UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended December
31, 2011
or
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¨
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TRANSITION
REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from
__________ to __________
Commission File Number
0-49639
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DIMECO, INC.
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(Exact name of Registrant as specified in its Charter)
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Pennsylvania
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23-2250152
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(State or other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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820 Church Street, Honesdale, Pennsylvania
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18431
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrant’s Telephone Number, including
area code:
(570) 253-1970
Securities Registered Pursuant to Section
12(b) of the Act:
None
Securities Registered Pursuant to Section
12(g) of the Act:
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Common Stock, $.50 par value
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(Title of Class)
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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨
YES
x
NO
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨
YES
x
NO
Indicate
by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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.
x
YES
¨
NO
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x
YES
¨
NO
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
x
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.
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Large accelerated filer
¨
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
x
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Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Act).
¨
YES
x
NO
The aggregate market value of the voting
and non-voting common equity held by non-affiliates of the registrant was approximately $46 million as of June 30, 2011 based on
the last sale ($35 per share) reported on the OTC Bulletin Board as of that date. Solely for purposes of this calculation, the
term “affiliate” refers to all directors and executive officers of the registrant and all stockholders beneficially
owning more than 5% of the registrant’s common stock.
As of March 1, 2012, there were issued
and outstanding 1,599,646 shares of the registrant’s common stock.
DOCUMENTS INCORPORATED
BY REFERENCE
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1.
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Portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2011. (Part II)
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2.
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Portions of the Registrant’s definitive Proxy Statement for the 2012 Annual Meeting of Shareholders. (Part III)
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DIMECO, INC.
ANNUAL REPORT ON FORM 10-K
for the fiscal year ended December 31,
2011
INDEX
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Page
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PART I
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Item 1.
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Business
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2
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Item 1A.
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Risk Factors
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23
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Item 1B.
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Unresolved Staff Comments
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23
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Item 2.
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Properties
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23
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Item 3.
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Legal Proceedings
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24
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Item 4.
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Mine Safety Disclosures
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24
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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24
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Item 6.
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Selected Financial Data
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24
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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24
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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24
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Item 8.
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Financial Statements and Supplementary Data
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25
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Item 9.
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Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
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25
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Item 9A.
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Controls and Procedures
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25
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Item 9B.
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Other Information
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25
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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25
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Item 11.
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Executive Compensation
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25
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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25
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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27
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Item 14.
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Principal Accounting Fees and Services
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27
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules
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27
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SIGNATURES
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29
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PART I
Forward-Looking Statements
Dimeco, Inc. (the “Company”
or “Registrant”) may, from time to time, make written or oral “forward-looking statements,” including statements
contained in the Company’s filings with the Securities and Exchange Commission (including this annual report on Form 10-K
and the exhibits thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith
by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking
statements involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations, estimates
and intentions that are subject to change based on various important factors (some of which are beyond the Company’s control).
The following factors, among others, could cause the Company’s financial performance to differ materially from the plans,
objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States
economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes
in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve
System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and services by users, including the features, pricing
and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products
and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products
and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning
taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits;
and the success of the Company at managing these risks.
The Company cautions
that this list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the Company.
Item 1. Business
General
The Company, a Pennsylvania
corporation, is a bank holding company headquartered in Honesdale, Pennsylvania. At December 31, 2011, the Company had total
consolidated assets, deposits and stockholders’ equity of approximately $582 million, $484 million and $55 million, respectively.
The Company’s principal business is to serve as a holding company for its wholly-owned subsidiary, The Dime Bank (the “Bank”).
The Bank is a Pennsylvania-chartered
commercial bank, originally organized in 1905. The Bank provides a comprehensive range of lending, depository and financial services
to individuals and small to medium-sized businesses. The Bank’s deposit services range from traditional time, demand, and
savings deposit accounts to sophisticated cash management products, including electronic banking and commercial sweep accounts.
The Bank’s lending services include secured and unsecured commercial, real estate and consumer loans. The Bank also operates
a trust department and an investment department which had $137 million in client assets under management at December 31, 2011.
The Bank conducts business from six branch offices, located in Honesdale, Hawley, Damascus, Greentown and Dingmans Ferry, Pennsylvania,
as well as maintaining two off-site ATM machines each located in Honesdale and Hawley, Pennsylvania and an Operations Center in
Honesdale, Pennsylvania. The Bank’s Lake Region office in Hawley, Pennsylvania also serves as the office for the Bank’s
trust and investments departments. The Bank maintains a website at www.thedimebank.com. Information on our website should not be
treated as part of this Annual Report on Form 10-K.
The Bank has a 100%
owned subsidiary, TDB Insurance Services, LLC in order to offer title insurance services in conjunction with the Bank’s lending
function.
Competition
The Bank is one of
many financial institutions serving its principal market area, which includes Wayne and Pike Counties, Pennsylvania and Sullivan
County, New York. Such market areas are approximately 90 miles west of New York City. Pike County, Pennsylvania is one of the fastest
growing counties in Pennsylvania. The competition for deposit products comes primarily from other insured financial institutions
such as commercial banks, thrift institutions, credit unions, and multi-state regional banks in the Company’s market area.
Based on data compiled by the FDIC as of June 30, 2011 (the latest date for which such information is available), the Bank
had the largest share of FDIC-insured deposits in Wayne County with approximately 28% and the second largest share of FDIC-insured
deposits in Pike County with approximately 20%. This data does not reflect deposits held by credit unions with which the Bank also
competes. Deposit competition also includes a number of insurance products sold by local agents and investment products, such as
mutual funds and other securities sold by local and regional brokers. Loan competition varies depending upon market conditions
and comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, multi-state regional
banks, and mortgage brokers.
Lending Activities
General.
The
principal lending activity of the Bank is the origination of commercial real estate loans, residential mortgage loans, commercial
and industrial loans, and to a lesser extent, installment loans, construction and development loans, home equity loans, and agricultural
loans. Generally, loans are originated in the Company’s primary market area of Pike and Wayne Counties, Pennsylvania and
Sullivan County, New York. The majority of the Bank’s borrowers are located in these counties and would be expected to be
affected by economic and other conditions in this area. In addition, at December 31, 2011, the Company had $106 million of
loans granted to summer camps and recreational facilities in the northeastern United States. This amount of loans constituted approximately
24% of the loan portfolio. The Company does not believe that there are any other concentrations of loans or borrowers exceeding
10% of total loans.
Analysis of Loan Portfolio.
Set forth
below is selected data relating to the composition of the Bank’s loan portfolio by type of loan on the dates indicated. Prior
period information has been reclassified to agree with current year presentation.
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2011
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2010
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2009
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2008
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2007
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(dollars in thousands)
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$
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%
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$
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%
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$
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%
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$
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%
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$
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%
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Loans secured by real estate:
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Construction and development
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$
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14,571
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3.3
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%
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$
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12,472
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2.9
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%
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$
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16,286
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4.0
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%
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$
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13,403
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3.5
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%
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$
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8,385
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2.4
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%
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Mortgage loans secured by farmland
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3,585
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0.8
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%
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2,590
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0.6
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%
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1,684
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0.4
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%
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1,804
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0.5
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%
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1,869
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0.5
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%
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Commercial loans secured
by non-farm, non-residential properties
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269,248
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60.2
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%
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255,851
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60.2
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%
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243,014
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59.3
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%
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217,378
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57.2
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%
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198,323
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57.5
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%
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Secured by 1-4 family residential properties:
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Home equity lines of credit
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11,215
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2.5
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%
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9,935
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2.4
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%
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8,657
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2.1
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%
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6,342
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1.7
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%
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4,718
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1.4
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%
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Mortgage loans
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87,088
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19.5
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%
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81,665
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19.2
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%
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76,193
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18.6
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%
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75,715
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19.9
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%
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69,242
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20.1
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%
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Commercial and industrial loans
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45,312
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10.1
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%
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44,850
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10.6
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%
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42,502
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10.4
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%
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42,396
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11.1
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%
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39,337
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11.4
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%
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Installment loans
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9,821
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2.2
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%
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10,772
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2.5
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%
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12,869
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3.1
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%
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14,750
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3.9
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%
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15,656
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4.5
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%
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Other loans:
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Agriculture
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955
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0.2
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%
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1,771
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0.4
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%
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1,426
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0.3
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%
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694
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0.2
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%
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879
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0.3
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%
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Other
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5,459
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1.2
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%
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5,163
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1.2
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%
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7,381
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1.8
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%
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7,725
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2.0
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%
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6,349
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1.9
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%
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Total loans
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$
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447,254
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100.0
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%
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$
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425,069
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100.0
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%
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$
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410,012
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100.0
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%
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$
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380,207
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100.0
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%
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$
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344,758
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100.0
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%
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Loan Maturities.
The following table sets forth the maturities for selected categories of the Bank’s loan portfolio at December 31, 2011.
The table does not include prepayments or scheduled principal repayments. All loans are shown as maturing based on contractual
maturities. Demand loans and loans having no stated maturity are shown as due within one year.
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(in thousands)
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Due within 1 yr.
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Due after 1
through 5 years
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Due after 5
years
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Total
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Commercial & agricultural real estate
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$
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18,434
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$
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17,038
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$
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237,361
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$
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272,833
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Commercial & industrial, and agricultural
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11,214
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14,848
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20,205
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46,267
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Construction and development
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219
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10,239
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4,113
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14,571
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Total
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$
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29,867
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$
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42,125
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$
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261,679
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$
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333,671
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The following table
sets forth the dollar amount as of December 31, 2011 of selected categories of the Company’s loans due more than one
year after December 31, 2011, which are based upon fixed interest rates or floating or adjustable interest rates.
