Exhibit 13



DIMECO, INC.



HONESDALE, PENNSYLVANIA



AUDIT REPORT



DECEMBER
31, 2004



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DIMECO, INC.

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2004



|                                                          |  |           
|--------------------------------------------------------- |  | ----------
|                                                          |  | PageNumber
|Report of Independent Registered Public Accounting Firm   |  | 1         
|                                                          | 
|Financial Statements                                      |  |           
|                                                          | 
|Consolidated Balance Sheet                                |  | 2         
|                                                          | 
|Consolidated Statement of Income                          |  | 3         
|                                                          | 
|Consolidated Statement of Changes in Stockholders Equity |  | 4         
|                                                          | 
|Consolidated Statement of Cash Flows                      |  | 5         
|                                                          | 
|Notes to Consolidated Financial Statements                |  | 6-29      



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

Dimeco, Inc.



We have audited the consolidated balance sheet of Dimeco, Inc. and subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of income, comprehensive income, changes in stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements
based on our audit.



We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dimeco, Inc. and subsidiary as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.



Wexford, Pennsylvania

February 4, 2005



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DIMECO, INC.

CONSOLIDATED BALANCE SHEET



(In thousands)

|                                                                                                 |  |              |         |      |   |        
|------------------------------------------------------------------------------------------------ |  | ------------ | ------- | ---- | - | -------
|                                                                                                 |  | December 31,
|                                                                                                 |  | 2004         |         | 2003
|Assets                                                                                           |  |              |         |      |   |        
|Cash and due from banks                                                                          |  | $            | 4,139   |      | $ | 7,493  
|Interest-bearing deposits in other banks                                                         |  |              | 15      |      |   | 947    
|Federal funds sold                                                                               |  |              | 978     |      |   | 1,770  
|                                                                                                 |  |              |         |      |   |        
|Total cash and cash equivalents                                                                  |  |              | 5,132   |      |   | 10,210 
|                                                                                                 |  |             
|Mortgage loans held for sale (market value of $112 and $662)                                     |  |              | 112     |      |   | 654    
|Investment securities available for sale                                                         |  |              | 55,662  |      |   | 64,357 
|Investment securities held to maturity (market value of $216 and $228)                           |  |              | 198     |      |   | 197    
|                                                                                                 |  |             
|Loans (net of unearned income of $623 and $741)                                                  |  |              | 253,141 |      |   | 219,609
|Less allowance for loan losses                                                                   |  |              | 3,172   |      |   | 3,014  
|                                                                                                 |  |              |         |      |   |        
|Net loans                                                                                        |  |              | 249,969 |      |   | 216,595
|                                                                                                 |  |             
|Premises and equipment                                                                           |  |              | 5,580   |      |   | 4,179  
|Accrued interest receivable                                                                      |  |              | 1,106   |      |   | 1,295  
|Bank-owned life insurance                                                                        |  |              | 5,065   |      |   | 4,861  
|Other assets                                                                                     |  |              | 2,897   |      |   | 1,956  
|                                                                                                 |  |              |         |      |   |        
|TOTAL ASSETS                                                                                     |  | $            | 325,721 |      | $ | 304,304
|                                                                                                 |  |              |         |      |   |        
|Liabilities                                                                                      |  |              |         |      |   |        
|Deposits:                                                                                        |  |              |         |      |   |        
|Noninterest-bearing                                                                              |  | $            | 30,380  |      | $ | 29,523 
|Interest-bearing                                                                                 |  |              | 240,162 |      |   | 232,684
|                                                                                                 |  |              |         |      |   |        
|Total deposits                                                                                   |  |              | 270,542 |      |   | 262,207
|                                                                                                 |  |             
|Short-term borrowings                                                                            |  |              | 12,033  |      |   | 11,800 
|Other borrowed funds                                                                             |  |              | 11,349  |      |   | 1,000  
|Accrued interest payable                                                                         |  |              | 609     |      |   | 678    
|Other liabilities                                                                                |  |              | 1,492   |      |   | 1,311  
|                                                                                                 |  |              |         |      |   |        
|TOTAL LIABILITIES                                                                                |  |              | 296,025 |      |   | 276,996
|                                                                                                 |  |              |         |      |   |        
|Stockholders Equity                                                                             |  |              |         |      |   |        
|Common stock, $.50 par value; 5,000,000 shares authorized; 1,548,994 and 1,526,134 shares issued |  |              | 774     |      |   | 763    
|Capital surplus                                                                                  |  |              | 4,377   |      |   | 3,973  
|Retained earnings                                                                                |  |              | 24,496  |      |   | 22,038 
|Accumulated other comprehensive income                                                           |  |              | 49      |      |   | 534    
|                                                                                                 |  |              |         |      |   |        
|TOTAL STOCKHOLDERS EQUITY                                                                       |  |              | 29,696  |      |   | 27,308 
|                                                                                                 |  |              |         |      |   |        
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                       |  | $            | 325,721 |      | $ | 304,304
|                                                                                                 |  |              |         |      |   |        



