trends; and

●  other factors affecting the collectability of the loans in its portfolio.

Provision for loan loss expense was $175,000 or 70.0% greater in the first quarter of 2011 than the same quarter of 2010.  Growth in the loan portfolio, negative changes in loan quality based on our loan rating system and stagnating economic indicators resulted in our analysis indicating higher provision expense in 2011 as compared to 2010.  We continue to monitor the allowance for loan loss based on our analysis and believe that the allowance for loan loss balance is adequate.

Total noninterest income declined slightly in the first quarter of 2011 as compared to the same quarter of 2010.  Variations were realized in all types of noninterest income.  Service charges on deposit accounts declined $72,000 or 21.0% from income a year earlier due to both regulatory changes that affected our ability to levy service charges on checking accounts and a general increase in our customer’s diligence in monitoring their balances to avoid service charges on their accounts.  We were able to increase gains on the sale of residential loans sold in the secondary market by $32,000 or 64.0% over income earned during the same quarter a year earlier due to a greater number of loan originations in 2011 as compared to 2010.  Brokerage commissions increased $43,000 or 31.2% over the same period last year.   The wealth management department is seeing more customers as a result of our referral program, the public’s increasing trust in financial markets and by market value increases in customers’ investment portfolios upon which we receive asset-based percentage fees.  Other noninterest income combines many other sources of revenue for the Company.  There were no significant changes in these types of income other than recognition of a $30,000 estimated loss on the limited partnership which we invested in to obtain federal low-income housing tax credits which was not operational in the first quarter of 2010.

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Salaries and employee benefits increased $103,000 or 6.2% in the first quarter of 2011 as compared to 2010.   Wages increased $36,000 or 3.1% in 2011 as compared to 2010 due primarily to annual salary increases.  Employee benefits increased $47,000 or 15.4% as costs of medical insurance increased due to higher claims incurred in our Pennsylvania Bankers Association consortium self-funded health insurance plan.   Employees are given specific areas for profit improvement each year upon which incentives are based.  In 2011 these incentives were accrued at a greater percentage rate than in 2010 based on better performance compared to the goals, requiring $12,000 or 51.4% greater accrual than in 2010.  Other miscellaneous employment expenses account for the remaining changes.

Professional fees increased $158,000 or 103.9% during the first quarter of 2011 as compared to the same period in 2010.  Legal fees were $93,000 or 416.7% greater in 2011 than the same quarter in 2010 due to the need to use out of state counsel in relation to collection activity on one loan relationship.  Fees paid for professional consultation in connection with the collection activity for that same out of state borrower were $49,000 in 2011 for which we had no similar expense in 2010.  In addition, we are encountering greater fees for appraisal services necessary for collection actions in the current year as we aggressively pursue the appropriate recourses available to us.

Other expense increased $144,000 or 24.5% due primarily to costs associated with other real estate owned including payment of past due real estate taxes at foreclosure which was $125,000 in 2011 and unmatched in 2010.   Smaller variances in other expense items were responsible for the remaining differences.

Liquidity and Cash Flows

To ensure that the Company can satisfy customer credit needs for current and future commitments and deposit withdrawal requirements, we manage the liquidity position by ensuring that there are adequate short-term funding sources available for those needs.  Liquid assets consist of cash and due from banks, federal funds sold, interest-bearing deposits with other banks and investment securities maturing in one year or less.  The following table shows these liquidity sources, minus short-term borrowings, as of March 31, 2011 compared to December 31, 2010:

	March 31, 2011			December 31, 2010
( in thousands)
Cash and due from banks	$	4,680		$	5,831
Interest-bearing deposits with other banks		2,660			4,821
Federal funds sold		-			-
Mortgage loans held for sale		92			-
Investment securities maturing in one year or less,
including scheduled principal reductions		21,526			18,888
		28,958			29,540
Less short-term borrowings		17,908			15,506
Net liquidity position	$	11,050		$	14,034
As a percent of total assets		2.0	%		2.6	%

The Bank has the ability to borrow from the Federal Home Loan Bank of Pittsburgh with the maximum borrowing capacity at March 31, 2011 of $195 million with an available balance of $170 million.  Other sources of liquidity are cash flows from regularly scheduled payments and prepayments of loans, sales or maturities in the investment portfolio, sales of residential mortgages in the secondary market, operating income, deposit growth and access to lines of credit with correspondent banks.  The Consolidated Statement of Cash Flows specifically details the contribution of each source.

Management monitors liquidity on a consistent basis and feels that liquidity levels are adequate. We are not aware of any known trends, events or uncertainties that will have or is reasonably likely to have a material effect on the Company's liquidity, capital resources or operations; nor are we aware of any current recommendations by regulatory authorities, which if implemented, would have such an effect.

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Risk Elements

The table below presents information concerning nonperforming assets including nonaccrual loans and loans 90 days or more past due at March 31, 2011 and December 31, 2010.  A loan is classified as nonaccrual when, in the opinion of management, there are doubts about collectability of interest and principal.  At the time the accrual of interest is discontinued, future income is recognized only when cash is received.

