Dimeco (DIMC) 10-Q 2010 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, 2010

or

[ ] 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 Incorporation or organization) (I.R.S. Employer 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     

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       No     

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 ¨	Accelerated filer ¨
Non-accelerated filer ¨ (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       No X

As of May 1, 2010 the registrant had outstanding 1,596,768 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, 2010 and December 31, 2009	3
	Consolidated Statement of Income (unaudited) for the three months ended March 31, 2010 and 2009	4
	Consolidated Statement of Comprehensive Income (unaudited) for the three months ended March  31, 2010 and 2009	5
	Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2010	6
	Consolidated Statement of Cash Flows (unaudited) for the three months ended March 31, 2010 and 2009	7
	Notes to Consolidated Financial Statements (unaudited)	8 - 15
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16 - 21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21 - 23
Item 4.	Controls and Procedures	23
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1a.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Reserved	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
SIGNATURES		25

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Dimeco, Inc.

CONSOLIDATED BALANCE SHEET (unaudited)

		March 31, 2010		December 31, 2009
(in thousands)
Assets
Cash and due from banks	$	4,839	$	3,991
Interest-bearing deposits in other banks		14,635		14,296
Federal funds sold		3,000		3,000
Total cash and cash equivalents		22,474		21,287
Investment securities available for sale		95,369		73,628
Loans (net of unearned income of $74 and $101)		407,670		410,012
Less allowance for loan losses		6,467		6,253
Net loans		401,203		403,759
Premises and equipment		10,781		10,965
Accrued interest receivable		1,806		1,842
Bank-owned life insurance		9,267		9,175
Other real estate owned		1,073		389
Prepaid FDIC insurance		2,144		2,309
Other assets		9,129		7,303
TOTAL ASSETS	$	553,246	$	530,657
Liabilities
Deposits :
Noninterest-bearing	$	43,458	$	39,687
Interest-bearing		413,904		403,429
Total deposits		457,362		443,116
Short-term borrowings		17,584		10,974
Other borrowed funds		21,947		24,402
Accrued interest payable		1,031		1,080
Other liabilities		6,910		3,968
TOTAL LIABILITIES		504,834		483,540
Stockholders’ Equity
Common stock, $.50 par value; 5,000,000 shares authorized; 1,650,868 and 1,613,878 shares issued		825		807
Capital surplus		6,134		5,552
Retained earnings		42,845		42,318
Accumulated other comprehensive income		675		507
Treasury stock, at cost (54,100 shares)		(2,067)		(2,067)
TOTAL STOCKHOLDER’S EQUITY		48,412		47,117
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	553,246	$	530,657

See accompanying notes to the unaudited consolidated financial statements.

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Dimeco, Inc.

CONSOLIDATED STATEMENT OF INCOME (unaudited)

(in thousands, except per share)		For the three months ended March 31,
		2010		2009
Interest Income
Interest and fees on loans	$	5,481	$	5,579
Investment securities:
Taxable		296		371
Exempt from federal income tax		256		215
Other		12		1
Total interest income		6,045		6,166
Interest Expense
Deposits		1,796		1,930
Short-term borrowings		25		57
Other borrowed funds		257		198
Total interest expense		2,078		2,185
Net Interest Income		3,967		3,981
Provision for loan losses		250		368
Net Interest Income After Provision for Loan Losses		3,717		3,613
Noninterest Income
Service charges on deposit accounts		343		371
Mortgage loans held for sale gains, net		50		154
Investment securities losses		-		(27)
Brokerage commissions		138		69
Earnings on bank-owned life insurance		106		99
Other income		324		233
Total noninterest income		961		899
Noninterest Expense
Salaries and employee benefits		1,674		1,592
Occupancy expense, net		305		306
Furniture and equipment expense		118		158
Professional fees		152		143
Data processing expense		187		116
FDIC insurance		177		136
Other expense		587		600
Total noninterest expense		3,200		3,051
Income before income taxes		1,478		1,461
Income taxes		376		384
NET INCOME	$	1,102	$	1,077
Earnings per Share - basic	$	0.70	$	0.69
Earnings per Share - diluted	$	0.70	$	0.68
Dividends per share	$	0.36	$	0.36
Average shares outstanding - basic		1,575,103		1,558,570
Average shares outstanding - diluted		1,575,150		1,579,418

See accompanying notes to the unaudited consolidated financial statements.

