Dimeco (DIMC) 10-Q 2006 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2006

or

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

For the transition period from                        to                        

Commission File Number 33-58936

Dimeco, Inc.

(Exact name of registrant as specified in its charter)

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

820 Church Street

Honesdale, PA 18431

(Address of principal executive offices)

(570) 253-1970

(Issuer’s Telephone Number)

Not Applicable

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act)    Yes¨ No  x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)    Yes¨ No  x

As of May 1, 2005, the registrant had outstanding 1,528,494 shares of its common stock, par value $.50 share.

Dimeco, Inc.

INDEX

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheet (unaudited) as of March 31, 2006 and December 31, 2005	3
	Consolidated Statement of Income (unaudited) for the three months ended March 31, 2006 and 2005	4
	Consolidated Statement of Comprehensive Income (unaudited) for the three months ended March 31, 2006 and 2005	5
	Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2006	6
	Consolidated Statement of Cash Flows (unaudited) for the three months ended March 31, 2006 and 2005	7
	Notes to Consolidated Financial Statements (unaudited)	8 - 9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10 - 14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	15 - 17
Item 4.	Controls and Procedures	18
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1a.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Submissions of Matters to a Vote of Security Holders	19
Item 5.	Other Information	19
Item 6.	Exhibits	19 - 20
SIGNATURES		21

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Dimeco, Inc.

CONSOLIDATED BALANCE SHEET (unaudited)

(in thousands)	March 31, 2006			December 31, 2005
Assets
Cash and due from banks	$	8,438		$	5,554
Interest-bearing deposits in other banks		1,808			33
Federal funds sold		7,030			2,890
Total cash and cash equivalents		17,276			8,477
Mortgage loans held for sale		142			211
Investment securities available for sale		47,840			54,129
Investment securities held to maturity (market value of $205 and $213)		199			199
Loans (net of unearned income of $713 and $590)		283,905			283,562
Less allowance for loan losses		4,171			3,973
Net loans		279,734			279,589
Premises and equipment		5,913			6,022
Accrued interest receivable		1,363			1,380
Bank-owned life insurance		5,301			5,254
Other assets		3,271			2,943
TOTAL ASSETS	$	361,039		$	358,204
Liabilities
Deposits :
Noninterest-bearing	$	29,388		$	36,619
Interest-bearing		264,885			258,237
Total deposits		294,273			294,856
Short-term borrowings		15,380			12,954
Other borrowed funds		16,356			16,548
Accrued interest payable		924			952
Other liabilities		1,991			1,634
TOTAL LIABILITIES		328,924			326,944
Stockholders’ Equity
Common stock, $.50 par value; 5,000,000 shares authorized; 1,553,494 and 1,549,269 shares issued		777			776
Capital surplus		4,455			4,445
Retained earnings		28,199			27,400
Accumulated other comprehensive (loss)		(254	)		(299	)
Treasury stock, at cost (30,000 shares)		(1,062	)		(1,062	)
TOTAL STOCKHOLDERS' EQUITY		32,115			31,260
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	361,039		$	358,204

See accompanying notes to the unaudited consolidated financial statements.

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Dimeco, Inc.

CONSOLIDATED STATEMENT OF INCOME (unaudited)

	For the three months ended March 31,
(in thousands, except per share)	2006		2005
Interest Income
Interest and fees on loans	$	4,871	$	3,711
Investment securities:
Taxable		521		404
Exempt from federal income tax		49		38
Other		16		22
Total interest income		5,457		4,175
Interest Expense
Deposits		1,700		1,142
Short-term borrowings		63		36
Other borrowed funds		176		115
Total interest expense		1,939		1,293
Net Interest Income		3,518		2,882
Provision for loan losses		215		220
Net Interest Income After Provision for Loan Losses		3,303		2,662
Noninterest Income
Services charges on deposit accounts		365		294
Mortgage loans held for sale gains, net		54		106
Investment securities gains		—		2
Brokerage commissions		80		117
Other income		240		219
Total noninterest income		739		738
Noninterest Expense
Salaries and employee benefits		1,267		1,091
Occupancy expense, net		209		202
Furniture and equipment expense		122		137
Other expense		696		611
Total noninterest expense		2,294		2,041
Income before income taxes		1,748		1,359
Income taxes		553		428
NET INCOME	$	1,195	$	931
Earnings per Share - basic	$	0.78	$	0.60
Earnings per Share - diluted	$	0.76	$	0.58
Dividends per share	$	0.26		0.25
Average shares outstanding - basic		1,522,967		1,549,187
Average shares outstanding - diluted		1,571,149		1,603,562

See accompanying notes to unaudited consolidated financial statements.

