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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2005

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  ¨    No  x

As of May 1, 2005, the registrant had outstanding 1,545,269 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 April, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS No. 123R). The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. FAS No. 123 (Revised 2004) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt FAS No. 123 (Revised 2004) on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

In December 2004, FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29”. The guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. FAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of FAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply the standard prospectively. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

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

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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:

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.

Financial Condition

Total assets increased $6,251,000 or 1.9% from December 31, 2004 to March 31, 2005.

Cash and cash equivalent increased $7,788,000 or 151.8% due to larger balances in federal funds sold. The Company uses these interest-bearing overnight investments for liquidity purposes; the increase is the result of short-term security maturities which were not yet reinvested in similar bonds.

Investment securities available for sale declined $7,903,000 or 14.2% from December 31, 2004 to March 31, 2005. A portion of these funds were used to fund loan demand which has continued to expand at a more rapid pace than deposit growth but the majority of the decline was invested in overnight federal funds sold until reinvestment in early April 2005.

Loans increased $5,921,000 or 2.3% from December 31, 2004 to March 31, 2005. Commercial real estate loans continued to account for the majority of growth, increasing by $9,643,000 or 7.2% with the origination of several large loans for real estate investment and to a recreational vehicle dealer. Declines in most other categories of loans as a result of regularly scheduled payments and payoffs offset this growth in commercial real estate loans.

Premises and equipment increased $512,000 or 9.2% with the purchase of an adjacent property to the Honesdale office. That facility is at maximum capacity with no room for additional needed parking and drive-in lanes. The purchase of this property will allow development of these facilities and allow for future expansion needs.

Total deposits increased $4,455,000 or 1.6% from December 31, 2004 to March 31, 2005. Growth came mainly from the Dingmans Ferry office which has established new deposit relationships of over $3 million during the first quarter of 2005. Competition for deposits continues to be strong in the markets we serve and management believes that we have to be proactive in order to increase our market share and attract additional deposits.

The bank offered a high rate certificate of deposit product in the first quarter in which existing customers took advantage of the higher interest rate and moved deposits into these accounts along with new customers attracted by the rate. The highest rate is offered to customers who have multiple accounts with the bank, attracting additional lower or noninterest deposits along with the certificates of deposit.

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Short-term borrowings increased $1,540,000 or 12.8% in the first quarter of 2005 due to seasonal customer cash increases.

Stockholders’ equity increased $311,000 or 1.0% from December 31, 2004 to March 31, 2005. Net income of $931,000 was offset by dividend declarations of $387,000. Available for sale investments declined in market value, representing a decrease of $237,000 in accumulated other comprehensive income during the period. Regulatory capital ratios of 11.9% total risk-based capital and 10.7% Tier I capital continue to exceeded the regulatory guidelines of 8.0% and 4.0%. The Company’s leverage ratio was 9.2% at March 31, 2005 and compared favorably to the regulatory minimum of 3.0%.

Results of Operations

Comparison of the three months ended March 31, 2005 and 2004

Net income for the quarter ended March 31, 2005 was $931,000 representing an increase of $81,000 or 9.5% over net income in the first quarter of 2004.

Net interest income increased $178,000 or 6.6% during the year between the first quarter of 2004 and 2005. With the prime interest rate increasing 1.75% over the period, interest and fees on loans increased $479,000 or 14.8% in 2005 as compared to 2004. The average balance of loans increased $30,229,000 or 13.5% in 2005 as compared to 2004 while the average interest rate received increased 13 basis points to 5.92%. Although new loans are usually granted at prime plus up to 1.5%, commercial real estate loans are typically granted with a fixed rate of interest for a one, two or three year period converting to an annually adjustable interest rate for future periods, generally tied to the prime rate. These loans will not adjust immediately but will increase in future periods.

Interest expense increased $265,000 or 25.8% during the first quarter of 2005 as compared to the same period in 2004. Interest on deposits increased $157,000 or 15.9%. The average balance of interest-bearing deposits increased $12,454,000 or 5.4% while the average interest rate paid increased 18 basis points to 1.9%. Interest expense of other borrowed funds increased $94,000 or 447.6% with an increase in the average balance of $8,819,000 or 327.8% while the average interest rate paid increased .52%. Management chose to borrow funds at fixed interest rates in the current rising rate environment. During 2004, deposit growth was not sufficient to meet liquidity demand for loan growth. Fixed rate funds were borrowed from the Federal Home Loan Bank of Pittsburgh (FHLB) to manage funding for loans after analysis of alternative sources.

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 decreased $157,000 or 41.6% from 2004 to 2005. In 2004 management recognized a potential problem with a commercial loan and deemed it prudent to record additional provision expense in relation to that loan. The loan has since been removed from the books.