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Dimeco, Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

	For the three months ended March 31,
(amounts in thousands)	2010		2009
Net income	$	1,102	$	1,077
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities		255		(168)
Less: Reclassification adjustment for loss included in net income		-		27
Other comprehensive income (loss) before tax		255		(141)
Income tax expense (benefit) related to other comprehensive income (loss)		87		(48)
Other comprehensive income (loss), net of tax		168		(93)
Comprehensive income	$	1,270	$	984

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		Treasury Stock		Total Stockholders’ Equity
Balance, December 31, 2009	$	807	$	5,552	$	42,318	$	507	$	(2,067)	$	47,117
Net income						1,102						1,102
Unrealized gain on available for sale securities, net of tax expense of $87								168				168
Exercise of stock options (36,990 shares)		18		582								600
Cash dividends ($.36 per share)						(575)						(575)
Balance, March 31, 2010	$	825	$	6,134	$	42,845	$	675	$	(2,067)	$	48,412

See accompanying notes to the unaudited consolidated financial statements.

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Dimeco, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

		For the three months ended March 31,
(in thousands)		2010		2009
Operating Activities
Net income	$	1,102	$	1,077
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Provision for loan losses		250		368
Depreciation and amortization		250		308
Amortization of premium and discount on investment securities, net		-		(97)
Amortization of net deferred loan origination fees		(27)		(41)
Investment securities loss		-		27
Origination of loans held for sale		(1,722)		(7,365)
Proceeds from sale of loans		1,772		5,974
Mortgage loans sold gains, net		(50)		(154)
Decrease in accrued interest receivable		36		318
Increase (decrease) in accrued interest payable		(49)		30
Deferred federal income taxes		(156)		112
Earnings on bank owned life insurance		(106)		(99)
Decrease in prepayment of FDIC insurance assessment		165		-
Other, net		(179)		(1,147)
Net cash provided by (used for) operating activities		1,286		(689)
Investing Activities
Investment securities available for sale:
Proceeds from maturities or paydown		52,685		48,632
Purchases		(71,344)		(34,701)
Net decrease (increase) in loans		1,649		(7,134)
Investment in Limited Partnership		-		(2,729)
Purchase of Federal Home Loan Bank stock		-		(67)
Purchase of fixed annuity		(1,500)		-
Purchase of bank-owned life insurance		-		(279)
Purchase of premises and equipment		(15)		(611)
Net cash provided by (used for) investing activities		(18,525)		3,111
Financing Activities
Net increase (decrease) in deposits		14,246		(3,721)
Increase in short-term borrowings		6,610		4,239
Repayment of other borrowed funds		(2,455)		(417)
Purchase of treasury stock		-		(35)
Proceeds from exercise of stock options		600		4
Cash dividends paid		(575)		(561)
Net cash provided by (used for) financing activities		18,426		(491)
Increase in cash and cash equivalents		1,187		1,931
Cash and cash equivalents at beginning of period		21,287		3,993
Cash and cash equivalents at end of period	$	22,474	$	5,924
Amount paid for interest	$	2,128	$	2,154
Amount paid for income taxes	$	-	$	-

See accompanying notes to the 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 December 2009, the FASB issued ASU 2009-16,Accounting for Transfer of Financial Assets. ASU 2009-16 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. ASU 2009-16 is effective for annual periods beginning after November 15, 2009 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 December 2009, the FASB issued ASU 2009-17,Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The objective of ASU 2009-17 is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. ASU 2009-17 is effective for annual periods beginning after November 15, 2009 and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s financial position.

In September 2009, the FASB issued new guidance impacting Topic 820,Fair Value Measurements and Disclosures. This creates a practical expedient to measure the fair value of an alternative investment that does not have a readily determinable fair value. This guidance also requires certain additional disclosures. This guidance is effective for interim and annual periods ending after December 15, 2009. The Company has presented the necessary disclosures in the Note 4 herein.

In October 2009, the FASB issued ASU 2009-15,Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The adoption of this guidance did not have a significant impact on the Company’s financial statements.