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Dimeco, Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

	Three months ended March 31,
	2006		2005
Net income	$	1,195	$	931
Other comprehensive income:
Unrealized gain (loss) on available for sale securities		67		(361	)
Less: Reclassification adjustment for gain included in net income		—		2
Other comprehensive income (loss) before tax		67		(359	)
Income tax expense (benefit) related to other comprehensive income (loss)		22		(122	)
Other comprehensive income (loss), net of tax		45		(237	)
Comprehensive income	$	1,240	$	694

See accompanying notes to the unaudited consolidated financial statements.

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Dimeco, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(amounts in thousands)	Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Stockholders’ Equity
Balance December 31, 2005	$	776	$	4,445	$	27,400		$	(299	)	$	(1,062	)	$	31,260
Net income						1,195									1,195
Net unrealized gain on available for sale securities									45						45
Exercise of stock options		1		10											11
Cash dividends ($.26 per share)						(396	)								(396	)
Balance, March 31, 2006	$	777	$	4,455	$	28,199		$	(254	)	$	(1,062	)	$	32,115

See accompanying notes to the unaudited consolidated financial statements.

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Dimeco, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

(in thousands)	2006			2005
For the three months ended March 31,
Operating Activities
Net income	$	1,195		$	931
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		215			220
Depreciation and amortization		177			196
Amortization of premium and discount on investment securities, net		(215	)		(148	)
Amortization of net deferred loan origination fees		(16	)		(15	)
Investment securities gains		—			(2	)
Origination of loans held for sale		(1,657	)		(3,710	)
Proceeds from sale of loans		1,779			3,502
Mortgage loans sold gains, net		(54	)		(106	)
Decrease (increase) in accrued interest receivable		17			(45	)
Increase (decrease) in accrued interest payable		(28	)		27
Deferred federal income taxes		(83	)		—
Other, net		150			114
Net cash provided by operating activities		1,480			964
Investing Activities
Investment securities available for sale:
Proceeds from sales		—			6
Proceeds from maturities or paydown		52,579			59,215
Purchases		(46,008	)		(51,527	)
Net increase in loans		(343	)		(5,906	)
Redemption of Federal Home Loan Bank stock		126			378
Purchase of Federal Home Loan Bank stock		(276	)		(199	)
Purchase of premises and equipment		(25	)		(651	)
Net cash provided by investing activities		6,053			1,316
Financing Activities
Net increase (decrease) in deposits		(583	)		4,455
Net increase in short-term borrowings		2,426			1,540
Proceeds from other borrowed funds		1,225			—
Repayment of other borrowed funds		(1,417	)		(104	)
Proceeds from exercise of stock options		11			4
Cash dividends paid		(396	)		(387	)
Net cash provided by financing activities		1,266			5,508
Increase in cash and cash equivalents		8,799			7,788
Cash and cash equivalents at beginning of period		8,477			5,132
Cash and cash equivalents at end of period	$	17,276		$	12,920

See accompanying notes to unaudited consolidated financial statements.

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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 February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting (“FAS”) No. 155,Accounting for Certain Hybrid Instruments, as an amendment of FASB Statements No. 133 and 140. FAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In March 2006, the FASB issued FAS No. 156,Accounting for Servicing of Financial Assets. This Statement, which is an amendment to FAS No. 140, will simplify the accounting for servicing assets and liabilities, such as those common with mortgage securitization activities. Specifically, FAS No. 156 addresses the recognition and measurement of separately recognized servicing assets and liabilities and provides an approach to simplify efforts to obtain hedge-like (offset) accounting. FAS No. 156 also clarifies when an obligation to service financial assets should be separately recognized as a servicing asset or a servicing liability, requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable, and permits an entity with a separately recognized servicing asset or servicing liability to choose either of the amortization or fair value methods for subsequent measurement. The provisions of FAS No. 156 are effective as of the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

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Stock Options

The Company maintains a stock option plan for key officers and non-employee directors. Had compensation expense for the stock option plans been recognized in accordance with the fair value accounting provisions of Statement of Financial Accounting Standards (“FAS”) No. 123“Accounting for Stock-based Compensation,”net income applicable to common stock, basic and diluted net income per common share would have been as follows:

	Three months ended March 31, 2005
Net income as reported	$	931
Less pro forma expense related to options		3
Pro forma net income	$	928
Basic net income per common share:
As reported	$	0.60
Pro forma	$	0.60
Diluted net income per common share:
As reported	$	0.58
Pro forma	$	0.58

For purposes of computing pro forma results, the company estimated the fair values of stock options using the Black-Scholes option-pricing model. The model requires the use of subjective assumptions that can materially affect fair value estimates. Therefore, the pro forma results are estimates of results of operations as if compensation expense had been recognized for the stock option plans.