The accompanying notes are an integral
part of these consolidated financial statements.



2



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DIMECO, INC.

CONSOLIDATED STATEMENT OF INCOME



(In
thousands, except per share data)

|                                                    |  |                         |        |      |   |        |  |   |       
|--------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                                    |  | Year Ended December 31,
|                                                    |  | 2004                    |        | 2003 |   | 2002  
|Interest Income                                     |  |                         |        |      |   |        |  |   |       
|Interest and fees on loans                          |  | $                       | 13,847 |      | $ | 12,864 |  | $ | 12,472
|Interest-bearing deposits in other banks            |  |                         | 9      |      |   | 1      |  |   | 34    
|Federal funds sold                                  |  |                         | 46     |      |   | 30     |  |   | 81    
|Investment securities:                              |  |                         |        |      |   |        |  |   |       
|Taxable                                             |  |                         | 1,674  |      |   | 2,131  |  |   | 2,571 
|Exempt from federal income tax                      |  |                         | 232    |      |   | 295    |  |   | 310   
|                                                    |  |                         |        |      |   |        |  |   |       
|Total interest income                               |  |                         | 15,808 |      |   | 15,321 |  |   | 15,468
|                                                    |  |                         |        |      |   |        |  |   |       
|Interest Expense                                    |  |                         |        |      |   |        |  |   |       
|Deposits                                            |  |                         | 4,001  |      |   | 4,385  |  |   | 5,207 
|Short-term borrowings                               |  |                         | 129    |      |   | 112    |  |   | 143   
|Other borrowed funds                                |  |                         | 282    |      |   | 202    |  |   | 268   
|                                                    |  |                         |        |      |   |        |  |   |       
|Total interest expense                              |  |                         | 4,412  |      |   | 4,699  |  |   | 5,618 
|                                                    |  |                         |        |      |   |        |  |   |       
|Net Interest Income                                 |  |                         | 11,396 |      |   | 10,622 |  |   | 9,850 
|Provision for loan losses                           |  |                         | 1,126  |      |   | 960    |  |   | 675   
|                                                    |  |                         |        |      |   |        |  |   |       
|Net Interest Income After Provision for Loan Losses |  |                         | 10,270 |      |   | 9,662  |  |   | 9,175 
|                                                    |  |                         |        |      |   |        |  |   |       
|Noninterest Income                                  |  |                         |        |      |   |        |  |   |       
|Service charges on deposit accounts                 |  |                         | 1,250  |      |   | 1,056  |  |   | 600   
|Mortgage loans held-for-sale gains, net             |  |                         | 460    |      |   | 834    |  |   | 451   
|Investment securities gains                         |  |                         | 95     |      |   | 13     |  |   | 12    
|Brokerage commissions                               |  |                         | 353    |      |   | 146    |  |   |      
|Earnings on bank-owned life insurance               |  |                         | 230    |      |   | 154    |  |   | 76    
|Other income                                        |  |                         | 545    |      |   | 492    |  |   | 580   
|                                                    |  |                         |        |      |   |        |  |   |       
|Total noninterest income                            |  |                         | 2,933  |      |   | 2,695  |  |   | 1,719 
|                                                    |  |                         |        |      |   |        |  |   |       
|Noninterest Expense                                 |  |                         |        |      |   |        |  |   |       
|Salaries and employee benefits                      |  |                         | 3,930  |      |   | 3,524  |  |   | 3,004 
|Occupancy expense, net                              |  |                         | 636    |      |   | 595    |  |   | 539   
|Furniture and equipment expense                     |  |                         | 489    |      |   | 448    |  |   | 469   
|Professional fees                                   |  |                         | 447    |      |   | 469    |  |   | 314   
|Data processing expense                             |  |                         | 375    |      |   | 290    |  |   | 268   
|Other expense                                       |  |                         | 1,648  |      |   | 1,477  |  |   | 1,380 
|                                                    |  |                         |        |      |   |        |  |   |       
|Total noninterest expense                           |  |                         | 7,525  |      |   | 6,803  |  |   | 5,974 
|                                                    |  |                         |        |      |   |        |  |   |       
|Income before income taxes                          |  |                         | 5,678  |      |   | 5,554  |  |   | 4,920 
|Income taxes                                        |  |                         | 1,772  |      |   | 1,700  |  |   | 1,549 
|                                                    |  |                         |        |      |   |        |  |   |       
|NET INCOME                                          |  | $                       | 3,906  |      | $ | 3,854  |  | $ | 3,371 
|                                                    |  |                         |        |      |   |        |  |   |       
|Earnings Per Share                                  |  |                         |        |      |   |        |  |   |       
|Basic                                               |  | $                       | 2.54   |      | $ | 2.54   |  | $ | 2.24  
|Diluted                                             |  | $                       | 2.46   |      | $ | 2.45   |  | $ | 2.19  