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(in thousands)
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Fixed Rate
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Variable Rate
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Total
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Commercial & agricultural real estate
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$
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11,289
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$
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243,110
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$
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254,399
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Commercial & industrial, and agricultural
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18,745
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16,308
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35,053
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Construction and development
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5,939
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8,413
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14,352
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Total
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$
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35,973
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$
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267,831
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$
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303,804
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Construction and Development Loans.
The Bank’s construction lending has primarily involved lending for commercial construction projects and for single-family
residences. All loans for the construction of speculative sale homes have a loan to value ratio of not more than 80%. For both
commercial and single-family projects loan proceeds are disbursed during the construction phase according to a draw schedule based
on the stage of completion. Construction projects are inspected by approved contracted inspectors. Construction loans are underwritten
on the basis of the appraised value of the property as completed. For commercial projects, the Bank typically provides the permanent
financing after the construction period, as a commercial mortgage.
The Bank has also
originated loans for the development of raw land. These loans have a term of up to three years. Loans granted to developers may
have an interest only period during development. Development loans have a loan-to-value ratio not exceeding 75%.
Loans involving construction
and development financing have a higher level of risk than loans for the purchase of existing property since collateral values,
land values, development costs and construction costs can only be estimated at the time the loan is approved. The Bank has sought
to minimize its risk in construction and development lending by offering such financing primarily to builders and developers to
whom the Bank has loaned funds in the past and to persons who have previous experience in such projects. The Bank also limits construction
and development lending to its market area, with which management is familiar.
Commercial Real
Estate and Farmland Loans.
The commercial real estate loan portfolio consists of loans secured primarily by children’s
recreational summer camps, retail stores, restaurants, resorts, hotels, investment real estate, stone quarries and manufacturing
facilities. The Bank also makes loans secured by farmland. Loans secured by commercial property or farmland may be originated in
amounts up to 80% of the lower of the appraised value or purchase price, for a maximum term of 20 years. The Bank has a concentration
of commercial real estate loans that are secured by summer camps and recreational facilities for children in the northeastern United
States. These loans are generally adjustable-rate loans, with terms of up to 20 years, and the rate tied to the prime interest
rate. Interest rate floors were included in most loans originations in 2009, 2010 and 2011 but were not before that time. At December 31,
2011, $106 million of the loan portfolio consisted of loans to these summer camps and recreational facilities for children.
Loans secured by commercial
properties generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. This increased
credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers,
the effects of general economic conditions on income-producing properties and the greater difficulty of evaluating and monitoring
these types of loans. Any significant adverse change in economic conditions could have an adverse impact on the borrowers’
ability to repay loans. A large portion of the Bank’s commercial real estate loan portfolio consists of loans secured by
summer camps and recreational facilities located in the northeastern United States. Such loans are dependent upon seasonal business
and factors beyond the Bank’s control, such as the general economic condition of the northeastern United States and the impact
on discretionary consumer spending. Furthermore, the repayment of loans secured by commercial real estate is typically dependent
upon the successful operation of the related business or commercial project. If the cash flow from the project is reduced, the
borrower’s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments.
In such cases, the Bank may be compelled to modify the terms of the loan. In addition, the nature of these loans makes them generally
less predictable and more difficult to evaluate and monitor. As a result, repayment of these loans may be subject to a greater
extent than residential loans to adverse conditions in the real estate market or economy.
Residential Real
Estate Loans.
The residential real estate portfolio consists primarily of owner-occupied 1-4 family residential mortgage loans.
The Bank generally originates 1-4 family residential mortgage loans in amounts of up to 80% of the appraised value of the mortgaged
property without requiring mortgage insurance. The Bank will originate residential mortgage loans in amounts up to 95% of the appraised
value of a mortgaged property; however, mortgage insurance is required for any loan amount in excess of 80% of appraised value.
In addition, the Bank participates in special residential loan programs through various state and federal agencies which provide
first-time home buyers the ability to finance up to 100% of the property value; these loans are guaranteed by those various federal
and state agencies. The Bank offers residential fixed-rate loans and adjustable-rate loans with a 15 to 30 year amortization period.
Interest rates for adjustable-rate loans for residences adjust every 1 to 3 years based upon rates on U.S. Treasury bills and notes.
Interest rate adjustments on such loans are generally limited to two percentage points during any adjustment period and six percentage
points over the life of the loan. These loans are originated for retention in the portfolio. The Bank does not use introductory
“teaser” rates on adjustable-rate mortgages nor has it originated “interest-only” mortgages.
Fixed-rate loans are
generally underwritten in accordance with Freddie Mac guidelines. Currently, loans underwritten in accordance with Freddie Mac
guidelines are generally sold in the secondary market. However, the number of saleable loans could vary materially as a result
of market conditions. Fixed-rate loans which are held in portfolio are underwritten in accordance with Freddie Mac credit guidelines
but occasionally may not conform in relation to loan amount or property guidelines. Since we are located in a rural area, many
homes are on properties with more acreage than permitted by Freddie Mac underwriting guidelines. At December 31, 2011, $38
million of the Bank’s residential real estate loan portfolio consisted of long-term, fixed-rate first mortgage loans.
Substantially all
of the 1-4 family mortgages include “due on sale” clauses, which are provisions giving the Bank the right to declare
a loan immediately payable if the borrower sells or otherwise transfers an interest in the property to a third party.
Property appraisals
on real estate securing 1-4 family residential loans are made by appraisers approved by the Loan Committee. Appraisals are performed
in accordance with applicable regulations and policies. The Bank obtains title insurance policies on most first mortgage real estate
loans originated.
Home equity term loans
are written for terms of 1 to 15 years with fixed rates of interest. The Bank also offers revolving home equity lines of credit
with variable interest rates tied to the New York prime rate. Interest rate floors were added to these loan originations in 2010.
These lines allow for a 10-year draw period followed by a 10-year repayment period. Both types of home equity loans are typically
based upon the lower of 80% of the collateral value or $150,000.
Commercial and
Industrial Loans.
Commercial and industrial loans consist of equipment, accounts receivable, inventory, lines of credit, and
other business purpose loans. Such loans are generally originated in amounts up to 75% of the appraised value of the business asset
and are secured by either the underlying collateral and/or by the personal guarantees of the principal(s) of the borrower. Commercial
and industrial loans are generally originated at rates above the prime interest rate and periodically adjust with changes to prime.
Loan interest rate floors were included in the majority of loans originated since 2009. These loans generally mature in 5 to 10
years.
Unlike residential
mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment
and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business
loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s
business. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the
success of the business itself and the general economic environment.
Installment Loans.
The installment loan portfolio includes various types of secured and unsecured consumer loans including automobile, education,
and recreational vehicle loans. The Bank also extends overdraft lines of credit through its Ready Credit program. The Bank originates
loans directly and indirectly through local automobile and recreational vehicle dealerships. These loans generally have terms of
1 to 5 years, generally at fixed rates of interest. The interest rates range between 2% for loans that are secured by deposits
to 14% for loans that are unsecured, with an average interest rate of approximately 9%. The installment loan portfolio includes
approximately $5 million of new and used automobile and recreational vehicle loans. These loans are originated in amounts up to
90% of the purchase price of the vehicle.
Consumer installment
lending may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured
or secured by assets, such as automobiles or recreational vehicles, which depreciate rapidly. Repossessed collateral for a defaulted
consumer loan may not be sufficient for repayment of the outstanding loan, and the remaining deficiency may not be collectible.
Indirect lending exposes us to additional risk in that we must rely on the dealer to provide accurate information to us and accurate
disclosure to the borrowers.
Loans Held For
Sale.
The Bank holds as available for sale certain residential mortgage loans. These loans conform to Freddie Mac guidelines
and are readily saleable in the secondary market. The Bank services such loans and is generally not liable for these loans, since
they are sold on a non-recourse basis. At December 31, 2011, we had no loans classified as held for sale.
Loan Solicitation
and Processing.
Loans are derived from a number of sources. Installment loans are primarily solicited through advertising,
existing customers and referrals from automobile and recreation vehicle dealers. Residential mortgage loans are generally derived
from advertising, walk-in customers and referrals by realtors, depositors, and borrowers. Commercial real estate loans and commercial
and industrial loans are generally obtained through existing relationships with borrowers and new relationships developed by our
loan officers.
The Bank has established
various lending limits for its officers and also maintains a Loan Committee. The Loan Committee is comprised of the President,
Senior Lending Officer and other Bank officers. The Loan Committee has the authority to approve all loans up to $500,000. Requests
in excess of this limit must be submitted to the Board of Directors’ Loan Committee or the entire Board for approval. Additionally,
the President and Senior Lending Officer each has the authority to approve secured loans up to $200,000, and unsecured loans up
to $100,000. Loan officers generally have the authority to approve secured loans between $30,000 and $150,000 and unsecured loans
between $15,000 and $50,000. Notwithstanding individual lending authority, certain loan policy exceptions must be submitted to
the Loan Committee for approval.
Hazard insurance coverage
is required on all properties securing loans made by the Bank. Flood insurance is also required, when applicable. Residential and
commercial loan applicants are notified of the credit decision by letter. If the loan is approved, the loan commitment specifies
the terms and conditions of the proposed loan including the amount, interest rate, and amortization term, a brief description of
the required collateral, and the required insurance coverage. The borrower must provide proof of fire, flood (if applicable) and
casualty insurance on the property serving as collateral, and these applicable insurances must be maintained during the full term
of the loan.