As of March 31, 2006, 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,
	2006	2005
Weighted average common stock outstanding	1,552,967	1,549,187
Average treasury stock	30,000	—
Weighted average common stock and common stock equivalents used to calculate basic earnings per share	1,522,967	1,549,187
Additional common stock equivalents (stock options) used to calculate diluted earnings per share	48,182	54,376
Weighted average common stock and common stock equivalents used to calculate diluted earnings per share	1,571,149	1,603,563

Options to purchase 32,996 shares of common stock at a price above current market were outstanding during the first quarter of 2006, but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. There were no anti-dilutive effects for the three months ended March 31, 2005.

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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 increased $2,835,000 or .8% during the first three months of 2006. Growth for the first quarter was slower than usual. A slowdown in the rate of increase of deposits is mainly responsible for this occurrence.

Total cash and cash equivalents increased $8,799,000 or 103.8% due in part to a temporary need for greater funds at the Federal Reserve Bank of Philadelphia in order to facilitate the clearing of customer deposit account transactions for the day. This balance was $2,911,000 greater at March 31, 2006 than at December 31, 2005. In addition, the Company invested $4,140,000 more in federal funds sold at March 31, 2006 than at year end from maturities of investment securities which were not reinvested. Management was aware of the need to have this amount of funds liquid at quarter end in order to facilitate a commercial customer’s cash needs.

Investment securities available for sale declined $6,289,000 or 11.6% from December 31, 2005 to March 31, 2006. As noted above, funds were maintained in overnight investments in order to facilitate the cash needs of a commercial customer who did withdraw over $4 million during April 2006. Investment maturities were typically reinvested in short term commercial paper, in federal funds sold at a comparable interest rate to the maturities, or added to balances at the Federal Reserve Bank of Philadelphia to assist in the funds transfer process.

Loans remained constant from December 31, 2005 to March 31, 2006 with the net increase in the portfolio .1% during the period. Loan originations were somewhat slower than in previous quarters but remained stable however the total balance was impacted by several large loan payoffs. Although some payoffs were expected, the number was greater due to the sale of some borrowers’ businesses.

While total deposits declined a slight $583,000 during the first quarter of 2006, the components changed at a more acute rate with noninterest-bearing deposits declining $7,231,000 or 19.7% and interest-bearing deposits increasing $6,648,000 during the time period. As part of our marketing efforts to increase total deposits, management examined all transaction accounts, eliminating several account types and moving certain balances from noninterest-bearing to interest-bearing status. During 2005 we employed outside consultants to assist in a plan to garner new customers while enhancing current customer relationships. The plan included re-allocation of our product line followed by the launch of a marketing program to acquire new customers. The first phase of the marketing program was completed in March 2006 with the second phase scheduled for April 2006. The majority of this conversion resulted in over two thousand accounts from noninterest-bearing accounts to

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interest-bearing accounts. The culmination of this conversion should result in greater customer loyalty and long term profitability.

At the same time, local competition for certificates of deposit became fierce. In order to keep those interest-bearing deposits and attract new deposits we offered very attractive rates for 6 and 13 month certificates of deposit. These offerings are in anticipation of our forecast of interest rates continuing to rise for the first three quarters of 2006 and garnered over $10 million in these special certificates of deposit, some from maturities of other products and some from new sources. In addition, a money market deposit of $4 million was received from a commercial customer in March which was placed with the Investments Department in April 2006. Simultaneously, as usual, municipal customers had certificates of deposit of $2,859,000 mature and used the funds for their normal operating expenses rather than re-depositing the funds.

Short-term borrowings increased $2,426,000 or 18.7% due to seasonal customer cash flows.

Stockholders’ equity increased $855,000 or 2.7% from December 31, 2005 to March 31, 2006. Net income of $1,195,000 was offset by dividend declarations of $396,000. Regulatory capital ratios of 12.0% total risk-based capital and 10.7% Tier I capital continue to exceed the regulatory guidelines of 8.0% and 4.0%. The Company’s leverage ratio was 9.1% at March 31, 2006 and compared favorably to the regulatory minimum of 3.0%.