In January 2010, the FASB issued ASU 2010-01,Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash – a consensus of the FASB Emerging Issues Task Force. ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In January 2010, the FASB issued ASU 2010-02,Consolidation (Topic 810): Accounting and reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. ASU 2010-02 amends Subtopic 810-10 to address implementation issues related to changes in ownership provisions including clarifying the scope of the decrease in ownership and additional disclosures. ASU 2010-02 is

–8–

effective beginning in the period that an entity adopts Statement 160. If an entity has previously adopted Statement 160, ASU 2010-02 is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009 and should be applied retrospectively to the first period Statement 160 was adopted. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In January 2010, the FASB issued ASU 2010-04,Accounting for Various Topics – Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements - subsequent events, use of residual method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. ASU 2010-04 is effective January 15, 2010. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In January 2010, the FASB issued ASU 2010-05,Compensation – Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation. ASU 2010-05 updates existing guidance to address the SEC staff’s views on overcoming the presumption that for certain shareholders escrowed share arrangements represent compensation. ASU 2010-05 is effective January 15, 2010. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

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 is not expected to have a significant impact on the Company’s financial statements.

In February 2010, the FASB issued ASU 2010-08,Technical Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In March 2010, the FASB issued ASU 2010-11,Derivatives and Hedging. ASU 2010-11 provides clarification and related additional examples to improve financial reporting by resolving potential ambiguity about the breadth of the embedded credit derivative scope exception in ASC 815-15-15-8. ASU 2010-11 is effective at the beginning of the first fiscal quarter beginning after June 15, 2010. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

In April 2010, the FASB issued ASU 2010-13,Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 provides guidance on the classification of a share-based payment award as either equity or a liability. A share-based payment that contains a condition that is not a market, performance, or service condition is required to be classified as a liability. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010 and 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 2010 or 2009.

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, 2010 and 2009, 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:

–9–

	Three months ended March 31,
	2010	2009
Weighted average common stock outstanding	1,629,203	1,611,981
Average treasury stock	(54,100)	(53,411)
Weighted average common stock and common stock equivalents used to calculate basic earnings per share	1,575,103	1,558,570
Additional common stock equivalents (stock options) used to calculate diluted earnings per share	47	20,848
Weighted average common stock and common stock equivalents used to calculate diluted earnings per share	1,575,150	1,579,418

Options to purchase shares of common stock at a price above current market were outstanding at March 31, 2010 and March 31, 2009 that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. At March 31, 2010 there were 27,792 of these options outstanding and March 31, 2009 there were 19,080 of these options outstanding.

NOTE 3 – INVESTMENTS

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

	March 31, 2010
	Amortized     Cost		Gross     Unrealized     Gains		Gross     Unrealized     Losses		Fair Value
AVAILABLE FOR SALE
U.S. government agencies	$	24,274	$	66	$	(40)	$	24,300
Mortgage-backed securities		12,524		147		(33)		12,638
Obligations of states and political subdivisions:
Taxable		400		28		-		428
Tax-exempt		26,371		487		(32)		26,826
Corporate securities		6,216		449		-		6,665
Commercial paper		23,995		-		-		23,995
Total debt securities		93,780		1,177		(105)		94,852
Equity securities		565		81		(129)		517
Total	$	94,345	$	1,258	$	(234)	$	95,369
	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
AVAILABLE FOR SALE
U.S. government agencies	$	22,178	$	53	$	(111)	$	22,120
Mortgage-backed securities		4,182		143		(20)		4,305
Obligations of states and political subdivisions:
Taxable		400		15		-		415
Tax-exempt		26,279		452		(58)		26,673
Corporate securities		6,211		426		(1)		6,636
Commercial paper		13,045		-		-		13,045
Total debt securities		72,295		1,089		(190)		73,194
Equity securities		565		35		(166)		434
Total	$	72,860	$	1,124	$	(356)	$	73,628

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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 as follows (in thousands):

	March 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	$	9,461	$	40	$	-	$	-	$	9,461	$	40
Mortgage-backed securities		3,148		33		-		-		3,148		33
Obligations of states and political subdivisions		2,215		29		345		3		2,560		32
Corporate securities		-		-		-		-		-		-
Total debt securities		14,824		102		345		3		15,169		105
Equity securities		-		-		159		129		159		129
Total	$	14,824	$	102	$	504	$	132	$	15,328	$	234
	December 31, 2009
	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	$	13,765	$	111	$	-	$	-	$	13,765	$	111
Mortgage-backed securities		976		19		23		1		999		20
Obligations of states and political subdivisions		4,442		53		343		5		4,785		58
Corporate securities		131		1		-		-		131		1
Total debt securities		19,314		184		366		6		19,680		190
Equity securities		85		4		158		162		243		166
Total	$	19,399	$	188	$	524	$	168	$	19,923	$	356

The Company reviews its position quarterly and has asserted that at March 31, 2010, 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 38 and 59 positions that were temporarily impaired at March 31, 2010 and December 31, 2009, 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.