	March 31, 2011
(In thousands)	Past due 90 days or more		Nonaccrual
Real estate-mortgage loans	$	696	$	12,517
Commercial and industrial loans		99		2
Installment loans to individuals		14		19
Other loans		-		-
Total	$	809	$	12,538

	December 31, 2010
	Past due 90 days or more		Nonaccrual
Real estate-mortgage loans	$	1,464	$	15,661
Commercial and industrial loans		541		-
Installment loans to individuals		44		15
Other loans		39		-
Total	$	2,088	$	15,676

Interest income of $76,000 in the first quarter of 2011 and $104,000 in the same period of 2010 would have been recognized on nonaccrual loans if they had been performing in accordance with their original terms.  The Company did recognize $78,000 of interest income on one relationship that has been making timely payments enabling recognition of interest income on the cash basis in the first quarter of 2011.

Management believes the level of the allowance for loan losses at March 31, 2011 is adequate to cover probable losses inherent in the loan portfolio. The relationship between the allowance for loan losses and outstanding loans is a function of the credit quality and known risk attributed to the loan portfolio.  The on-going loan review program, along with management analysis, is used to determine the adequacy of the allowance for loan losses.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A key function of management in its role as the Asset/Liability Committee (“ALCO”) is to evaluate the Company’s exposure to interest rate risk.  The primary business of the Company in the financial services industry is to act as a depository financial intermediary.  In this role, an integral element of risk involves the chance that prevailing interest rates will adversely affect assets, liabilities, capital, income and/or expense at different times and in different amounts.  The ALCO is comprised of all senior officers of the bank and other key officers.  This committee reports directly to the Board of Directors on at least a quarterly basis.

Two separate reports are used to assist in measuring interest rate risk.  The first is the Statement of Interest Sensitivity Gap report.  This report matches all interest-earning assets and all interest-bearing liabilities by the time frame in which funds can be reinvested or repriced.  The second report is the Interest Rate Shock Analysis discussed in more detail below.  In both reports, there are inherent assumptions that must be used in the evaluation.  These assumptions include the maturity or repricing times of deposits, even though all deposits, other than time deposits, have no stated maturity and the reference that interest rate shifts will be parallel, with the rates of assets and liabilities shifting in the same amount in the same time frame.  In reality, various assets and various liabilities will react differently to changes in interest rates, with some lagging behind the change and some anticipating the upcoming change and reacting before any actual change occurs.  Each tool also suggests that there is a propensity to replace assets and liabilities with similar assets and liabilities rather than taking into consideration management’s ability to reallocate the Balance Sheet.   In addition, the models used do not include any elements to determine how an action by management to increase or decrease interest rates charged on loans or paid on deposits or to increase borrowings at the FHLB will affect the results of the analysis.    In spite of these limitations, these analyses are still very good tools to assist in management of the Company and similar versions of these same reports are used by all financial institutions.

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Statement of Interest Sensitivity Gap

March 31, 2011

	90 days or less			>90 days but < 1 year			1 - 5 years			>5 years			Total
Assets:
Interest-bearing deposits in other banks and federal funds sold	$	2,660		$	-		$	-		$	-		$	2,660
Mortgage loans held for sale		92			-			-			-			92
Investment securities available for sale(5)		20,866			4,307			25,896			31,908			82,977
Fixed annuity investment		-			-			1,534			-			1,534
Loans (1) (4)		94,030			114,994			88,778			113,255			411,057
Rate sensitive assets	$	117,648		$	119,301		$	116,208		$	145,163		$	498,320
Liabilities:
Interest-bearing deposits:
Interest-bearing demand (2)	$	3,987		$	12,460		$	33,394		$	-		$	49,841
Money market(3)		11,172			32,861			21,688			-			65,721
Savings (2)		3,374			10,544			28,259			-			42,177
Time deposits		69,325			130,426			42,951			-			242,702
Short-term borrowings		17,908			-			-			-			17,908
Other borrowings (6)		481			3,971			8,304			6,321			19,077
Rate sensitive liabilities	$	106,247		$	190,262		$	134,596		$	6,321		$	437,426
Interest sensitivity gap	$	11,401		$	(70,961	)	$	(18,388	)	$	138,842		$	60,894
Cumulative gap	$	11,401		$	(59,560	)	$	(77,948	)	$	60,894
Cumulative gap to total assets		2.10	%		(10.96	%)		(14.35	%)		11.21	%

(1) Loans are included in the earlier 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 and savings are segmented based on the percentage of decay method. The decay rates used include "90 days or less" 8%, " >90 days but <1 year" 25% and "1-5 years" 67%.

(3) Money market deposits are segmented based on the percentage of decay method.The decay rates used include "90 days or less" 17%, ">90 days but < 1 year" 50% and "1-5 years" 33%.

(4) Does not include loans in nonaccrual status, deposit overdrafts, unposted items or deferred fees on loans.

(5) Variable interest rate investments are included in the period in which interest rates are next scheduled to adjust, while fixed interest rate investments are included in each period according to the contractual repayment schedule.

(6) Borrowings are included in each period according to the contractual repayment schedule.