Results of Operations

Comparison of the three months ended March 31, 2006 and 2005

Net income for the quarter ended March 31, 2006 was $1,195,000 representing an increase of $264,000 or 28.4% over net income in the first quarter of 2005.

Net interest income increased $636,000 or 22.1% in 2006 as compared to the same quarter of 2005.

Interest earned on loans increased $1,160,000 or 31.3% in the first quarter of 2006 as compared to 2005. The prime interest rate increased 2.00% over the period and as a result, the average interest rate received on loans increased 1.00% equaling 6.92% at March 31, 2006. Approximately 73% of the loan portfolio is in variable interest rate loans. The majority of these loans reprice annually on the anniversary date of the loan and the remaining portfolio reprice at the end of the month based on changes in the prime rate. Commercial real estate loans have generally been granted with a fixed interest rate of up to three years and then revert to annual adjustments based on changes to the prime interest rate. This increase in average interest rates received is enhanced by $31,374,000 more in average year-to-date loans in March 2005 as compared to March 2006.

Interest earned on taxable investments increased $117,000 or 29.0% in the first quarter of 2006 as compared to the year earlier due to an increase of 1.13% in the average rate earned on these investments. This portfolio is mainly invested in short-term commercial paper and U.S. government agency bonds with step-up provisions, thereby as short-term market interest rates rose, the average rate of the investments also increased. The average balances in this portfolio declined $1,864,000 or 3.8% in the first quarter of 2006 compared to the same quarter in 2005.

Interest expense increased $646,000 or 50.0% in the quarter ended March 31, 2006 as compared to the same quarter of 2005. Interest paid to depositors was the main component of the change with the average rate paid for deposits increasing to 2.68% from 1.92% one year earlier. The average balance of interest-bearing deposits increased in 2006 by $16,620,000 or 6.9% over the same period in 2005. The bank continued to offer

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certificate of deposit specials paying a high interest rate in the first quarter of 2006 in order to attract new and retain existing deposits. The average balance of these accounts increased $24,297,000 in 2006 as compared to 2005, generated from a combination of new funds deposited and a transition of funds from lower paying savings and checking accounts. That transition, combined with a greater propensity for customers to return funds to the stock market and insurance products, accounted for much of the decline of $5,302,000 in the average balances of interest-bearing checking accounts in 2006 as compared to 2005.

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; and

• other factors affecting the collectibility of the loans in its portfolio.

The provision for loan losses remained fairly stable from 2006 compared to 2005. The loan portfolio increased $24,843,000 or 9.6% at March 31, 2006 as compared to one year earlier. Qualitative factors in our internal analysis of the allowance changed from the previous year, suggesting that a higher allowance level is appropriate.

Noninterest income remained stable for the first quarter of 2006 as compared to 2005 while the level of income related to service charges increased $71,000 or 24.1% and other sources of noninterest income declined $70,000 or 15.8%. Service charge income was enhanced by an increase of $5 in the overdraft fee on certain accounts as of January 1, 2006. Income generated from sales of residential mortgage loans declined $52,000 or 49.2% in 2006 as compared to 2005. Origination activity continued to be slow in the first quarter of 2006 as compared to 2005. The number of construction mortgages originated in 2004 and completed in the first quarter of 2005, becoming eligible for sale at that time, were greater than in the same quarter of 2006. We believe that a large part of this decline is related to greater competition from mortgage brokers in the area. Income generated from the bank’s merchant card program increased $10,000 or 26.6% over the period. Fees earned in relation to ATM and debit cards increased $15,000 or 34.1% associated with a greater number of cards issued since the Bank eliminated charging an annual fee for the card combined with greater use of the electronic payment system. Brokerage commissions decreased $37,000 or 31.8% in the first quarter of 2006 as compared to 2005 due in part to the timing of the final closing of transactions. Management believes that this category of income will increase in future quarters. Smaller variances in other types of income accounts comprise the remaining difference, none of which is a material change in itself.

Salaries and employee benefits increased $176,000 or 16.1% in 2006 as compared to 2005. Salaries increased $86,000 or 10.6% due to annual salary increases combined with staffing for the entire quarter in 2006 for all middle managers hired in 2005 compared to the gradual addition of these employees during 2005. Incentive accruals for all employees were $51,000 or 178.3% more than in 2005. The level of incentive is directly related to the return on average equity which improved to 15.02% in 2006 as compared to 12.38% in 2005. Increases on all other employee benefits are responsible for the remainder of the higher expense in 2006, including a 14% increase in the average cost of health insurance and a greater number of employees becoming eligible for inclusion in the 401(k) plan due to reduced eligibility requirements in 2005.