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Salaries and employee benefits increased $139,000 or 14.6% in the first quarter of 2005 as compared to 2004. This increase in the result of a number of events: 1)several middle managers were hired in late 2004 and January 2005, 2)the title insurance subsidiary employees were not hired until after the first quarter of 2004 so there is no wage expense in the first quarter of 2004 , 3)commission expense for certain employees was not determined until later periods in 2004 but was calculated and recorded in the first quarter of 2005, 4)due to increasing local competition for a limited number of entry level employees, we found it necessary to increase entry level pay scales for new and existing employees in January 2005, 5)the Dingmans Ferry office opened in December 2005 with management staff hired in the third quarter of 2004 and the fourth quarter of 2004 and 6)all other employees were granted annual salary increases in January 2005. Additionally, the cost of employee benefits was greater in 2005 than in 2004 based upon higher costs of medical insurance along with the greater number of employees who were eligible for all benefits.

Due to the opening of the Dingmans Ferry office, expenses relating to both occupancy and furniture and equipment expense increased in 2005. Occupancy expense was $33,000 or 19.5% greater in the first quarter of 2005 compared to the same period in 2004 and furniture and equipment expense was $25,000 or 22.3% greater.

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, 2005 compared to December 31, 2004:

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, 2005 of $72 million.

Management monitors liquidity on a consistent basis and feels that liquidity levels are adequate. We are not

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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, 2005 and December 31, 2004. 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.

Management believes the level of the allowance for loan losses at March 31, 2005 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 $461,000 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 $21,000. There were no impaired loans without a related allowance for loan losses. The average balance of impaired loans for the year to date was $461,000.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A key function of management in its role as the Asset/Liability Committee (“ALCO”) is to evaluate the Company’s exposure to interest rate risk. The primary business of the Company in the financial services industry is to act as a depository financial intermediary. In this role, an integral element of risk involves the chance that prevailing interest rates will adversely affect assets, liabilities, capital, income and/or expense at different times and in different amounts. The ALCO is comprised of all Senior Officers and the Vice Presidents in charge of deposit operations and information technology 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 in which funds can be reinvested or repriced. The second report is the Interest Rate Shock Analysis discussed in more detail below. In both reports, there are inherent assumptions that must be used in the evaluation. These assumptions include the maturity or repricing times of deposits, even though all deposits, other than time deposits, have no stated maturity and the reference that interest rate shifts will be parallel, with the rates of assets and liabilities shifting in the same amount in the same time frame. In reality, various assets and various liabilities will react differently to changes in interest rates, with some lagging behind the change and some anticipating the upcoming change and reacting before any actual change occurs. Each tool also suggests that there is a propensity to replace assets and liabilities with similar assets and liabilities rather than taking into consideration management’s ability to reallocate the Balance Sheet. In addition, the models used do not include any elements to determine how an action by management to increase or decrease interest rates charged on loans or paid on deposits or to increase borrowings at the FHLB will affect the results of the analysis. In spite of these limitations, these analyses are still very good tools to assist in management of the Company and similar versions of these same reports are used by all financial institutions.

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Statement of Interest Sensitivity Gap

As this report shows, the Company was in an asset sensitive position at March 31, 2005. This means that in the one year time frame there were more interest-sensitive assets than liabilities. Management feels that the optimal position in a rising interest rate scenario is to be asset sensitive since assets tend to reprice quicker than liabilities. The Company has classified its callable, step-up U.S. Government Agency bonds in the periods in which the bonds will next reprice versus the period in which they mature since, in management’s judgment, these repricing events will occur either through the purchase terms or through the call functions inherent in the bonds.

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The second report used to monitor interest rate risk is the Interest Rate Shock Analysis. This tool attempts to determine the affect on income of various shifts in the interest rate environment. In particular, a shift of 200 basis points, or 2% in interest rates, is the industry standard. Given a downward shift of 200 basis points, net interest income would decrease by $360,000 or 12.5% while net income would decrease $209,000 or 22.5%. Given the Federal Reserve’s current stance of increasing interest rates quarterly, management feels that a general decrease in interest rates of this magnitude is not probable. 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.

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CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

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

Changes in internal controls

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

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PART II - OTHER INFORMATION

Item 1    -    Legal Proceedings

    NONE

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

    NONE

Item 3    -    Defaults upon Senior Securities

    NONE

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

The following represents the results of matters submitted to a vote of the stockholders at the Annual Meeting held on April 28, 2005:

The following directors were re-elected with terms to expire in 2008:

Item 5    -    Other Information

    NONE

Item 6    -    Exhibits

    Report on April 22, 2005 - News Release of Registrant – Dimeco, Inc. Announces 2005 first Quarter Earnings

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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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