As this report shows, the Company was liability sensitive in the one year period at March 31, 2011 with many of the higher costing liabilities maturing or repricing before assets in this timeframe.  We expect that interest rates will increase at some point; and as that occurs, the variable interest rate loans will reprice upward.  We anticipate that higher interest rate certificate of deposits will reprice to new, lower rates because we do not expect to offer any certificate of deposit special products; therefore interest margins should continue to improve.

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The second report used to monitor interest rate risk is the Analysis of Sensitivity to Changes in Market Interest Rates.  This tool attempts to determine the affect on income of various shifts in the interest rate environment.  We have presented this analysis for three different scenarios, a change in rates of 100, 200 or 300 basis points in order to offer a more in-depth analysis.  A shift of 200 basis points, or 2% in interest rates, is the industry standard.  Given an immediate parallel upward shift of 200 basis points, net interest income would decrease by $831,000 or 4.10% while net income would decrease $538,000 or 8.45%.  This analysis makes the shift automatic and equal for both assets and liabilities and does not take into consideration management’s ability to change the rates for deposits in a different fashion.  We would not expect to make this parallel shift in deposit interest rates.  Even given that this analysis does not actually assimilate the reality of our actions when rates do increase, the results of a potential shift of 200 basis points in either direction are within internal policy guidelines.  If the results were not tolerable, our policy would determine that management should reallocate the balance sheet in order to maintain compliance with the policy.   If interest rates were to immediately increase by 200 basis points, the economic value of equity (EVE) would decrease by $5,961,000 or 9.93%, which is within our policy guidelines. The economic value of equity is sometimes referred to as the present value of equity and is presented as one more statistic to monitor in managing interest rate risk.

ANALYSIS OF SENSITIVITY TO CHANGES IN MARKET INTEREST RATES

	100 basis points
	Up					Down
	Amount			%		Amount		%
Net interest income	$	(554	)	-2.73	%	$	860	4.24	%
Net income	$	(360	)	-5.65	%	$	567	8.92	%
EVE	$	(3,487	)	-5.81	%	$	6,397	10.66	%

	200 basis points
	Up					Down
	Amount			%		Amount		%
Net interest income	$	(831	)	-4.10	%	$	44	0.21	%
Net income	$	(538	)	-8.45	%	$	20	0.32	%
EVE	$	(5,961	)	-9.93	%	$	13,288	22.14	%

	300 basis points
	Up					Down
	Amount			%		Amount			%
Net interest income	$	(1,159	)	-5.72	%	$	(805	)	-3.97	%
Net income	$	(746	)	-11.73	%	$	(548	)	-8.61	%
EVE	$	(10,877	)	-18.12	%	$	18,965		31.60	%

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

As of March 31, 2011 an evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, on the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2011. There have been no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect internal controls during the quarter.

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed by the Company in its reports filed and submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports filed under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal controls

There were no significant changes in the Registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II - OTHER INFORMATION

Item 1	-	Legal Proceedings
		NONE
Item 1a.	-	Risk Factors
		There were no material changes to the risk factors described in Item 1a. of Dimeco’s Annual Report on Form 10K for the period ended December 31, 2010.
Item 2	-	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3	-	Defaults upon Senior Securities
		NONE
Item 4	-	Reserved
Item 5	-	Other Information
		NONE
Item 6 -	Exhibits
		Form 8K – Report on April 25, 2011 – News Release of Registrant
		Form 8K – Report on May 3, 2011 – News Release of Registrant

Exhibit Number:

31.1	Certification Pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
31.2	Certification Pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
32	Certification Pursuant to 18 U.S.C. Section 1350
99	Report of Independent Registered Public Accounting Firm

The following exhibits are included in this Report or incorporated herein by reference:

3(i)	Articles of Incorporation of Dimeco, Inc.*
3(ii)	Amended Bylaws of Dimeco, Inc.****
10.1	2000 Independent Directors Stock Option Plan**
10.2	2000 Stock Incentive Plan***
10.3	Form of Salary Continuation Plan for Executive Officers****
10.4	2010 Equity Incentive Plan *****

* Incorporated by reference to the Exhibit 3A to the Form S-4 (File No. 333-58936) filed with the Commission on February 26, 1993.

** Incorporated by reference to Exhibit 99.1 to the Form S-8 (File No. 333-69420) filed with the Commission on September 14, 2002.

*** Incorporated by reference to Exhibit 99.1 to the Form S-8 (File No. 333-69416) filed with the Commission on September 14, 2002.

**** Incorporated by reference to identically numbered exhibit to the Registrant’s Form 8-K filed July 2, 2007.

***** Incorporated by reference to Exhibit 10.1 to Form S -8 (File No. 333-169454) filed with the Commission on September 17, 2010.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.

	DIMECO, INC.
Date: May 16, 2011	By:	/s/ Gary C. Beilman
		Gary C. Beilman
		President and Chief Executive Officer

Date: May 16, 2011	By:	/s/ Maureen H. Beilman
		Maureen H. Beilman
		Chief Financial Officer

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