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Other expense increased $85,000 or 13.9% in 2006 over the same period the pervious year due to minor increases in many smaller balances. The most notable were an increase in legal expense of $24,000 or 323.9% in 2006 relating to costs incurred in relation to renegotiating a contract for software and processing of our ATM network along with an increase of $20,000 or 74.1% for donations in 2006 as compared to 2005.

Liquidity and Cash Flows

To ensure that the Company can satisfy customer credit needs for current and future commitments and deposit withdrawal requirements, the Bank manages the liquidity position by ensuring that there are adequate short-term funding sources available for those needs. Liquid assets 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, 2006 compared to December 31, 2005:

(dollars in thousands)	March 31, 2006			December 31, 2005
Cash and due from banks	$	8,438		$	5,554
Interest-bearing deposits with other banks		1,808			33
Federal funds sold		7,030			2,890
Mortgage loans held for sale		142			211
Investment securities maturing or repricing in one year or less		33,386			38,682
		50,804			47,370
Less short-term borrowings		17,380			14,954
Net liquidity position	$	33,424		$	32,416
As a percent of total assets		9.26	%		9.05	%

Included in short-term borrowings is $2,000,000 borrowed from FHLB as a long term borrowing with a maturity date of June 28, 2006.

The Bank has the ability to borrow from the Federal Home Loan Bank of Pittsburgh with the maximum borrowing capacity at March 31, 2006 of $74 million. Other sources of liquidity are cash flows from regularly scheduled and prepayments of loans, sales or maturities in the investment portfolio, sales of residential mortgages in the secondary market, operating income and deposit growth. 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, renegotiated loans, loans 90 days or more past due, other real estate loans and repossessed assets at March 31, 2006 and December 31, 2005. 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. Impaired loans are recognized according to FASB 114, “Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosure”. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deterioration of the borrower.

(dollars in thousands)	March 31, 2006			December 31, 2005
Loans on nonaccrual basis	$	154		$	526
Loans past due 90 days or more		467			279
Impaired loans		—			—
Total nonperforming loans		621			805
Other real estate		—			—
Repossessed assets		2			—
Total nonperforming assets	$	623		$	805
Nonperforming loans as a percent of total loans		0.2	%		0.3	%
Nonperforming assets as a percent of total assets		0.2	%		0.2	%
Allowance for loan loss as a percent of loans		1.47	%		1.40	%

Management believes the level of the allowance for loan losses at March 31, 2006 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 and management analysis is used to determine the adequacy of the allowance for loan losses.

There are no loans classified as impaired under the terms of FAS No. 114, “Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosure” at March 31, 2006.

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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 the following bank officers: all Senior Officers, the Vice President of Deposit Operations, the Vice President of Information Technology and the Marketing Officer. 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 theStatement 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 theInterest Rate Shock Analysis which presents the Company’s potential sensitivity to changes in interest rates. 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

	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	$	8,838		$	—		$	—		$	—		$	8,838
Mortgage loans held for sale		142			—			—			—			142
Investment securities available for sale (1)(4)(6)		25,970			7,217			9,610			6,138			48,935
Investment securities held to maturity (1)		—			199			—			—			199
Loans (1)(5)		74,197			101,016			61,688			48,261			285,162
Rate sensitive assets	$	109,147		$	108,432		$	71,298		$	54,399		$	343,276
Liabilities:
Interest-bearing deposits:
Interest-bearing demand (2)	$	3,166		$	9,895		$	26,520		$	—		$	39,581
Money market(3)		4,994			14,687			9,693			—			29,374
Savings (2)		3,080			9,626			25,798			—			38,504
Time deposits		38,207			60,471			58,715			33			157,426
Short-term borrowings		15,380			—			—			—			15,380
Other borrowings		2,000			—			3,000			11,356			16,356
Rate sensitive liabilities	$	66,827		$	94,679		$	123,726		$	11,389		$	296,621
Interest sensitivity gap	$	42,320		$	13,753		$	(52,428	)	$	43,010		$	46,655
Cumulative gap	$	42,320		$	56,073		$	3,645		$	46,655
Cumulative gap to total assets		11.72	%		15.53	%		1.01	%		12.92	%

⁽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, Passbook savings and Statement savings are segmented based on the percentage of decay method. The decay rates used include 8% “90 days or less”, 12.5% “>90 days but <1 year” and 67% “1-5 years.”