Loan Commitments.
The Bank generally grants commitments to fund fixed-rate and adjustable-rate, single-family mortgage loans for periods of 30 days
at a specified term and interest rate. The total amount of its commitments to extend credit as of December 31, 2011, was $3
million.
Nonperforming Assets
The following table
identifies nonperforming assets including nonaccrual loans and past due loans which were accruing but contractually past due 90
days or more and restructured loans. Restructured loans are those on which terms have been renegotiated to provide a reduction
or deferral of principal or interest as a result of the deteriorating position of the borrower
.
At December 31, 2011,
the Bank had $17 million of impaired loans within the definition of ASC Topic 310.
|
|
|
At December 31,
|
|
|
(In thousands)
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Loans accounted for on a nonaccrual basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate-construction loans
|
|
$
|
1,105
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Real estate-mortgage loans
|
|
|
12,324
|
|
|
|
15,661
|
|
|
|
5,966
|
|
|
|
341
|
|
|
|
443
|
|
|
Commercial and industrial loans
|
|
|
38
|
|
|
|
-
|
|
|
|
1,524
|
|
|
|
23
|
|
|
|
116
|
|
|
Installment loans to individuals
|
|
|
48
|
|
|
|
15
|
|
|
|
32
|
|
|
|
25
|
|
|
|
13
|
|
|
Other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
13,515
|
|
|
$
|
15,676
|
|
|
$
|
7,522
|
|
|
$
|
389
|
|
|
$
|
572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans which are contractually past due 90 days or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate-construction loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
Real estate-mortgage loans
|
|
|
386
|
|
|
|
1,464
|
|
|
|
1,988
|
|
|
|
5,823
|
|
|
|
509
|
|
|
Commercial and industrial loans
|
|
|
163
|
|
|
|
541
|
|
|
|
67
|
|
|
|
11
|
|
|
|
50
|
|
|
Installment loans to individuals
|
|
|
2
|
|
|
|
44
|
|
|
|
61
|
|
|
|
20
|
|
|
|
1
|
|
|
Other loans
|
|
|
-
|
|
|
|
39
|
|
|
|
30
|
|
|
|
4
|
|
|
|
-
|
|
|
Total
|
|
$
|
551
|
|
|
$
|
2,088
|
|
|
$
|
2,152
|
|
|
$
|
5,864
|
|
|
$
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans
|
|
|
4,725
|
|
|
|
43
|
|
|
|
46
|
|
|
|
48
|
|
|
|
83
|
|
|
Total nonperforming loans
|
|
|
18,791
|
|
|
|
17,807
|
|
|
|
9,720
|
|
|
|
6,301
|
|
|
|
1,215
|
|
|
Other real estate owned
|
|
|
3,467
|
|
|
|
960
|
|
|
|
389
|
|
|
|
1,955
|
|
|
|
-
|
|
|
Repossessed assets
|
|
|
25
|
|
|
|
27
|
|
|
|
6
|
|
|
|
164
|
|
|
|
4
|
|
|
Total nonperforming assets
|
|
$
|
22,283
|
|
|
$
|
18,794
|
|
|
$
|
10,115
|
|
|
$
|
8,420
|
|
|
$
|
1,219
|
|
Interest income of
$613 thousand would have been recognized on nonaccrual loans during 2011 if they had been performing in accordance with their original
terms. We recognized no income on such loans during 2011. No interest was foregone on restructured loans in 2011.
Balances of nonperforming
loans increased $1 million during the year ended December 31, 2011 due primarily to an increase of $5 million in restructured
loans. Loans past due 90 days or more and still accruing interest declined by $2 million and loans in nonaccrual status declined
$2 million. Commercial real estate loans accounted for the largest portion of the total nonaccrual loans. These loans are well
secured by real estate, with loan to value ratios below our required standards and we are pursuing collection efforts. Management
does not believe that we have any one loan that would require a material charge to the allowance for loan losses. The long term
national economic downturn has caused our nonperforming loans to increase to current levels. There is a detailed explanation of
loans in this category included in “Management’s Discussion and Analysis of Financial Condition and Results of Operation
– Allowance for Loan Losses,” incorporated herein by reference from the Annual Report to Shareholders for the year
ended December 31, 2011 filed as Exhibit 13 to this Annual Report on Form 10-K.
Other Real Estate
Owned.
Real estate acquired by foreclosure is classified within other assets on the Consolidated Balance Sheet at the lower
of the recorded investment in the property or its fair value minus estimated costs of sale. Prior to foreclosure, the value of
the underlying collateral is written down by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs
are charged against operating expenses. Operating expenses of such properties, net of related income and losses on their disposition,
are included as other expense.
Due to the increase
in foreclosure activity in the current economic environment, the average length of time for completing a foreclosure is currently
nine to twelve months. For a discussion of our other real estate owned properties, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operation – Statement of Condition” incorporated herein by reference
to the Annual Report to Shareholders for the year ended December 31, 2011 filed as Exhibit 13 to this Annual Report on Form 10-K.
Classified Assets.
Management, in compliance with regulatory guidelines, has instituted an internal loan review program, whereby weaker credits are
classified as special mention, substandard, doubtful or loss. When a loan is classified as substandard or doubtful, management
is required to establish a valuation reserve for loan losses in an amount that is deemed prudent. When management classifies a
loan as a loss asset, a reserve equal to 100% of the loan balance is required to be established or the loan is to be charged-off.
The allowance for loan losses is composed of an allowance for both inherent risk associated with lending activities and particular
problem assets.
An asset is considered
substandard if it is inadequately protected by the paying capacity and net worth of the obligor or the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies
are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the
added characteristic that the weaknesses present make collection or liquidation in full, highly questionable and improbable, on
the basis of currently existing facts, conditions, and values. Assets classified as loss are those considered uncollectible and
of such little value that their continuance as assets without the establishment of a loss reserve is not warranted. Assets which
do not currently expose the insured institution to a sufficient degree of risk to warrant classification in one of the aforementioned
categories but possess credit deficiencies or potential weaknesses are required to be designated special mention by management.
Management’s
evaluation of the classification of assets and the adequacy of the allowance for loan losses is reviewed by the Board on a regular
basis and by the regulatory agencies as part of their examination process.
The following table
sets forth the Bank’s classified assets in accordance with its classification system:
|
At December 31,
|
|
(In thousands)
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Special mention
|
|
$
|
11,748
|
|
|
$
|
11,698
|
|
|
$
|
12,029
|
|
|
$
|
18,281
|
|
|
$
|
11,990
|
|
|
Substandard
|
|
|
42,822
|
|
|
|
41,937
|
|
|
|
23,308
|
|
|
|
18,359
|
|
|
|
7,889
|
|
|
Doubtful
|
|
|
17
|
|
|
|
1
|
|
|
|
1,774
|
|
|
|
2,032
|
|
|
|
2,561
|
|
|
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
54,587
|
|
|
$
|
53,636
|
|
|
$
|
37,111
|
|
|
$
|
38,672
|
|
|
$
|
22,440
|
|
Potential Problem
Loans.
As of December 31, 2011, there were no loans other than those disclosed as non-performing or classified assets,
where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability
of such borrowers to comply with the present loan repayment terms.
Allowance for Loan Losses
For a description
of the Company’s methodology for determining the allowance for loan losses, see Note 1 of the Notes to Consolidated Financial
Statements. For information on charge-off and recovery activity in the Allowance for Loan Losses, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operation – Allowance for Loan Losses” in the Annual
Report to Shareholders for the year ended December 31, 2011 which is filed as Exhibit 13 to this Annual Report on Form 10-K
and incorporated herein by reference.
The allowance for
loan losses increased 7% from December 31, 2010 to December 31, 2011 with several factors contributing to the change.
The allowance for loan losses is made up of various components including: historical loss ratios for rated loans (loans subject
to individual evaluations) and for homogeneous loans over the past three years, and external environmental factors such as trends
in volume, trends in delinquencies, classified loans and charge-offs, local and national economic factors, changes in management
and loan policies, loan concentrations, etc. We track the loss ratio in order to determine the percentage of loans in each loan
review rating that have resulted in a loss to the Company, and weighting the most recent years heavier than the oldest year in
the calculation. Contributing to increases in our allowance for loan losses was growth in the loan portfolio of 5.2% and deteriorating
external economic factors.
Over the past few
years, management has taken a conservative approach to evaluating loans subject to individual reviews in light of current economic
conditions within the banking industry. Impaired loans, which are identified independently of the above categories, increased by
$2 million from approximately $16 million. While management has been diligent in its underwriting of loans and generally requires
real estate collateral on these risk rated loans, we believe it was appropriate to review these loans on a conservative basis.
The increase in the allowance for loan losses relating to impaired loans amounted to $2 million.
The allowance for loan
losses is based on significant estimates and management evaluates the allowance for loan losses based on an appropriate range as
opposed to an absolute amount. Management believes the allowance for loan losses is in an acceptable range at December 31,
2011 and will continue to actively monitor current events and trends in their analysis.