The accompanying notes are an integral
part of these consolidated financial statements.



3



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DIMECO, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY



(In thousands, except per share data)

|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------- | --- | -------------- | - | ---------------- |  | - | ----------------------------------- | - |  | ------------- | ---- | - | ------------------------ | - | ---- | ------------------- |  | - | ------ | - |  | - | ----- | -
|                                                                                                                 |  | CommonStock |     | CapitalSurplus |   | RetainedEarnings |  |   | AccumulatedOtherComprehensiveIncome |   |  | TreasuryStock |      |   | TotalStockholdersEquity |   |      | ComprehensiveIncome | 
|Balance, December 31, 2001                                                                                       |  | $           | 374 |                | $ | 3,349            |  | $ | 17,762                              |   |  | $             | 484  |   |                          | $ | (18  | )                   |  | $ | 21,951 |   |  |   |       |  
|                                                                                                                 |  |             |     |                |   |                  | 
|Net income                                                                                                       |  |             |     |                |   |                  |  |   | 3,371                               |   |  |               |      |   |                          |   |      |                     |  |   | 3,371  |   |  | $ | 3,371 |  
|Other comprehensive income:                                                                                      |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Unrealized gain on available-for-sale securities, net of reclassification adjustment, net of taxes of $72        |  |             |     |                |   |                  |  |   |                                     |   |  |               | 140  |   |                          |   |      |                     |  |   | 140    |   |  |   | 140   |  
|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Comprehensive income                                                                                             |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  | $ | 3,511 |  
|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Dividend reinvestment plan                                                                                       |  |             | 3   |                |   | 286              |  |   |                                     |   |  |               |      |   |                          |   | 211  |                     |  |   | 500    |   |  |   |       |  
|Purchase treasury stock                                                                                          |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   | (231 | )                   |  |   | (231   | ) |  |   |       |  
|Exercise of stock options                                                                                        |  |             |     |                |   | 13               |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   | 13     |   |  |   |       |  
|Cash dividends ($.82 per share)                                                                                  |  |             |     |                |   |                  |  |   | (1,225                              | ) |  |               |      |   |                          |   |      |                     |  |   | (1,225 | ) |  |   |       |  
|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Balance, December 31, 2002                                                                                       |  |             | 377 |                |   | 3,648            |  |   | 19,908                              |   |  |               | 624  |   |                          |   | (38  | )                   |  |   | 24,519 |   |  |   |       |  
|                                                                                                                 |  |             |     |                |   |                  | 
|Net income                                                                                                       |  |             |     |                |   |                  |  |   | 3,854                               |   |  |               |      |   |                          |   |      |                     |  |   | 3,854  |   |  | $ | 3,854 |  
|Other comprehensive loss:                                                                                        |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Unrealized loss on available-for-sale securities, net of reclassification adjustment, net of tax benefit of $46  |  |             |     |                |   |                  |  |   |                                     |   |  |               | (90  | ) |                          |   |      |                     |  |   | (90    | ) |  |   | (90   | )
|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Comprehensive income                                                                                             |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  | $ | 3,764 |  
|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Dividend reinvestment plan                                                                                       |  |             | 2   |                |   | 209              |  |   |                                     |   |  |               |      |   |                          |   | 80   |                     |  |   | 291    |   |  |   |       |  
|Purchase treasury stock                                                                                          |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   | (114 | )                   |  |   | (114   | ) |  |   |       |  