The amortized cost and estimated market values of debt securities at March, 31 2010, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

	Available for Sale
	Amortized Cost		Fair Value
Due in one year or less	$	30,117	$	30,172
Due after one year through five years		23,559		23,947
Due after five years through ten years		9,272		9,515
Due after ten years		30,832		31,218
Total debt securities	$	93,780	$	94,852

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NOTE 4 – 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 tables present the assets reported on the consolidated statements of financial condition at their fair value as of March 31, 2010 and December 31, 2009 by level within the fair value hierarchy. 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, 2010
	Level I		Level II		Level III		Total
Assets:
U.S. government agencies	$	-	$	24,300	$	-	$	24,300
Mortgage-backed securities		-		12,638		-		12,638
Obligations of states and political subdivisions:
Taxable		-		428		-		428
Tax-exempt		-		26,826		-		26,826
Corporate securities		-		6,665		-		6,665
Commercial paper		23,995		-		-		23,995
Total debt securities		23,995		70,857		-		94,852
Equity securities		517		-		-		517
Total	$	24,512	$	70,857	$	-	$	95,369
	December 31, 2009
	Level I		Level II		Level III		Total
Assets:
U.S. government agencies	$	-	$	22,120	$	-	$	22,120
Mortgage-backed securities		-		4,305		-		4,305
Obligations of states and political subdivisions:
Taxable		-		415		-		415
Tax-exempt		-		26,673		-		26,673
Corporate securities		-		6,636		-		6,636
Commercial paper		13,045		-		-		13,045
Total debt securities		13,045		60,149		-		73,194
Equity securities		434		-		-		434
Total	$	13,479	$	60,149	$	-	$	73,628

–12–

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, 2010 and December 31, 2009, 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.

Assets measured on a nonrecurring basis:	Level I		Level II		Level III		Total
Impaired Loans:
March 31, 2010	$	-	$	4,505	$	1,478	$	5,983
December 31, 2009	$	-	$	4,564	$	1,525	$	6,089
Other real estate owned:
March 31, 2010	$	-	$	1,073	$	-	$	1,073
December 31, 2009	$	-	$	389	$	-	$	389
Mortgage Servicing Rights:
March 31, 2010	$	-	$	-	$	579	$	579
December 31, 2009	$	-	$	-	$	583	$	583

–13–

NOTE 5 – FAIR VALUE DISCLOSURE

The estimated fair values of the Company’s financial instruments are as follows:

	March 31, 2010				December 31, 2009
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Cash and cash equivalents	$	22,474	$	22,474	$	21,287	$	21,287
Investment securities		95,369		95,369		73,628		73,628
Net loans		401,203		416,751		403,759		419,825
Accrued interest receivable		1,806		1,806		1,842		1,842
Regulatory stock		1,741		1,741		1,741		1,741
Bank-owned life insurance		9,267		9,267		9,175		9,175
Mortgage servicing rights		579		579		583		583
Financial liabilities:
Deposits		457,362		460,971		443,116		446,972
Short-term borrowings		17,584		17,584		10,974		10,974
Other borrowed funds		21,947		23,379		24,402		25,964
Accrued interest payable		1,031		1,031		1,080		1,080

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.

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.

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.

–14–

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.

–15–

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, 2010 were $553,246,000, an increase of $22,589,000 or 4.3% over December 31, 2009.

Cash and cash equivalents of $22,474,000 at March 31, 2010, represented an increase of $1,187,000 or 5.6 % over balances at December 31, 2009. The primary reason for the increase was additional funds held at the Federal Reserve Bank in order to provide funds needed in the check clearing process.