The following table presents a breakdown by loan category of
the allowance for loan losses:
|
|
|
At December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Percent
of Loans
to Total
Loans
|
|
|
Amount
|
|
|
Percent
of Loans
to Total
Loans
|
|
|
Amount
|
|
|
Percent
of Loans
to Total
Loans
|
|
|
Amount
|
|
|
Percent
of Loans
to Total
Loans
|
|
|
Amount
|
|
|
Percent
of Loans
to Total
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial, and
agricultural
|
|
$
|
474
|
|
|
|
10.3
|
%
|
|
$
|
634
|
|
|
|
12.2
|
%
|
|
$
|
626
|
|
|
|
12.5
|
%
|
|
$
|
1,263
|
|
|
|
13.4
|
%
|
|
$
|
1,916
|
|
|
|
13.5
|
%
|
|
Construction and development
|
|
|
283
|
|
|
|
3.3
|
%
|
|
|
223
|
|
|
|
2.9
|
%
|
|
|
—
|
|
|
|
4.0
|
%
|
|
|
—
|
|
|
|
3.5
|
%
|
|
|
—
|
|
|
|
2.4
|
%
|
|
Mortgage
|
|
|
7,401
|
|
|
|
83.0
|
%
|
|
|
6,690
|
|
|
|
82.4
|
%
|
|
|
5,456
|
|
|
|
80.4
|
%
|
|
|
3.980
|
|
|
|
79.2
|
%
|
|
|
3,270
|
|
|
|
79.6
|
%
|
|
Installment
|
|
|
158
|
|
|
|
3.4
|
%
|
|
|
194
|
|
|
|
2.5
|
%
|
|
|
171
|
|
|
|
3.1
|
%
|
|
|
173
|
|
|
|
3.9
|
%
|
|
|
206
|
|
|
|
4.5
|
%
|
|
Total
|
|
$
|
8,316
|
|
|
|
100.0
|
%
|
|
$
|
7,741
|
|
|
|
100.0
|
%
|
|
$
|
6,253
|
|
|
|
100.0
|
%
|
|
$
|
5,416
|
|
|
|
100.0
|
%
|
|
$
|
5,392
|
|
|
|
100.0
|
%
|
Investment Activities
The Bank is required
by federal banking regulators to maintain an adequate level of liquid assets which may be invested in specified short-term securities
and certain other investments. The level of liquid assets varies depending upon several factors, including: (i) the yields
on investment alternatives, (ii) management’s judgment as to the attractiveness of the yields then available in relation
to other opportunities, (iii) expectation of future yield levels, and (iv) management’s projections as to the short-term
demand for funds to be used in loan origination and other activities. Investment securities are classified at the time of purchase,
based upon management’s intentions and abilities, as securities held to maturity or securities available for sale. Management
has for several years maintained all current investment purchases in the available for sale category in order to have the ability
to liquidate the investment with no accounting ramifications. It is not our intent to sell these securities, we do expect to hold
them until maturity, but have classified them as available for sale in order to have the ability to sell them if the need arises.
Securities classified as available for sale are reported for financial reporting purposes at fair value with net changes in the
fair value from period to period included as a separate component of stockholders’ equity, net of income taxes. They are
booked at cost and adjusted for amortization of premium and accretion of discount to arrive at their amortized cost. Amortization
of premium and accretion of discount is computed using the interest method and recognized as adjustments of interest income. Debt
securities classified as held to maturity would be those which management purchased with the intent and ability to hold to maturity
and would be stated at cost and adjusted for amortization of premium and accretion of discount, computed using the interest method
and recognized as adjustments of interest income. Equity securities which consist of investments in stock of various financial
services companies are classified as available for sale when purchased.
As of December 31,
2011, the Bank had no securities classified as trading or held to maturity and had securities in the amount of $96 million classified
as available for sale. The Bank’s securities available for sale had an amortized cost of $93 million and a fair value of
$96 million. Changes in market value in the Bank’s available for sale portfolio reflect normal market conditions and vary,
either positively or negatively, based primarily on changes in general levels of market interest rates relative to the yields of
the portfolio. Changes in the fair value of securities available for sale do not affect the Company’s income. In addition,
changes in the fair value of securities available for sale do not affect the Bank’s regulatory capital requirements or its
loan-to-one borrower limit.
At December 31,
2011, the Company’s investment portfolio policy allowed investments in instruments such as: (i) U.S. Treasury obligations;
(ii) U.S. federal agency or federally sponsored agency obligations; (iii) obligations of state and political subdivisions;
(iv) mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored entities; (v) banker’s
acceptances; (vi) certificates of deposit; (vii) equity securities of financial institutions and (viii) investment
grade corporate bonds and commercial paper. All bonds purchased must have an investment grade of at least Baa3 by Moody’s
or BBB- by Standard & Poor or similar rating by another rating agency. Commercial paper must have a rating of at least A-3
by Standard & Poor or P-3 from Moody’s. The Board of Directors may authorize additional investments. The Company does
not have any investments in subprime mortgage-backed securities.
Management evaluates
securities in the investment portfolio for other than temporary impairment in accordance with ASC Topic 320,
Investments, Debt
and Equity Securities.
Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors,
including, but not limited to, the length of time and extent to which the market value has been less than cost, the financial condition
of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability
to recover any decline in its market value, and management’s intent and ability to hold the security for a period of time
sufficient to allow for a recovery in market value. Among the factors that are considered in determining management’s intent
and ability is a review of the Company’s capital adequacy, interest rate risk position, and liquidity. The assessment of
a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations, and
management’s intent and ability requires considerable judgment. A decline in value that is considered to be other than temporary
is recorded as a loss within noninterest income in the Consolidated Statement of Income.
Investment Portfolio.
The following table sets forth the carrying value of the investment securities portfolio at the dates indicated.
|
|
|
At December 31,
|
|
|
(In thousands)
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities
|
|
$
|
11,191
|
|
|
$
|
12,774
|
|
|
$
|
22,120
|
|
|
Mortgage-backed securities of government - sponsored entities
|
|
|
28,578
|
|
|
|
24,274
|
|
|
|
4,305
|
|
|
Collateralized mortgage obligations of government - sponsored entities
|
|
|
5,175
|
|
|
|
-
|
|
|
|
-
|
|
|
Obligations of state and political subdivisions
|
|
|
34,090
|
|
|
|
29,178
|
|
|
|
27,088
|
|
|
Corporate securities
|
|
|
4,082
|
|
|
|
4,730
|
|
|
|
6,636
|
|
|
Commercial paper
|
|
|
11,998
|
|
|
|
8,099
|
|
|
|
13,045
|
|
|
Equity securities of financial institutions
|
|
|
505
|
|
|
|
600
|
|
|
|
434
|
|
|
Total
|
|
$
|
95,619
|
|
|
$
|
79,655
|
|
|
$
|
73,628
|
|
Investment Portfolio
Maturities.
The following table sets forth certain information regarding the carrying values, weighted average yields and maturities
of the Registrant’s investment and mortgage-related securities portfolio at December 31, 2011. The following table does
not take into consideration the effects of scheduled repayments of mortgage-backed securities and collateralized mortgage obligations
or the effects of possible prepayments. Securities held in the available for sale category are carried at their market value.
|
|
|
One year or
less
|
|
|
One to five
years
|
|
|
Five to ten
years
|
|
|
More than ten
years
|
|
|
Total Investment
Securities
|
|
|
(dollars in thousands)
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Market
|
|
|
Available for Sale
|
|
Value
|
|
|
Yield (1)
|
|
|
Value
|
|
|
Yield (1)
|
|
|
Value
|
|
|
Yield (1)
|
|
|
Value
|
|
|
Yield (1)
|
|
|
Value
|
|
|
Yield (1)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities
|
|
$
|
2,348
|
|
|
|
1.59
|
%
|
|
$
|
5,950
|
|
|
|
1.82
|
%
|
|
$
|
1,927
|
|
|
|
1.51
|
%
|
|
$
|
966
|
|
|
|
1.19
|
%
|
|
$
|
11,191
|
|
|
|
1.67
|
%
|
|
|
11,191
|
|
|
Mortgage-backed securities
of government - sponsored entities
|
|
|
4,991
|
|
|
|
2.67
|
%
|
|
|
10,180
|
|
|
|
2.74
|
%
|
|
|
4,559
|
|
|
|
3.04
|
%
|
|
|
8,848
|
|
|
|
4.03
|
%
|
|
|
28,578
|
|
|
|
3.17
|
%
|
|
|
28,578
|
|
|
Collateralized mortgage
obligations of government - sponsored entities
|
|
|
826
|
|
|
|
1.52
|
%
|
|
|
3,842
|
|
|
|
2.47
|
%
|
|
|
433
|
|
|
|
2.08
|
%
|
|
|
74
|
|
|
|
2.15
|
%
|
|
|
5,175
|
|
|
|
2.28
|
%
|
|
|
5,175
|
|
|
Obligations of states
and political subdivisions
|
|
|
1,721
|
|
|
|
3.80
|
%
|
|
|
5,206
|
|
|
|
3.65
|
%
|
|
|
15,103
|
|
|
|
3.73
|
%
|
|
|
12,060
|
|
|
|
4.44
|
%
|
|
|
34,090
|
|
|
|
3.97
|
%
|
|
|
34,090
|
|
|
Corporate securities
|
|
|
-
|
|
|
|
-
|
|
|
|
3,001
|
|
|
|
4.58
|
%
|
|
|
1,081
|
|
|
|
8.40
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
4,082
|
|
|
|
5.46
|
%
|
|
|
4,082
|
|
|
Commercial paper
|
|
|
11,998
|
|
|
|
0.54
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,998
|
|
|
|
0.54
|
%
|
|
|
11,998
|
|
|
Equity
securities of financial institutions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
505
|
|
|
|
2.41
|
%
|
|
|
505
|
|
|
|
2.41
|
%
|
|
|
505
|
|
|
Total
|
|
$
|
21,884
|
|
|
|
1.43
|
%
|
|
$
|
28,179
|
|
|
|
2.86
|
%
|
|
$
|
23,103
|
|
|
|
3.54
|
%
|
|
$
|
22,453
|
|
|
|
4.08
|
%
|
|
$
|
95,619
|
|
|
|
2.97
|
%
|
|
$
|
95,619
|
|
|
|
(1)
|
Weighted average yields on tax-exempt obligations have
been computed on a taxable equivalent basis assuming a federal income tax rate of 34%.
|
Sources of Funds
General.
