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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

or

For the transition period from              to             

Commission File Number 33-58936

Dimeco, Inc.

(Exact name of registrant as specified in its charter)

820 Church Street

Honesdale, PA 18431

(Address of principal executive offices)

(570) 253-1970

(Issuer’s Telephone Number)

Not Applicable

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

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

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

As of May 1, 2004, the registrant had outstanding 1,535,134 shares of its common stock, par value $.50 share.

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Dimeco, Inc.

INDEX

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Dimeco, Inc.

CONSOLIDATED BALANCE SHEET (unaudited)

See accompanying notes to the unaudited consolidated financial statements.

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Dimeco, Inc.

CONSOLIDATED STATEMENT OF INCOME (unaudited)

See accompanying notes to unaudited consolidated financial statements.

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Dimeco, Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

See accompanying notes to the unaudited consolidated financial statements.

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Dimeco, Inc.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

See accompanying notes to the unaudited consolidated financial statements.

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Dimeco, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

See accompanying notes to unaudited consolidated financial statements.

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Dimeco, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

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

Recent Accounting Pronouncements

In December 2003, the Financial Accounting Standards Board (“FASB”) issued a revision to Interpretation 46, Consolidation of Variable Interest Entities, which established standards for identifying a variable interest entity (VIE) and for determining under what circumstances a VIE should be consolidated with its primary beneficiary. Application of this Interpretation is required in financial statements of public entities that have interests in special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of VIEs is required in financial statements for periods ending after March 15, 2004. Small business issuers must apply this Interpretation to all other types of VIEs at the end of the first reporting period ending after December 15, 2004. The adoption of this interpretation has not and is not expected to have a material effect on the Company’s financial position or results of operations.

Stock Options

As permitted under Statement of Financial Accounting Standards (“FAS”) No. 123 “Accounting for Stock-based Compensation,” the Company has elected to continue following Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related Interpretations, in accounting for stock-based awards to employees. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized in the Company’s financial statements. The following table represents pro forma net income and earnings per share had compensation expense been included in stock option plan costs as determined based on the fair value at the grant dates for options granted under these plans consistent with FAS No. 123.

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NOTE 2 – EARNINGS PER SHARE

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Forward Looking Statement

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

Sarbanes-Oxley Act of 2002

On July 30, 2002 the President signed into law the Sarbanes-Oxley Act of 2002 (the Act), following an investigative order proposed by the SEC on chief financial officers and chief executive officers of 947 large public companies on June 27, 2002. Additional regulations are expected to be promulgated by the SEC. As a result of the accounting restatements by large public companies, the passage of the Act and regulations expected to be implemented by the SEC, publicly-registered companies, such as the Company, will be subject to additional reporting regulations and disclosure. These new regulations, which are intended to curtail corporate fraud, will require certain officers to personally certify certain SEC filings and financial statements and may require additional measures to be taken by our outside auditors, officers and directors. The loss of investor confidence in the stock market and the new laws and regulations will increase non-interest expenses of the Company and could adversely affect the prices of publicly-traded stocks, such as the Company.

Financial Condition

Total assets decreased $7,757,000 or 2.5% from December 31, 2003 to March 31, 2004.

Investment securities available for sale decreased $15,118,000 or 23.5% from December 31, 2003 to March 31, 2004. Investments which matured or were called were invested in loans, reinvested in short-term commercial paper or used to fund deposit runoff. Reinvestments were done on a short-term basis in anticipation of having funds available when interest rates rise.

The loan portfolio increased by $8,739,000 or 4.0% from December 31, 2003 to March 31, 2004. Commercial real estate loans accounted for the majority of growth, increasing by $7,624,000 or 6.8% due to origination of several large loans in the sporting/recreational camping segment of our loan portfolio.

Total deposits decreased $9,480,000 or 3.6% during the first quarter of 2004. Noninterest-bearing deposits declined $2,452,000 or 8.3% from year end mainly due to one deposit account experiencing an outflow of a temporary balance increase at December 31, 2003. Interest-bearing balances declined $7,028,000 or 3.0% during the period due largely to a decline in jumbo certificates of deposit. Local school districts typically invest in these deposits with maturities to coincide with budgeted payments, resulting in a decline of $6,700,000 during the first quarter of 2004. Other interest-bearing deposit balances declined due to customer liquidity demands and a transition of customers investing in equities and insurance products. Offsetting declines in these deposits, money

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market deposits continued to increase over the period with growth of $4,558,000 or 26.7% in the first quarter. We believe that customers are looking for opportunities to increase yield while maintaining liquidity. The bank offers an attractive pricing structure and has been successful in retaining current customers along with attracting new depositors in this product.

Although the Company’s deposit base historically shows annual declines in the first quarter, there is concern that deposits that increased greatly in a down stock market will decline as investment in the securities markets becomes more palatable for our customers. Management has a marketing program in place to attract additional deposits. As we see the need to augment deposits with borrowings from the Federal Home Loan Bank (FHLB), we will do so.