Investment securities available for sale increased $21,741,000 or 29.5 % from balances at December 31, 2009. The largest type of investment to increase was commercial paper which grew by $10,950,000 or 83.9%. We were able to purchase highly rated commercial paper this quarter as more companies offered these investments. In addition, balances of mortgage-backed securities increased by $8,332,000 or 193.5%. Our current investment objective is to receive the highest interest while maintaining liquidity in the portfolio during this low interest rate environment so that we have available funds to invest when interest rates rise. This was achieved through purchases of short term commercial paper along with mortgage backed securities that will return principal over time.

Total loans decreased by $2,342,000 or .6% during the first quarter of 2010. Loan originations totaled $20,928,000, a decline of 49.0% from a year earlier. We believe that the reduction in loan originations is a direct reflection of the economic slowdown and soft housing market.

Other real estate owned increased $684,000 or 175.8% due to the foreclosure action of a restaurant. Management is actively negotiating the sale of this property and expects it to be sold before year end.

Other assets increased $1,826,000 or 25.0% since December 31, 2009. The primary increase was the investment of $1,500,000 in a fixed rate annuity. In the current low interest rate environment we decided to purchase this insurance product which offers a spread to market rates and the opportunity to redeem a portion annually in the event that we are able to earn a better rate of return in future periods.

Total deposits increased $14,246,000 or 3.2% since December 31, 2009. Noninterest-bearing deposits increased $3,771,000 or 9.5% with all locations continuing to attract new customers. Some of the increase is due to the seasonal nature of a few commercial business customers who typically have higher balances at this time of year along with an increase in the average balance of all customers. At the same time interest-bearing deposits increased $10,475,000 or 2.6%. Balances of money market accounts increased $8,082,000 or 19.6%. We believe that customers are choosing this type of account in order to maintain liquidity while waiting for an increase in interest rates. One customer in particular moved $6,500,000 from a certificate of deposit to a money market because they have a short term need for those funds and can maintain their liquidity while earning a similar return to what they were paid in a short term certificate of deposit. Interest-bearing checking balances grew $2,283,000 or 5.8% and savings deposits increased $2,885,000 or 7.7%. We have continued to offer attractive interest rates on these products and have offered higher certificate of deposit interest rates to customers who utilize our platinum checking account which pays interest. Certificates of deposit declined $2,775,000 or 1.0% which included the transfer of funds to money market noted above. When considering that one transfer, we experienced an increase of $3,725,000 from other customers. During the first two months of 2010 we continued to offer special short-term certificates of deposit at lower interest rates. After discontinuing offering special certificate of deposit products in March 2010, most customers are still rolling their certificates of deposit into new, lower costing certificates of deposit.

Short-term borrowings increased by $6,610,000 or 60.2% over the period with the entire increase in the Financial Manager sweep product. Each year our summer camp customer balances increase as they accept prepayments for the upcoming season in the first quarter of the year.

–16–

Other borrowed funds decreased $2,455,000 or 10.1% due to the maturity of $2,000,000 of Federal Home Loan Bank of Pittsburgh advances and other regularly scheduled principal payments on amortizing borrowings.

Other liabilities include a variety of additional liabilities no one of which is large enough to be listed separately. The total of all these accounts increased $2,942,000 or 74.1% since December 31, 2009. When securities are purchased during a period and the funds don’t settle until the next period, we record a liability for the purchase amount. A March 31, 2010, this balance was $2,826,000 greater than at December 31, 2009.

Stockholders’ equity increased $1,295,000 or 2.7% during the first three months of the year. Net income of $1,102,000 was offset by dividends declared of $575,000. Stock options granted to directors and officers that expired March 15, 2010 were exercised in the first quarter of the year thereby increasing equity by $600,000. In addition, we recognized an increase in the market value of our investment portfolio of $168,000 net of income taxes during the quarter which increased accumulated other comprehensive income. Regulatory capital ratios remain strong with 11.7% total risk-based capital, 10.5% Tier I capital and a Tier I leverage ratio of 8.8%. The regulatory minimums to be well capitalized for these ratios are 10.0%, 6.0% and 5.0%, respectively.

Results of Operations

Comparison of the three months ended March 31, 2010 and 2009

The Company reported net income of $1,102,000 for the quarter ended March 31, 2010, representing an increase of $25,000 or 2.3% over the first quarter of 2009.

Net interest income of $3,967,000 in the first quarter of 2010 represented a slight decrease of $14,000 or .4% from that recorded for the same quarter of 2009.