Deposits
are the major source of the Bank’s funds for lending and other investment purposes. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds from other sources. They also may be used on a longer-term basis
for interest rate risk management and general business purposes. In addition to deposits and borrowings, the Bank derives funds
from loan principal repayments, short-term borrowings in the form of securities sold under agreement to repurchase and proceeds
from the sale and maturity of investment securities. Loan payments are a relatively stable source of funds, while deposit inflows
are significantly influenced by general interest rates and money market conditions.
Deposits.
The
Bank offers a variety of deposit accounts, although a majority of deposits are in fixed-term, market-rate certificate of deposit
accounts. Deposit account terms vary, primarily as to the required minimum balance amount, the amount of time that the funds must
remain on deposit and the applicable interest rate. To attract deposits, the Bank offers a variety of customer convenience services,
such as telephone, online and mobile banking. The Bank also offers multiple tiered checking accounts pursuant to which higher balance
accounts receive higher rates and free services. For information on the average balances and rates paid on the Bank’s various
categories of deposits, reference is made to “Distribution of Assets, Liabilities and Stockholders’ Equity; Interest
Rate and Interest Differential” in the Annual Report to Shareholders for the year ended December 31, 2011 filed as Exhibit
13 hereto and incorporated by reference herein.
In
2004, the Bank joined the Promontory Interfinancial Network, gaining the ability to offer customers certificates of deposit with
FDIC insurance coverage up to $50 million through its Certificate of Deposit Account Registry Service (“CDARS”). Our
customers’ funds are reciprocated in the network with funds from other banks, with no bank having total customer deposits
at the current maximum FDIC coverage limit of $250,000. The Bank is the only point of contact for the customer. In addition, to
assist with liquidity, the Bank originated non-reciprocal deposits in 2011 with a balance of $36 million at December 31, 2011.
For their services, CDARS has charged a fee of between 2.25 and 30 basis points depending on the size/term of the deposit. Any
deposits placed through this network are classified as brokered certificates of deposit. The Bank had $40 million of total deposits
in the program at December 31, 2011. In the third quarter of 2011, the Bank purchased $3 million in brokered deposits through
a long-standing investment partner.
In view of the source of this deposit and its favorable interest rate, the Bank determined
that the acceptance of this deposit was consistent with its current asset-liability management strategies.
Jumbo Certificates
of Deposit.
The following table shows the amount (in thousands) of the Bank’s certificates of deposit of $100,000 or
more by time remaining until maturity as of December 31, 2011:
|
Maturity Period
|
|
Certificates
of Deposit
|
|
|
Three months or less
|
|
$
|
36,926
|
|
|
Four through six months
|
|
|
31,888
|
|
|
Seven through twelve months
|
|
|
51,052
|
|
|
Over twelve months
|
|
|
36,656
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
156,522
|
|
Borrowings
.
The Bank may obtain advances from the Federal Home Loan Bank of Pittsburgh (“FHLB”) to supplement its supply of lendable
funds. Advances from FHLB are typically secured by a pledge of the Bank’s stock in FHLB and a portion of the Bank’s
loans and certain other assets. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of
maturities. The Bank also has established unsecured lines of credit with Atlantic Central Bankers Bank in the amount of $7 million
and with M & T Bank in the amount of $3 million. The Bank, if the need arises, may also access the Federal Reserve Bank discount
window to supplement its supply of lendable funds and to meet deposit withdrawal requirements. At December 31, 2011, the Bank had
fixed rate short term borrowings of $6 million from the FHLB. These borrowings were at an average rate of 22.5 basis points, which
was less than the interest rates on deposits of similar duration. The Bank has offered securities sold with agreements to repurchase
to larger commercial customers and had balances of $15 million at December 31, 2011. These arrangements are not deposits within
the definition of the FDIC and therefore do not qualify for FDIC insurance. To collateralize these liabilities, the Bank has pledged
securities with amortized cost of $18 million and fair value of $19 million at December 31, 2011.
The following table
sets forth information concerning short-term borrowings, which consist primarily of securities sold under agreements to repurchase
during the periods indicated.
|
|
|
At or For the Years
Ended December 31,
|
|
|
(dollars in thousands)
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding
|
|
$
|
21,800
|
|
|
$
|
17,423
|
|
|
$
|
15,488
|
|
|
Maximum amount outstanding at any month-end during the year
|
|
$
|
33,157
|
|
|
$
|
23,371
|
|
|
$
|
21,003
|
|
|
Weighted average interest rate during the year
|
|
|
0.50
|
%
|
|
|
0.82
|
%
|
|
|
0.79
|
%
|
|
Total short-term borrowings at year end
|
|
$
|
20,686
|
|
|
$
|
13,006
|
|
|
$
|
10,974
|
|
|
Weighted average interest rate at year end
|
|
|
0.35
|
%
|
|
|
0.66
|
%
|
|
|
0.65
|
%
|
Trust and Financial Services Activities
The Bank operates
a Trust Department and an Investment Department. These departments provide estate planning, investment management and financial
planning to customers. At December 31, 2011, the Bank had $137 million of assets under management, of which all but $406 thousand
is non-discretionary with no investment authority.
Personnel
As of December 31,
2011, the Company had 113 full-time employees and 17 part-time employees. The employees are not represented by a collective bargaining
unit. The Company believes its relationship with its employees to be satisfactory.
SUPERVISION AND REGULATION
Set forth below is
a brief description of certain laws which relate to the regulation and supervision of the Company and the Bank. The description
does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank
Act is intended to affect a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank Act creates
a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new
authority to take control of and liquidate financial firms. The Dodd-Frank Act additionally creates a new independent federal regulator
to administer federal consumer protection laws. The Dodd-Frank Act is expected to have a significant impact on our business operations
as its provisions take effect. Among the provisions that are likely to affect us are the following:
Holding Company
Capital Requirements.
The Dodd-Frank Act requires the Federal Reserve to apply consolidated capital requirements to depository
institution holding companies that are no less stringent than those currently applied to depository institutions. Under these standards,
trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by
a bank holding company with less than $15 billion in assets. The Dodd-Frank Act additionally requires capital requirements
to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of
economic contraction, consistent with safety and soundness.
Deposit Insurance.
The Dodd-Frank Act permanently increases the maximum deposit insurance amount for banks, savings institutions and credit unions
to $250,000 per depositor, and extends unlimited deposit insurance to non-interest bearing transaction accounts through December 31,
2012. The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated
total assets less tangible equity capital of a financial institution. The Dodd-Frank Act requires the FDIC to increase the reserve
ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC
pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. Effective one year from the
date of enactment, the Dodd-Frank Act eliminated the federal statutory prohibition against the payment of interest on business
checking accounts.
Corporate Governance.
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their
first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called
“golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by
shareholders. The new legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own
candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to
promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with
assets in excess of $1.0 billion, regardless of whether the company is publicly traded or not. The Dodd-Frank Act gives the SEC
authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.
Prohibition Against
Charter Conversions of Troubled Institutions.
Effective one year after enactment, the Dodd-Frank Act prohibits a depository
institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or
other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate
federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and
that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting
institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting
federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and
provide access to all supervisory and investigative information relating hereto.
Interstate Branching.
The Dodd-Frank Act authorizes national and state banks to establish branches in other states to the same extent as a bank chartered
by that state would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly
permitted out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely.
Limits on Derivatives.
Effective 18 months after enactment, the Dodd-Frank Act prohibits state-chartered banks from engaging in derivatives transactions
unless the loans to one borrower limits of the state in which the bank is chartered takes into consideration credit exposure to
derivatives transactions. For this purpose, derivative transaction includes any contract, agreement, swap, warrant, note or option
that is based in whole or in part on the value of, any interest in, or any quantitative measure or the occurrence of any event
relating to, one or more commodities securities, currencies, interest or other rates, indices or other assets.
Transactions with
Affiliates and Insiders.
Effective one year from the date of enactment, the Dodd-Frank Act expands the definition of affiliate
for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutual funds advised
by a depository institution or its affiliates. The Dodd-Frank Act will apply Section 23A and Section 22(h) of the Federal Reserve
Act (governing transactions with insiders) to derivative transactions, repurchase agreements and securities lending and borrowing
transaction that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured.
The current exemption from Section 23A for transactions with financial subsidiaries will be eliminated. The Dodd-Frank Act will
additionally prohibit an insured depository institution from purchasing an asset from or selling an asset to an insider unless
the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.
Debit Card Interchange
Fees.
Effective July 21, 2011, the Dodd-Frank Act requires that the amount of any interchange fee charged by a debit card issuer
with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. Within nine months
of enactment, the Federal Reserve Board is required to establish standards for reasonable and proportional fees which may take
into account the costs of preventing fraud. While the restrictions on interchange fees do not apply to banks that, together with
their affiliates, have assets of less than $10 billion, the rule could affect the competitiveness of debit cards issued by smaller
banks.