Short-term borrowings decreased $1,979,000 or 16.8% during the first three months of 2004. Securities sold under agreements to repurchase increased $633,000 or 6.9% during the first quarter while short-term borrowings from the FHLB of $2,612,000 were repaid.

Other borrowed funds increased $3,000,000 due to a borrowing from the FHLB to fund specific long term loans generated. Customers have been requesting fixed rate loan commitments and in order to maintain customer relationships and offset interest rate risk, management has used fixed rate financing to achieve this goal.

Stockholders’ equity increased $609,000 or 2.2% from December 31, 2003 to March 31, 2004. Net income of $850,000 was offset by dividend declarations of $352,000. Officers and directors exercise of stock options represented $98,000 of additional increases. Market value appreciation of the available for sale investment portfolio of $13,000 added to the total growth. Regulatory capital ratios of 12.7% total risk-based capital and 11.4% Tier I capital greatly exceeded the regulatory guidelines of 8.0% and 4.0%. The Company’s leverage ratio was 9.3% at March 31, 2004 and compared favorably to the regulatory minimum of 3.0%.

Results of Operations

Comparison of the three months ended March 31, 2004 and 2003

Net income for the three months ended March 31, 2004 was $850,000 representing a decrease of 8.5% over net income in the first quarter of 2003.

Net interest income increased $162,000, or 6.4% in the first quarter of 2004 as compared to the same period in 2003. Interest-earning assets and interest-costing liabilities are constantly monitored in order to maintain the net interest margin at acceptable levels to maintain profitability. In the low interest rate environment of the past few years, it has become even more important to remain competitive in order to attract business while maintaining optimal interest rate spreads.

Interest and fees on loans increased $104,000 or 3.3% in 2004 as compared to 2003. The average balance of the loan portfolio increased $31,890,000 or 16.6% while the average interest rate earned on the portfolio decreased from 6.6% to 5.8% over the period. The Company has seen substantial growth in the loan portfolio in the past year with variable interest rate loans comprising approximately 68% of the portfolio, the majority of which repriced downward over the past few years.

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Interest earned on taxable investment securities decreased $159,000 or 27.3% in the first quarter of 2004 as compared to the first quarter of 2003. The average size of the portfolio decreased $11,302,000 or 18.5% while the average interest rate declined from 3.9% to 3.4%. The investment portfolio is administered to maintain liquidity for loan growth and balance sheet management while purchasing investments which have repricing opportunities in the current low interest rate environment. With sufficient increases in loans during the past year, investments in securities diminished while management gained higher interest yields in the loan portfolio than is available from acceptable investments.

Interest expense on deposits decreased $174,000 or 15.0% in 2004 as compared to 2003. The average balance of interest-bearing deposits increased $16,455,000 or 7.8% while the average interest rate paid declined to 1.7% in 2004 from 2.9% in 2003. Rates paid on all types of deposits other than money market accounts have been lowered over the period. Transactional accounts have rather immediate repricing opportunities while time deposits reprice downward as they mature. Through adjusting interest rates paid on deposits, management has some ability to regulate the volume of deposits. In a rather competitive market environment, management has chosen to keep rates slightly higher than national averages in order to maintain relationships.

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

The provision for loan losses increased $185,000 or 96.4% from 2003 to 2004. A lower collateral value relating to an impaired loan required a larger allocation in the allowance for loan losses. Although an appraisal of the collateral was performed in 2003 when the loan was placed in impaired status, circumstances followed in the first quarter of 2004 resulting in a lower valuation of that collateral and a corresponding increase in provision expense.

Noninterest income increased $105,000 or 17.1% in the three months ended March 31, 2004 as compared to the same period in 2003. Service charge income of $299,000 in 2004 represents growth of 35.3% over income recorded in 2003. Implementation of the overdraft protection product in February of 2003 has caused service charge income on deposit accounts to continue to grow with more customers taking advantage of the product.

Gains on mortgage loans held for sale declined $159,000 or 61.3% in 2004 as compared to 2003. As anticipated in 2003 filings, mortgage loan activity has slowed. Although the Company continues to derive solid earnings from sales of loans in the secondary market, this trend is typical in the industry nationwide. Current volumes of residential lending are consistent with activity in years before the significant drop in interest rates which fueled growth over the past two years.

Income attributable to the investments department, which originated in the third quarter of 2003, was $163,000 for the first quarter of 2004. Income was higher than expected as a result of one-time transition fees to convert prior accounts in addition to income generated from new sales. In light of these one-time fees, we expect this income source to slow slightly in the remainder of 2004 and build for future periods.

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Salaries and employee benefits increased $132,000 or 16.1% in the first quarter of 2004 as compared to 2003. The addition of two Vice Presidents in the second quarter of 2003, normal annual salary increases and the addition of staff to handle increased volumes of both loans and deposits are the main reasons for the increase. The number of full time equivalent employees increased from 92 in 2003 to 96 in 2004.