|Exercise of stock options                                                                                        |  |             | 3   |                |   | 116              |  |   | (23                                 | ) |  |               |      |   |                          |   | 72   |                     |  |   | 168    |   |  |   |       |  
|100 % stock split effected in the form of a stock dividend                                                       |  |             | 381 |                |   |                  |  |   | (381                                | ) |  |               |      |   |                          |   |      |                     |  |   |       |   |  |   |       |  
|Cash dividends ($.87 per share)                                                                                  |  |             |     |                |   |                  |  |   | (1,320                              | ) |  |               |      |   |                          |   |      |                     |  |   | (1,320 | ) |  |   |       |  
|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Balance, December 31, 2003                                                                                       |  |             | 763 |                |   | 3,973            |  |   | 22,038                              |   |  |               | 534  |   |                          |   |     |                     |  |   | 27,308 |   |  |   |       |  
|                                                                                                                 |  |             |     |                |   |                  | 
|Net income                                                                                                       |  |             |     |                |   |                  |  |   | 3,906                               |   |  |               |      |   |                          |   |      |                     |  |   | 3,906  |   |  | $ | 3,906 |  
|Other comprehensive loss:                                                                                        |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Unrealized loss on available-for-sale securities, net of reclassification adjustment, net of tax benefit of $250 |  |             |     |                |   |                  |  |   |                                     |   |  |               | (485 | ) |                          |   |      |                     |  |   | (485   | ) |  |   | (485  | )
|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Comprehensive income                                                                                             |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  | $ | 3,421 |  
|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Exercise of stock options                                                                                        |  |             | 11  |                |   | 404              |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   | 415    |   |  |   |       |  
|Cash dividends ($.94 per share)                                                                                  |  |             |     |                |   |                  |  |   | (1,448                              | ) |  |               |      |   |                          |   |      |                     |  |   | (1,448 | ) |  |   |       |  
|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Balance, December 31, 2004                                                                                       |  | $           | 774 |                | $ | 4,377            |  | $ | 24,496                              |   |  | $             | 49   |   |                          | $ |     |                     |  | $ | 29,696 |   |  |   |       |  
|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|                                                                                                                 |  |             |     |                |   |                  | 
|                                                                                                                 |  |             |     |                |   | 2004             |  |   | 2003                                |   |  | 2002          |      |   |                          |   |      |                     | 
|Components of other comprehensive income (loss):                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Change in net unrealized gain (loss) on investment securities available for sale                                 |  |             |     |                |   |                  |  | $ | (422                                | ) |  | $             | (81  | ) |                          | $ | 148  |                     |  |   |        |   |  |   |       |  
|Realized gains included in net income, net of taxes of $32, $4, and $4                                           |  |             |     |                |   |                  |  |   | (63                                 | ) |  |               | (9   | ) |                          |   | (8   | )                   |  |   |        |   |  |   |       |  
|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  
|Total                                                                                                            |  |             |     |                |   |                  |  | $ | (485                                | ) |  | $             | (90  | ) |                          | $ | 140  |                     |  |   |        |   |  |   |       |  
|                                                                                                                 |  |             |     |                |   |                  |  |   |                                     |   |  |               |      |   |                          |   |      |                     |  |   |        |   |  |   |       |  



The accompanying notes are an integral
part of these consolidated financial statements.