Consumer Financial
Protection Bureau.
The Dodd-Frank Act creates a new, independent federal agency called the Consumer
Financial Protection Bureau (“CFPB”), which is granted broad rulemaking, supervisory and enforcement powers under various
federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement
Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley
Act and certain other statutes. The CFPB will have examination and primary enforcement authority with respect to depository institutions
with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to
be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent
unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes
the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s
ability to repay. In addition, the Dodd-Frank Act will allow borrowers to raise certain defenses to foreclosure if they receive
any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer
protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits
state attorneys general to enforce compliance with both the state and federal laws and regulations.
Regulation of the Company
General.
As
a bank holding company under the Bank Holding Company Act of 1956, as amended, the Company is subject to regulation, supervision
and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and by the Pennsylvania
Department of Banking. The Company is required to file annually a report of its operations with the Federal Reserve and the Pennsylvania
Department of Banking. This regulation and oversight is generally intended to ensure that the Company limits its activities to
those allowed by law and that it operates in a safe and sound manner without endangering the financial health of the Bank.
Under the Bank Holding
Company Act, the Company must obtain the prior approval of the Federal Reserve before it may acquire control of another bank or
bank holding company, merge or consolidate with another bank holding company, acquire all or substantially all of the assets of
another bank or bank holding company, or acquire direct or indirect ownership or control of any voting shares of any bank or bank
holding company if, after such acquisition, the Company would directly or indirectly own or control more than 5% of such shares.
Federal statutes impose
restrictions on the ability of a bank holding company and its nonbank subsidiaries to obtain extensions of credit from its subsidiary
bank, on the subsidiary bank’s investments in the stock or securities of the holding company, and on the subsidiary bank’s
taking of the holding company’s stock or securities as collateral for loans to any borrower. A bank holding company and its
subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease
or sale of property, or furnishing of services by the subsidiary bank.
A bank holding company
is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations
in an unsafe or unsound manner. In addition, it is the Federal Reserve policy that a bank holding company should stand ready to
use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and
should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary
banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal
Reserve regulations, or both.
Non-Banking Activities.
The business activities of the Company, as a bank holding company, are restricted by the Bank Holding Company Act. Under the Bank
Holding Company Act and the Federal Reserve’s bank holding company regulations, the Company may only engage in, or acquire
or control voting securities or assets of a company engaged in (i) banking or managing or controlling banks and other subsidiaries
authorized under the Bank Holding Company Act; or (ii) any non-banking activity the Federal Reserve has determined to be so
closely related to banking or managing or controlling banks to be a proper incident thereto. These include any incidental activities
necessary to carry on those activities, as well as a lengthy list of activities that the Federal Reserve has determined to be so
closely related to the business of banking as to be a proper incident thereto.
Financial Activities.
Provisions of the Gramm-Leach-Bliley Act permit greater affiliation among banks, securities firms, insurance companies, and other
companies under a new type of financial services company known as a “financial holding company.” A financial holding
company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by
statute to engage in a number of financial activities previously impermissible for bank holding companies, including: (i) securities
underwriting, dealing and market making; (ii) sponsoring mutual funds and investment companies; (iii) insurance underwriting
and agency; and (iv) merchant banking activities. The Gramm-Leach-Bliley Act also permits the Federal Reserve and the Treasury
Department to authorize additional activities for financial holding companies if they are “financial in nature” or
“incidental” to financial activities. A bank holding company may become a financial holding company if each of its
subsidiary banks is well capitalized, well managed, and has at least a “satisfactory” CRA rating. A financial holding
company must provide notice to the Federal Reserve within 30 days after commencing activities previously determined by statute
or by the Federal Reserve and Department of the Treasury to be permissible. The Company has not submitted notice to the Federal
Reserve to become a financial holding company.
Regulatory Capital
Requirements.
The Federal Reserve has adopted capital adequacy guidelines under which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal
Reserve’s capital adequacy guidelines are similar to those imposed on the Bank by the Federal Deposit Insurance Corporation
(“FDIC”). See “Regulation of the Bank—Regulatory Capital Requirements.”
Restrictions on
Dividends.
The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which
expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding
company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that
is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve
also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the federal prompt corrective action regulations, the Federal Reserve may prohibit a bank holding company from
paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.” The Federal
Reserve requires advance notice of any dividend that exceeds earnings for the period for which the dividend is being paid.
Regulation of the Bank
General.
As
a Pennsylvania chartered commercial bank with deposits insured by the FDIC which is not a Federal Reserve System member, the Bank
is subject to extensive regulation and examination by the Pennsylvania Department of Banking and by the FDIC, which insures its
deposits to the maximum extent permitted by law. The federal and state laws and regulations applicable to banks regulate, among
other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of
the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing
the Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. This regulatory
structure also gives the federal and state banking agencies extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate
loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Pennsylvania Department of Banking, the
FDIC or the United States Congress, could have a material impact on the Bank and its operations.
Federal law provides
the federal banking regulators, including the FDIC and the Federal Reserve, with substantial enforcement powers. This enforcement
authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders,
and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these
enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions
may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
Pennsylvania Banking
Law.
The Pennsylvania Banking Code contains detailed provisions governing the organization, location of offices, rights and
responsibilities of trustees, officers, and employees, as well as corporate powers, savings and investment operations and other
aspects of the Bank and its affairs. The Code delegates extensive rule-making power and administrative discretion to the Pennsylvania
Department of Banking so that the supervision and regulation of state chartered commercial banks may be flexible and readily responsive
to changes in economic conditions and in savings and lending practices.
The Code also provides
state-chartered commercial banks with all of the powers enjoyed by national banks and federal savings associations, subject to
regulation by the Pennsylvania Department of Banking. The Federal Deposit Insurance Corporation Act, however, prohibits a state-chartered
bank from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted
for national banks unless (i) the FDIC determines the activity or investment does not pose a significant risk of loss to the
relevant insurance fund and (ii) the bank meets all applicable capital requirements. Accordingly, the additional operating
authority provided to the Bank by the code is significantly restricted by the Federal Deposit Insurance Act.
The Pennsylvania Banking
Code states, in part, that dividends may be declared and paid only out of accumulated net earnings and may not be declared or paid
unless surplus (retained earnings) is at least equal to contributed capital. The Bank has not declared or paid any dividends that
have caused its retained earnings to be reduced below the amount required. Finally, dividends may not be declared or paid if the
Bank is in default in payment of any assessment due the FDIC.
Federal Deposit
Insurance.
The Bank’s deposits are insured to applicable limits by the FDIC. Under the Dodd-Frank Wall Street
Reform and Consumer Protection Act, the maximum deposit insurance amount has been permanently increased from $100,000 to $250,000
and unlimited deposit insurance has been extended to non-interest-bearing transaction accounts until December 31, 2012. Prior to
the Dodd-Frank Act, the FDIC had established a Temporary Liquidity Guarantee Program under which, for the payment of an additional
assessment by insured banks that did not opt out, the FDIC fully guaranteed all non-interest-bearing transaction accounts until
December 31, 2010 (the “Transaction Account Guarantee Program”) and all senior unsecured debt of insured depository
institutions or their qualified holding companies issued between October 14, 2008 and October 31, 2009, with the FDIC’s guarantee
expiring by December 31, 2012 (the “Debt Guarantee Program”). The Company and the Bank opted out of the Debt Guarantee
Program. The Bank did not opt out of the Transaction Account Guarantee Program.
The FDIC has adopted
a risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four
risk categories based on their examination ratings and capital ratios. Well-capitalized institutions with the CAMELS ratings of
1 or 2 are grouped in Risk Category I and, until 2009, were assessed for deposit insurance at an annual rate of between five and
seven basis points with the assessment rate for an individual institution determined according to a formula based on a weighted
average of the institution’s individual CAMELS component ratings plus either five financial ratios or the average ratings
of its long-term debt. Institutions in Risk Categories II, III and IV were assessed at annual rates of 10, 28, and 43 basis points,
respectively.
Starting in 2009, the
FDIC significantly raised the assessment rate in order to restore the reserve ratio of the Deposit Insurance Fund to the statutory
minimum of 1.15%. For the quarter beginning January 1, 2009, the FDIC raised the base annual assessment rate for institutions in
Risk Category I to between 12 and 14 basis points while the base annual assessment rates for institutions in Risk Categories II,
III and IV were increased to 17, 35 and 50 basis points, respectively. For the quarter beginning April 1, 2009 the FDIC set
the base annual assessment rate for institutions in Risk Category I to between 12 and 16 basis points and the base annual assessment
rates for institutions in Risk Categories II, III and IV at 22, 32 and 45 basis points, respectively. An institution’s assessment
rate could be lowered by as much as five basis points based on the ratio of its long-term unsecured debt to deposits or, for smaller
institutions based on the ratio of certain amounts of Tier 1 capital to adjusted assets. The assessment rate may be adjusted
for Risk Category I institutions that have a high level of brokered deposits and have experienced higher levels of asset growth
(other than through acquisitions) and could be increased by as much as ten basis points for institutions in Risk Categories II,
III and IV whose ratio of brokered deposits to deposits exceeds 10%. Reciprocal deposit arrangements like CDARS were treated as
brokered deposits for Risk Category II, III and IV institutions but not for institutions in Risk Category I. An institution’s
base assessment rate would also be increased if an institution’s ratio of secured liabilities (including FHLB advances and
repurchase agreements) to deposits exceeds 25%. The maximum adjustment for secured liabilities for institutions in Risk Categories
I, II, III and IV would be 8, 11, 16 and 22.5 basis points, respectively, provided that the adjustment may not increase an institution’s
base assessment rate by more than 50%.