Total interest income declined by $121,000 or 2.0% in 2010 as compared to 2009. Interest and fees earned on loans decreased $98,000 or 1.8% in 2010 over 2009.The bank continues to experience rate declines on variable interest rate loans as those with longer-term repricing structures tied to the prime rate adjust downward. The average balance of the loan portfolio increased $26,290,000 or 6.8% over the period while the average interest rate of the portfolio declined by .5% from 2009 to 2010, resulting in the average rate earned of 5.5% during the first quarter of 2010. As of March 31, 2010 we had $7,701,000 of loans in nonaccrual status which would have earned $104,000 of additional income if they were performing. In the first quarter of 2009 we would have earned $94,000 of additional income.

Interest earned on taxable investments declined $75,000 or 20.2% in 2010 as compared to 2009. The average rate earned on the portfolio for the first quarter of 2010 was 2.27% as compared to 4.65% earned in the first quarter of 2009. The average balance of taxable investments increased $20,482,000 or 63.5% in 2010 compared to balances a year earlier. Although our desire is to continue to invest in quality loans in lieu of investments, the increase in deposits was at a faster pace than quality loan opportunities, resulting in more dollars being invested in bonds than is typical. In the current lower interest rate environment new bond purchases were at significantly lower yields than those in the portfolio a year earlier. The average interest rate earned on short term commercial paper in 2010 was .39% compared to 3.01% a year earlier. In order to maintain liquidity for future interest rate increases, we continued to purchase these securities, increasing the average balance of commercial paper by $6,577,000 or 61.8%. At the same time we increased purchases of U.S. government agency bonds that typically contain optionality, having an average balance of $22,133,000 for the first quarter of 2010, which was $14,010,000 or 172.5% greater than during the first quarter of 2009. The average interest rate received declined from 5.37% in 2009 to 2.23% in 2010 as we experienced calls during 2009 and the first three months of 2010 and replaced those bonds with current rate instruments. Mortgage backed securities pay principal and interest monthly, giving the purchaser the opportunity to reinvest funds as interest rates rise. In previous periods we had not purchased many of this type of bond but in an effort to gain opportunity for future rising interest rates we have increased this type of purchase resulting in an average balance of $5,819,000 for the first quarter of 2010 versus an average of $3,718,000 in the same period last year. The average interest rate earned on these bonds was 4.31% for the first quarter of 2010 compared to 5.10% in the first quarter of 2009.

Interest earned on tax exempt investments increased $41,000 or 19.1% in the first quarter of 2010 as compared to 2009. The average balance of these investments increased $5,010,000 or 23.2% in 2010 as compared to 2009. During 2009, we continued to purchase municipal bonds on a tax equivalent scale at rates that were greater than or equal to taxable bond offerings in the market. Opportunities for similar results were not available to the same degree in 2010.

Interest expense of $2,078,000 represented a decrease of $107,000 or 4.9% in the first quarter of 2010 as compared to the same period of 2009. Although the average balance of interest-bearing deposits increased $70,289,000 or 20.6%, we paid 53 basis points less than during the first quarter of 2009. As certificates of deposits matured, we were able to re-write those deposits with those paying lower

–17–

interest rates. Interest paid on short-term borrowings declined $32,000 or 56.1% as the average interest rate paid declined 47 basis points. Interest on other borrowed funds increased $59,000 or 29.8% primarily due to a one-time adjustment of $62,000 in 2009 for capitalized interest in relation to the construction of the Lake Region office which was completed in the first quarter of 2009.

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 $250,000 for the first quarter of 2010, a decrease of $118,000 or 32.1% from the same quarter of 2009. Economic indicators deteriorated substantially during 2009 which negatively affected the loan rating on several large loans last year, driving the provision expense higher at that time. Although these conditions have not been eliminated, we adjusted the allowance calculation for those loans in 2009 and didn’t need to adjust further for those issues. We believe that the allowance for loan loss balance is adequate.