Liquidity and Cash Flows

To ensure that the Company can satisfy customer credit needs for current and future commitments and deposit withdrawal requirements, the Bank manages the liquidity position by ensuring that there are adequate short-term funding sources available for those needs. Liquid assets consist of cash and due from banks, federal funds sold, interest-bearing deposits with other banks and investment securities maturing in one year or less. The following table shows these liquidity sources, minus short-term borrowings, as of March 31, 2004 compared to December 31, 2003:

Other sources of liquidity are cash flows from regularly scheduled and prepayments of loans, sales or maturities in the investment portfolio, sales of residential mortgages in the secondary market, operating income and deposit growth. The Consolidated Statement of Cash Flows specifically details the contribution of each source. In addition, the Bank has the ability to borrow from the Federal Home Loan Bank of Pittsburgh with the maximum borrowing capacity at March 31, 2004 of $54 million.

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

Risk Elements

The table below presents information concerning nonperforming assets including nonaccrual loans, renegotiated loans, loans 90 days or more past due, other real estate loans and repossessed assets at March 31, 2004 and December 31, 2003. A loan is classified as nonaccrual when, in the opinion of management, there are doubts about collectability of interest and principal. At the time the accrual of interest is discontinued, future income is recognized only when cash is received. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deterioration of the borrower.

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Management believes the level of the allowance for loan losses at March 31, 2004 is adequate to cover probable losses inherent in the loan portfolio. The relationship between the allowance for loan losses and outstanding loans is a function of the credit quality and known risk attributed to the loan portfolio. The on-going loan review program and management analysis is used to determine the adequacy of the allowance for loan losses.

Included in total loans are loans of $2,531,000 which management has classified as impaired under the terms of FAS No. 114, “Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosure”. The related allowance for loan losses on these loans amounted to $702,000. There were no impaired loans without a related allowance for loan losses. The average balance of impaired loans for the period was $2,531,000.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Two separate reports are used to assist in measuring interest rate risk. The first is the Statement of Interest Sensitivity Gap report. This report matches all interest-earning assets and all interest-bearing liabilities by the time frame, or bucket, in which funds can be reinvested or repriced. The second report is the Interest Rate Shock Analysis discussed in more detail below. In both reports, there are inherent assumptions that must be used in the evaluation. These assumptions include the maturity or repricing times of deposits, even though all deposits, other than time deposits, have no stated maturity and the reference that interest rate shifts will be parallel, with the rates of assets and liabilities shifting in the same amount in the same time frame. In reality, various assets and various liabilities will react differently to changes in interest rates, with some lagging behind the change and some anticipating the upcoming change and reacting before any actual change occurs. Each tool also suggests that

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there is a propensity to replace assets and liabilities with similar assets and liabilities rather than taking into consideration management’s ability to reallocate the Balance Sheet. In addition, the models used do not include any elements to determine how an action by management to increase or decrease interest rates charged on loans or paid on deposits or to increase borrowings at the FHLB will affect the results of the analysis. In spite of these limitations, these analyses are still very good tools to assist in management of the Company and similar versions of these same reports are used by all financial institutions.

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As this report shows, the Company was nearly balanced with a slight liability sensitive position at March 31, 2004. This means that in the one year time frame, or bucket, there were more interest-sensitive liabilties than assets. An optimal position with interest rates poised to increase would be slightly asset sensitive since assets tend to reprice quicker than liabilities although the -2.82% ratio is certainly well with internal guidelines. The Company has classified its callable, step-up U.S. Government Agency bonds in the periods in which the bonds will next reprice versus the period in which they mature since, in management’s judgment, these repricing events will occur either through the purchase terms or through the call functions inherent in the bonds.

The second report used to monitor interest rate risk is the Interest Rate Shock Analysis. This tool attempts to determine the affect on income of various shifts in the interest rate environment. In particular, a shift of 200 basis points, or 2% in interest rates, is the industry standard. Given a shift downward of 200 basis points, net interest income would decrease by $465 or 4.3% while net income would decrease $282 or 8.3%. Given the current low interest rate environment, management feels that a general decrease in interest rates of this magnitude is nearly impossible. The results of a potential shift of 200 basis points in either direction are well within internal policy guidelines. If the results were not tolerable, our policy would determine that management should reallocate the Balance Sheet in order to maintain compliance with the policy.

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

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

Changes in internal controls

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

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PART II - OTHER INFORMATION

Item 1 -  Legal Proceedings

NONE

Item 2 -  Changes Securities, Use of Proceeds and Issuer Purchases of Equity Securities

NONE

Item 3 -  Defaults upon Senior Securities

NONE

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

The following represents the results of matters submitted to a vote of the stockholders at the Annual Meeting held on April 22, 2004:

The following directors were re-elected with terms to expire in 2007:

Item 5 -  Other Information

NONE

Item 6 -  Exhibits and Reports on Form 8-K

Report on January 23,2004 - News Release of Registrant – Dimeco, Inc. Announces 2003 Final Quarter Earnings

Report on May 11, 2004 - News Release of Registrant – Dimeco, Inc. Announces 2004 First Quarter Earnings

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Exhibit Number:

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

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SIGNATURES

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

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