The FDIC imposed a
special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009 payable on September 30, 2009 and
reserved the right to impose additional special assessments. In lieu of further special assessments, on November 12, 2009 the FDIC
required all insured depository institutions to prepay their estimated risk-based assessments for the fourth quarter of 2009, and
for all of 2010, 2011, and 2012 on December 30, 2009. For purposes of estimating future assessments, an institution would assume
5% annual growth in the assessment base and a three basis point increase in the current assessment rate for 2011 and 2012. The
prepaid assessment would be applied against the actual assessment until exhausted. Any funds remaining after June 30, 2013 would
be returned to the institution.
The Dodd-Frank Act
requires the FDIC to take such steps as necessary to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35%
of insured deposits by 2020. In setting the assessments, the FDIC is required to offset the effect of the higher reserve ratio
against insured depository institutions with total consolidated assets of less than $10 billion. The Dodd-Frank Act also broadens
the base for FDIC insurance assessments so that assessments will be based on the average consolidated total assets less average
tangible equity capital of a financial institution rather than on its insured deposits. The FDIC has adopted a new restoration
plan to increase the reserve ratio to 1.15% by September 30, 2020 with additional rulemaking scheduled regarding the method to
be used to achieve a 1.35% reserve ratio by that date and offset the effect on institutions with assets less than $10 billion in
assets.
The FDIC has adopted
new assessment regulations that redefine the assessment base as average consolidated assets less average tangible equity. Insured
banks with more than $1.0 billion in assets must calculate quarterly average assets based on daily balances while smaller banks
and newly chartered banks may use weekly averages. In the case of a merger, the average assets of the surviving bank for the quarter
must include the average assets of the merged institution for the period in the quarter prior to the merger. Average assets would
be reduced by goodwill and other intangibles. Average tangible equity will equal Tier 1 capital. For institutions with more than
$1.0 billion in assets average tangible equity will be calculated on a weekly basis while smaller institutions may use the quarter-end
balance. Beginning April 1, 2011, the base assessment rate for insured institutions in Risk Category I will range between 5 to
9 basis points and for institutions in Risk Categories II, III, and IV will be 14, 23 and 35 basis points. An institution’s
assessment rate will be reduced based on the amount of its outstanding unsecured long-term debt and for institutions in Risk Categories
II, III and IV may be increased based on their brokered deposits. Risk Categories are eliminated for institutions with more than
$10 billion in assets which will be assessed at a rate between 5 and 35 basis points.
In addition, all FDIC-insured
institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation
(“FICO”), an agency of the Federal government established to recapitalize the Federal Savings and Loan Insurance Corporation.
The FICO assessment rates, which are determined quarterly, averaged .0084% of insured deposits on an annualized basis in fiscal
year 2011. These assessments will continue until the FICO bonds mature in 2017.
Regulatory Capital
Requirements.
The FDIC has promulgated capital adequacy requirements for state-chartered banks that, like the Bank, are not
members of the Federal Reserve System. At December 31, 2011, the Bank exceeded all regulatory capital requirements and was
classified as “well capitalized.”
The FDIC’s capital
regulations establish a minimum 3% Tier 1 leverage capital requirement for the most highly rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively
increases the minimum Tier 1 leverage ratio for such other banks to 4% to 5% or more. Under the FDIC’s regulation, the highest-rated
banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System. Tier 1 or core
capital is defined as the sum of common stockholders’ equity (including retained earnings), noncumulative perpetual preferred
stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain
mortgage and non-mortgage servicing assets and purchased credit card relationships.
The FDIC’s regulations
also require that state-chartered, non-member banks meet a risk-based capital standard. The risk-based capital standard requires
the maintenance of total capital (which is defined as Tier 1 capital and supplementary (Tier 2) capital) to risk weighted assets
of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by
a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of
Tier 1 capital for the risk-based standards are the same as those for the leverage capital requirement. The components of supplementary
(Tier 2) capital include cumulative perpetual preferred stock, mandatory subordinated debt, perpetual subordinated debt, intermediate-term
preferred stock, up to 45% of unrealized gains on equity securities and a bank’s allowance for loan and lease losses. Allowance
for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall,
the amount of supplementary capital that may be included in total capital is limited to 100% of Tier 1 capital.
A bank that has less
than the minimum leverage capital requirement is subject to various capital plan and activities restriction requirements. The FDIC’s
regulations also provide that any insured depository institution with a ratio of Tier 1 capital to total assets that is less than
2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit Insurance
Act and could be subject to termination of deposit insurance.
The Bank is also subject
to minimum capital requirements imposed by the Pennsylvania Department of Banking on Pennsylvania-chartered depository institutions.
Under the Pennsylvania Department of Banking’s capital regulations, a Pennsylvania bank or savings bank must maintain a minimum
leverage ratio of Tier 1 capital (as defined under the FDIC’s capital regulations) to total assets of 4%. In addition, the
Pennsylvania Department of Banking has the supervisory discretion to require a higher leverage ratio for any institutions based
on the institution’s substandard performance in any of a number of areas. The Bank was in compliance with both the FDIC and
the Pennsylvania Department of Banking capital requirements as of December 31, 2011.
Affiliate Transaction
Restrictions.
Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their
bank holding companies. Such transactions between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank
holding company are limited to 10% of a bank subsidiary’s capital and surplus and, with respect to such parent company and
all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus. Further, loans and extensions
of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that all
transactions between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.
Federal Home Loan
Bank System.
The Bank is a member of FHLB of Pittsburgh, which is one of 12 regional Federal Home Loan Banks. Each Federal
Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds
deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank system. It
makes loans to members (
i.e.
advances) in accordance with policies and procedures established by the board of trustees of
the Federal Home Loan Bank.
As a member, it is
required to purchase and maintain stock in FHLB in an amount equal to 4% of its aggregate unpaid residential mortgage loans, home
purchase contracts or similar obligations at the beginning of each year and 4.75% of its outstanding advances from the Federal
Home Loan Bank. At December 31, 2011, the Bank was in compliance with this requirement.
Federal Reserve
System.
The Federal Reserve requires all depository institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking and NOW accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy the liquidity requirements. At December 31,
2011, the Bank met its reserve requirements.
Loans to One Borrower.
Under Pennsylvania law, commercial banks have, subject to certain exemptions, lending limits to one borrower in an amount equal
to 15% of the institution’s capital accounts. Pursuant to the national bank parity provisions of the Pennsylvania Banking
Code, the Bank may also lend up to the maximum amounts permissible for national banks, which are allowed to make loans to one borrower
of up to 25% of capital and surplus in certain circumstances. An institution’s capital account includes the aggregate of
all capital, surplus, undivided profits, capital securities and general reserves for loan losses. As of December 31, 2011,
the Bank’s loans to one borrower limitation were $9 million and the Bank was in compliance with such limitation.
Item 1A. Risk Factors
Not applicable.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
The Company operates
from its main office, an operations center, and six branch offices, as described in “Item 1. Business”. All offices
are owned except for two branch offices and the operations center. The leases have initial terms of between 5-20 years, with renewal
options for additional years. The following table sets forth certain information regarding our offices:
|
|
|
Year
Opened
|
|
|
Owned or
Leased
|
|
|
Book Value
at 12/31/11
(in thousands)
|
|
|
Main Office
|
|
|
|
|
|
|
|
|
|
|
|
|
820 Church Street
Honesdale, PA
|
|
|
1985
|
|
|
|
Owned
|
|
|
$
|
2,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch Offices
|
|
|
|
|
|
|
|
|
|
|
|
|
309 Main Avenue
Hawley, PA
|
|
|
1988
|
|
|
|
Owned
|
|
|
$
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Route 371
Damascus, PA
|
|
|
1995
|
|
|
|
Leased
|
(1)
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Route 507
Greentown, PA
|
|
|
1997
|
|
|
|
Leased
|
(2)
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Route 739
Dingmans Ferry, PA
|
|
|
2004
|
|
|
|
Owned
|
|
|
$
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 Welwood Avenue (Route 6)
Hawley, PA
|
|
|
2008
|
|
|
|
Owned
|
|
|
$
|
5,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations Center
|
|
|
|
|
|
|
|
|
|
|
|
|
120 Sunrise Avenue
Honesdale, PA
|
|
|
1998
|
|
|
|
Leased
|
(3)
|
|
$
|
484
|
|
(1)
Lease expires 2015 with
15 year renewal option.
(2)
Lease expires 2012 with 10 year
renewal option.
(3)
Lease expires
2013 with a 5 year renewal option.
Item 3. Legal Proceedings
There are various claims
and lawsuits in which Registrant is periodically involved, such as claims to enforce liens, condemnation proceedings on properties
in which Registrant holds security interests, claims involving the making and servicing of real property loans, and other issues
incident to Registrant’s business. In the opinion of management, no material loss is expected from any of the pending claims
or lawsuits.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a)
Market
for Common Equity.
The Information relating to the market for Registrant’s common equity and related stockholder
matters appears under “Market Prices of Stock/Dividends Declared” in the Registrant’s Annual Report to Shareholders
for the fiscal year ended December 31, 2011 (“Annual Report”) which is filed as Exhibit 13 hereto and is incorporated
herein by reference. During the period covered by this report, the Company did not sell any equity securities that were not registered
under the Securities Act of 1933.