Noninterest income of $961,000 was $62,000 or 6.9% greater in 2010 than in 2009. Service charges on deposit accounts continued to decline resulting in a decrease of $28,000 or 7.5% in 2010. We believe that our customers are avoiding overdrafts on their accounts even though the number of accounts subject to these charges has increased. Gains on mortgage loans held for sale declined $104,000 or 67.5% in 2010 after the large increase of refinances in 2009. Brokerage commissions increased $69,000 or 100.0% with customers overcoming their hesitancy to invest in the stock market, the increase of market values in asset-based fee accounts and a surge in sales of insurance annuity products. The category of other noninterest income increased $91,000 or 39.1% in 2010 as compared to 2009. Two categories of other income had larger increases for the first quarter of 2010 compared to 2009. The first was a decline in the amortization of mortgage servicing rights, an offset to income, of $47,000 or 74.8% due to the decline in refinancing activity in 2010. As residential loans that we originated, sold in previous periods and currently service are paid off, the value of those mortgage servicing rights become fully amortized. This accounting resulted in larger contra income in 2009 than in 2010 when the volume of refinances declined. Interchange fees earned from our customers use of their debit cards has consistently increased as we offer debit cards to each new account and electronic payment methods gain more widespread acceptance. This fee income increased $26,000 or 30.5% in 2010 compared to 2009. Smaller increases in other noninterest income accounts were responsible for the remaining gain in income in 2010.

Salaries and employee benefits increased $82,000 or 5.2% in the first quarter of 2010 as compared to 2009. Wages increased $54,000 or 4.8% in 2010 as compared to 2009 due to annual salary increases combined with hiring two additional full time equivalent employees in 2010 as compared to 2009. We added a commercial loan officer to replace one who is retiring in May 2010 and a trust officer as this position was never filled with the job responsibilities completed by other employees, requiring more time as the trust assets increased. Employee benefits increased $18,000 or 6.1% as costs of medical insurance increased in 2010 along with having more employees eligible for the benefit in 2010 than a year earlier. Other miscellaneous employment expenses account for the remaining changes.

Furniture and equipment expense decreased $40,000 or 25.3% in 2010 as compared to 2009 as equipment leasing expense declined with outsourcing the data processing function.

Data processing expense increased $71,000 or 61.2% due to outsourcing this function in April 2009.

FDIC insurance assessments increased $41,000 or 30.1% as bank assessments increased to support the fund as more financial institutions succumb to the current economic conditions.

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

–18–

of March 31, 2010 compared to December 31, 2009:

	March 31, 2010		December 31, 2009
(dollars in thousands)
Cash and due from banks	$	4,839	$	3,991
Interest-bearing deposits with other banks		14,635		14,296
Federal funds sold		3,000		3,000
Investment securities maturing or repricing in one year or less		41,306		30,924
		63,780		52,211
Less short-term borrowings		17,584		10,974
Net liquidity position	$	46,196	$	41,237
As a percent of total assets		8.4%		7.8%

The Bank has the ability to borrow from the Federal Home Loan Bank of Pittsburgh with the maximum borrowing capacity at March 31, 2010 of $186 million with an available balance of $164 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 the discount window of the Federal Reserve Bank of Philadelphia. 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.

–19–

Risk Elements

The table below presents information concerning nonperforming assets including nonaccrual loans and loans 90 days or more past due at March 31, 2010 and December 31, 2009. 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, 2009
(In thousands)	Past due 90 days or more		Nonaccrual
Real estate-construction loans	$	6	$	-
Real estate-mortgage loans		1,061		6,197
Commercial and industrial loans		54		1,463
Installment loans to individuals		30		41
Other loans		91		-
Total	$	1,242	$	7,701
	December 31, 2009
	Past due 90 days or more		Nonaccrual
Real estate-construction loans	$	6	$	-
Real estate-mortgage loans		1,988		5,966
Commercial and industrial loans		67		1,524
Installment loans to individuals		61		32
Other loans		30		-
Total	$	2,152	$	7,522

Interest income of $104,000 in the first quarter of 2010 and $93,000 in the same quarter of 2009 would have been recognized on nonaccrual loans if they had been performing in accordance with their original terms.

At March 31, 2010 there were loans classified as impaired of $7,365,000 with a related allowance for loan loss of $1,382,000. The average balance of these loans during 2010 was $7,391,000. No interest was recognized on these loans in 2010. At December 31, 2009 there was $7,418,000 of loans classified as impaired for which there was a related allowance for loan loss of $1,329,000.