⁽³⁾ Money market deposits are segmented based on the percentage of decay method. The decay rates used include 17% “90 days or less”, 25% “>90 days but < 1 year” and 33% “1-5 years.”

⁽⁴⁾ Includes Federal Home Loan Bank and Atlantic Central Bankers Bank stock which is included in Other Assets on the Consolidated Financial Statements.

⁽⁵⁾ Does not include loans in nonaccrual status, deposit overdrafts, unposted items or deferred fees on loans.

⁽⁶⁾ Among Dimeco’s investment portfolios are step-up securities. These securities are characterized by having tiered (usually increasing) interest rates over their life. Due to this feature these securities have been reallocated from their matuity date to their next step-up date. The specific impact of this policy by timeframe is as follows: “90 days or less” increased $7,940, “>90 days but < 1” year increased $3,893, “1-5 years” decreased $2,039 and “>5 years” decreased $9,794.

As this report shows, the Company was in an asset sensitive position at March 31, 2006. This means that in the one year time frame there were more interest-sensitive assets than liabilities. Management feels that the optimal position in a rising interest rate scenario is to be asset sensitive since assets tend to reprice quicker than liabilities. The Company has classified its callable, step-up U.S. Government Agency bonds in the periods in which the bonds will next reprice versus the period in which they mature since, in management’s judgment, these repricing events will occur either through the purchase terms or through the call functions inherent in the bonds.

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Presented below is theInterest Rate Shock Analysis. The greatest threat to the company from an income perspective is if interest rates decrease by 200 basis points, or 2%. Given a downward shift of 200 basis points, annual net interest income would decrease by $766,000 or 5.3% while net income would decrease $525,000 or 10.2%. Given the Federal Reserve’s current stance of increasing interest rates regularly, management feels that a general decrease in interest rates of this magnitude is not probable. In the Economic Value of Equity (EVE) measurement an increase of 2% in interest rates would affect equity by $3,109,000 or 7.72%. The results of a potential shift of 200 basis points in either direction are well 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.

ANALYSIS OF SENSITIVITY TO CHANGES IN MARKET INTEREST RATES

	100 basis points										200 basis points
	Up					Down					Up					Down
	Amount			%		Amount			%		Amount			%		Amount			%
Net interest income	$	343		2.39	%	$	(373	)	-2.60	%	$	604		4.21	%	$	(766	)	-5.34	%
Net income	$	237		4.61	%	$	(256	)	-4.98	%	$	419		8.14	%	$	(525	)	-10.23	%
EVE	$	(1,031	)	-2.56	%	$	731		1.82	%	$	(3,109	)	-7.72	%	$	1,200		2.98	%

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CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Registrant’s principal executive officer and principal financial officer have concluded that the Registrant’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

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. in Dimeco’s Annual Report on Form 10K for the period ended December 31, 2005.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

NONE

Item 3 - Defaults upon Senior Securities

NONE

Item 4 - Submissions of Matters to a Vote of Security Holders

The following represents the result of matters submitted to a vote of the stockholders at the Annual Meeting held on April 27, 2006:

1. Election of Directors:

The following directors were re-elected with terms to expire in 2009:

	For	Withhold Authority
Barbara J. Genzlinger	1,159,212	3,250
John S. Kiesendahl	1,158,424	4,037
John F. Spall	1,116,538	45,924

2. S.R. Snodgrass, A.C. was elected as the Company’s Independent Auditors for the year ending December 31, 2006 by the following vote:

For	1,155,298
Against	2,592
Abstain	4,571

Item 5 - Other Information

NONE

Item 6 - Exhibits

Report on April 21, 2006-News Release of Registrant – Dimeco, Inc. Announces Earnings at March 31, 2006

Report on April 28, 2006 – News Release of Registrant – Dimeco, Inc. Adopts Stock Repurchase Plan

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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****

* 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 the identically numbered exhibits of the Registrant’s Form 10-KSB for the year ended December 31, 2001 filed on March 26, 2002.

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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 10, 2006	By:	/s/ GARY C. BEILMAN
		Gary C. Beilman President and Chief Executive Officer

Date: May 10, 2006	By:	/s/ MAUREEN H. BEILMAN
		Maureen H. Beilman Chief Financial Officer

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