(b)
Use of
Proceeds.
Not applicable.
(c)
Issuer
Purchases of Equity Securities
Not applicable.
Item 6. Selected Financial Data
The information contained
in the table captioned “Summary of Selected Financial Data” in the Annual Report is incorporated herein by reference.
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
The information contained
in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operation”
in the Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative
Disclosure About Market Risk
The information contained
in the section captioned “Quantitative and Qualitative Disclosures About Market Risk” in the Annual Report is incorporated
herein by reference. The consolidated financial statements and notes thereto presented herein have been prepared in accordance
with U.S. generally accepted accounting principles, which generally require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due
to inflation. Unlike most industrial companies, nearly all of the Registrant’s assets and liabilities are monetary in nature.
As a result, interest rates have a greater impact on the Registrant’s performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Item 8. Financial Statements and
Supplementary Data
The Registrant’s
financial statements listed in Item 15 are incorporated herein by reference from the Annual Report.
Item 9. Changes In and Disagreements
with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Disclosure
Controls and Procedures.
Dimeco, Inc.’s management is responsible for establishing and maintaining effective disclosure
controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31,
2011, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Registrant’s disclosure
controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that
the Registrant’s disclosure controls and procedures were effective as of that date in ensuring material information required
to be disclosed in this Annual Report on 10-K was recorded, processed, summarized, and reported on a timely basis.
(b) Internal
Control Over Financial Reporting.
Management’s Report on Internal Control Over Financial Reporting is furnished herein
by reference from the Annual Report. Such report is not deemed to be filed for purposes of Section 18 of the Securities Exchange
Act of 1934 or otherwise subject to the liabilities of that section. There were no changes in the Registrant’s internal control
over financial reporting that occurred during the quarter ended December 31, 2011 that have materially affected, or are reasonably
likely to materially affect, the Registrant’s internal control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive
Officers and Corporate Governance
Other information required
under this item is incorporated herein by reference to the Proxy Statement for the 2012 Annual Meeting of Shareholders (the “Proxy
Statement”) contained under the sections captioned “Section 16(a) Beneficial Ownership Reporting Compliance,”
“Proposal I – Election of Directors,” and “Corporate Governance.”
The Registrant has
adopted a Code of Ethics that applies to its principal executive officers, principal financial officer, principal accounting officer
or controller or persons performing similar functions. A copy of the Registrant’s Code of Ethics will be provided to any
person without charge upon written request to Secretary, Dimeco, Inc., PO Box 509, Honesdale, PA 18431.
Item 11. Executive Compensation
The information required
by this item is incorporated by reference to the Proxy Statement contained under the sections captioned “Executive Compensation”
and “Director Compensation.”
Item 12. Security Ownership
of Certain Beneficial Owners and Management
|
|
(a)
|
Security Ownership of Certain Beneficial Owners
|
Information required
by this item is incorporated herein by reference to the section captioned “Principal Holders of Our Common Stock” of
the Proxy Statement.
|
|
(b)
|
Security Ownership of Management
|
Information required
by this item is incorporated herein by reference to the section captioned “Proposal I — Election of Directors”
of the Proxy Statement.
Management of the Registrant
knows of no arrangements, including any pledge by any person of securities of the Registrant, the operation of which may at a subsequent
date result in a change in control of the Registrant.
|
|
(d)
|
Securities Authorized for Issuance Under Equity Compensation
Plans
|
Set forth below is
information as of December 31, 2011, with respect to compensation plans under which equity securities of the Registrant are
authorized for issuance.
Equity Compensation
Plan Information
|
|
|
(A)
|
|
|
(B)
|
|
|
(C)
|
|
|
|
|
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
|
|
|
Weighted-average
Exercise Price of
Outstanding
Options,
Warrants and
Rights
|
|
|
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities
Reflected in Column (A))
|
|
|
Equity compensation plans approved by shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 Independent Directors Stock Option Plan
|
|
|
4,284
|
|
|
$
|
34.00
|
|
|
|
-
|
|
|
2000 Stock Incentive Plan
|
|
|
22,630
|
|
|
|
35.48
|
|
|
|
-
|
|
|
2010 Equity Incentive Plan
|
|
|
74,500
|
|
|
|
35.00
|
|
|
|
26,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by shareholders:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
101,414
|
|
|
$
|
35.06
|
|
|
|
26,040
|
|
Item 13. Certain Relationships and Related Transactions,
and Director Independence
The information required
by this item is incorporated herein by reference to the section captioned “Related Party Transactions” and “Corporate
Governance” in the Proxy Statement.
Item 14. Principal Accounting Fees
and Services
The information called
for by this item is incorporated herein by reference to the section entitled “Proposal 2 - Ratification of Independent Auditors”
in the Proxy Statement.
Part IV
Item 15. Exhibits, Financial Statement
Schedules
(a) The following documents are filed
as a part of this report:
(1) The
consolidated balance sheet of Dimeco, Inc. as of December 31, 2011 and 2010 and the related consolidated statements of income,
changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2011, together
with the related notes and the independent auditors’ report of S.R. Snodgrass, A.C., independent registered public accountants
for the three years ended December 31, 2011.
(2) Schedules omitted
as they are not applicable.
(3) The following
exhibits are included in this Report or incorporated herein by reference:
|
|
3(i)
|
Articles of Incorporation of Dimeco, Inc., as amended
(1)
|
|
|
3(ii)
|
Amended Bylaws of Dimeco, Inc.
(2)
|
|
|
10.1
†
|
2000 Independent Directors Stock Option Plan
(3)
|
|
|
10.2
†
|
2000 Stock Incentive Plan
(4)
|
|
|
10.3
†
|
Form of Salary Continuation Plan for Executive Officers, as amended and restated
(5)
|
|
|
10.4
†
|
Amended and Restated Change in Control Severance Agreement with Gary C. Beilman
|
|
|
10.5
†
|
Amended and Restated Change in Control Severance Agreement with Maureen H. Beilman
|
|
|
10.6
†
|
Amended and Restated Change in Control Severance Agreement with Peter Bochnovich
|
|
|
10.7
†
|
2010 Equity Incentive Plan
(6)
|
|
|
13
|
Annual Report to Shareholders for the fiscal year ended December 31, 2011
|
|
|
14
|
Code of Ethics for Principal Executive Officers and Senior Financial Officers
(7)
|
|
|
21
|
Subsidiaries of the Registrant
|
|
|
23
|
Consent of S.R. Snodgrass, A.C.
|
|
|
31.1
|
Rule 13a-14(a)/15d-14(a) Certification
|
|
|
31.2
|
Rule 13a-14(a)/15d-14(a) Certification
|
|
|
32
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Section 1350 Certification
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101.INS
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XBRL Instance Document *
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101.SCH
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XBRL Schema Document *
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101.CAL
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XBRL Calculation Linkbase Document *
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101.LAB
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XBRL Labels Linkbase Document *
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101.PRE
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XBRL Presentation Linkbase Document *
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101.DEF
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XBRL Definition Linkbase Document *
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†
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Management contract or compensatory plan or arrangement.
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*
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Submitted as Exhibits 101 to this Annual Report on Form 10-K are documents formatted in XBRL (Extensible Business Reporting Language). Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
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(1)
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Incorporated by reference to the identically numbered exhibit to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004.
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(2)
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Incorporated by reference to the identically numbered exhibit to the Registrant’s Form 10-K for the fiscal year ended December 31, 2009.
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(3)
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Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 (File No. 333-69416) filed with the Commission on September 14, 2002.
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(4)
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Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 (File No. 333-69420) filed with the Commission on September 14, 2002.
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(5)
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Incorporated by reference to identically numbered exhibit to the Registrant’s Form 8-K filed July 2, 2007.
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(6)
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Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8 (File No. 333-169454) filed with the Commission on September 17, 2010.
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(7)
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Incorporated by reference to the identically numbered exhibit to the Registrant’s Form 10-KSB for the fiscal year ended December 31, 2003.
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SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
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DIMECO, INC.
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Dated: March 23, 2012
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/s/ Gary C. Beilman
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By:
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Gary C. Beilman
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President and Chief Executive Officer
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(Duly Authorized Representative)
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Pursuant to the requirement
of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on March 23, 2012 on behalf
of the Registrant and in the capacities indicated.
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/s/ William E. Schwarz
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/s/ Gary C. Beilman
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William E. Schwarz
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Gary C. Beilman
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Chairman of the Board and Director
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President, Chief Executive Officer and Director
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(Principal Executive Officer)
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/s/ Maureen H. Beilman
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/s/ Robert E. Genirs
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Maureen H. Beilman
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Robert E. Genirs
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Chief Financial Officer and Treasurer
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Director
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(Principal Financial and Accounting Officer)
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/s/ Barbara Jean Genzlinger
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/s/ John S. Kiesendahl
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Barbara Jean Genzlinger
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John S. Kiesendahl
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Director
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Vice Chairman of the Board of Directors
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/s/ Thomas A. Peifer
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/s/ Henry M. Skier
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Thomas A. Peifer
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Henry M. Skier
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Director
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Director
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/s/ John F. Spall
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/s/ Todd J. Stephens
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John F. Spall
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Todd J. Stephens
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Director
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Director
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Dimeco (QX) (USOTC:DIMC)
Gráfica de Acción Histórica
De Nov 2024 a Dic 2024
Dimeco (QX) (USOTC:DIMC)
Gráfica de Acción Histórica
De Dic 2023 a Dic 2024