Management believes the level of the allowance for loan losses at March 31, 2010 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. Following is an analysis of transactions within the allowance for the first quarter of 2010:

–20–

Balance December 31, 2009	$	6,253
Charge-offs:
Commercial, financial and agricultural		13
Real estate-construction		-
Real estate-mortgage		-
Installment loans to individuals		37
Total charge-offs		50
Recoveries:
Commercial, financial and agricultural		-
Real estate-construction		-
Real estate-mortgage		-
Installment loans to individuals		14
Total recoveries		14
Net charge-offs		36
Additions charged to operations		250
Balance at March 31, 2010	$	6,467
Ratio of net charge-offs during the period to average loans outstanding during the period		.01%
Allowance for loan loss as a % of loans		1.59%

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.

–21–

	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	$	17,635	$	-	$	-	$	-	$	17,635
Investment securities available for sale (5)		32,143		9,163		18,527		35,536		95,369
Loans(1) (4)		94,272		116,293		101,370		89,077		401,012
Rate sensitive assets	$	144,050	$	125,456	$	119,897	$	124,613	$	514,016
Liabilities:
Interest-bearing deposits:
Interest-bearing demand(2)	$	3,349	$	10,467	$	28,051	$	-	$	41,867
Money market (3)		8,375		24,631		16,256		-		49,262
Savings(2)		3,214		10,043		26,915		-		40,172
Time deposits		67,676		168,994		45,933		-		282,603
Short-term borrowings		17,584		-		-		-		17,584
Other borrowings		460		2,411		11,474		7,602		21,947
Rate sensitive liabilities	$	100,658	$	216,546	$	128,629	$	7,602	$	453,435
Interest sensitivity gap	$	43,392	$	(91,090)	$	(8,732)	$	117,011	$	60,581
Cumulative gap	$	43,392	$	(47,698)	$	(56,430)	$	60,581
Cumulative gap to total assets		7.84%		(8.62%)		(10.20%)		10.95%

⁽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⁾ Investments are included in the earlier period in which interest rates are next scheduled to adjust or in which they are due. Included are U.S. Government Agency step-up bonds characterized by having tiered interest rates over their life. Due to this feature these securities have been reallocated from their maturity date to their next step-up date. The specific impact of this policy by timeframe is as follows: “90 days or less” increased $2,680, “>90 days but < 1 year” increased $5,497, “1-5 years” decreased $5,675 and “>5 years” decreased $2,502. In addition, municipal bonds and corporate bonds with market values of $2,500 and $1,230, respectively, have been reallocated from the “>5 year” category to “90 days or less” because they are variable interest rate bonds, some of which have a 7 day put feature. A corporate bond with a market value of $249 was reallocated from “1 - 5 years” to “90 days or less” because the interest rate reprices quarterly.

As this report shows, the Company was liability sensitive in the one year period at March 31, 2010 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; 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 improve.

–22–

The second report used to monitor interest rate risk is the Interest Rate Shock Analysis. This tool attempts to determine the affect on income of various shifts in the interest rate environment. In particular, a shift of 200 basis points, or 2% in interest rates, is the industry standard. Given a downward shift of 200 basis points, net interest income would decrease by $1,157,000 or 6.5% while net income would decrease $778,000 or 14.9%. We do not believe that a downward shift of rates of this magnitude is possible since the market federal funds sold rate is between 0% and .25% now, however 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 $7,264,000 or 12.6%, 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.

				Interest Rate Shock Analysis
	100 basis points							200 basis points
	Up				Down			Up				Down
	Amount			%	Amount		%	Amount			%	Amount			%
Net interest income	$	196		1.10%	$	334	1.88%	$	328		1.85%	$	(1,157	)	-6.51%
Net income	$	141		2.69%	$	218	4.17%	$	237		4.53%	$	(778	)	-14.87%
EVE	$	(3,232	)	-5.60%	$	4,280	7.42%	$	(7,264	)	-12.59%	$	10,071		17.46%

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

As of March 31, 2010 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, 2010. 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. in Dimeco’s Annual Report on Form 10K for the period ended December 31, 2009.
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 20, 2010 – News Release of Registrant
		Form 8K – Report on April 26, 2010 – 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
32.1		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.

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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 14, 2010	By:	/s/ Gary C. Beilman
		Gary C. Beilman
		President and Chief Executive Officer
Date: May 14, 2010	By:	/s/ Maureen H. Beilman
		Maureen H. Beilman
		Chief Financial Officer

–25–