4



---

DIMECO, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS



(In
thousands)

|                                                                                  |  |                         |         |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                  |  | Year Ended December 31, |        
|                                                                                  |  | 2004                    |         |   | 2003 |   |          | 2002 | 
|Operating Activities                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|Net income                                                                        |  | $                       | 3,906   |   |      | $ | 3,854    |      |  | $ | 3,371    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |         |   |      |   |          |      |  |   |          |  
|Provision for loan losses                                                         |  |                         | 1,126   |   |      |   | 960      |      |  |   | 675      |  
|Depreciation and amortization                                                     |  |                         | 736     |   |      |   | 576      |      |  |   | 553      |  
|Amortization of premium and discount on investment securities, net                |  |                         | (126    | ) |      |   | (235     | )    |  |   | (696     | )
|Amortization of net deferred loan origination fees                                |  |                         | (99     | ) |      |   | (88      | )    |  |   | (604     | )
|Investment securities gains                                                       |  |                         | (95     | ) |      |   | (13      | )    |  |   | (12      | )
|Origination of loans held for sale                                                |  |                         | (12,302 | ) |      |   | (29,081  | )    |  |   | (18,046  | )
|Proceeds from sale of loans                                                       |  |                         | 12,896  |   |      |   | 30,034   |      |  |   | 17,607   |  
|Mortgage loans sold gains, net                                                    |  |                         | (460    | ) |      |   | (834     | )    |  |   | (451     | )
|Decrease (increase) in accrued interest receivable                                |  |                         | 189     |   |      |   | (71      | )    |  |   | 33       |  
|Decrease in accrued interest payable                                              |  |                         | (69     | ) |      |   | (164     | )    |  |   | (324     | )
|Deferred federal income taxes                                                     |  |                         | 264     |   |      |   | 6        |      |  |   | (249     | )
|Other, net                                                                        |  |                         | (440    | ) |      |   | (120     | )    |  |   | 320      |  
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                         | 5,526   |   |      |   | 4,824    |      |  |   | 2,177    |  
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |          |  
|Investing Activities                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|Investment securities available for sale:                                         |  |                         |         |   |      |   |          |      |  |   |          |  
|Proceeds from sales                                                               |  |                         | 174     |   |      |   | 33       |      |  |   | 7        |  
|Proceeds from maturities or paydown                                               |  |                         | 94,873  |   |      |   | 165,449  |      |  |   | 220,351  |  
|Purchases                                                                         |  |                         | (86,868 | ) |      |   | (152,840 | )    |  |   | (228,277 | )
|Investment securities held to maturity:                                           |  |                         |         |   |      |   |          |      |  |   |          |  
|Proceeds from maturities or paydown                                               |  |                         |        |   |      |   | 230      |      |  |   |         |  
|Purchase of Federal Home Loan Bank stock                                          |  |                         | (423    | ) |      |   |         |      |  |   |         |  
|Net increase in loans                                                             |  |                         | (34,901 | ) |      |   | (32,953  | )    |  |   | (25,262  | )
|Purchase of bank-owned life insurance                                             |  |                         |        |   |      |   | (3,000   | )    |  |   | (200     | )
|Purchase of premises and equipment                                                |  |                         | (1,887  | ) |      |   | (560     | )    |  |   | (782     | )
|Proceeds from the sale of other real estate                                       |  |                         | 500     |   |      |   | 33       |      |  |   | 123      |  
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |          |  
|Net cash used for investing activities                                            |  |                         | (28,532 | ) |      |   | (23,608  | )    |  |   | (34,040  | )
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |          |  
|Financing Activities                                                              |  |                         |         |   |      |   |          |      |  |   |          |  
|Net increase in deposits                                                          |  |                         | 8,335   |   |      |   | 22,848   |      |  |   | 28,974   |  
|Increase in short-term borrowings                                                 |  |                         | 233     |   |      |   | 2,872    |      |  |   | 676      |  
|Increase in other borrowed funds                                                  |  |                         | 10,600  |   |      |   |         |      |  |   |         |  
|Proceeds from other borrowed funds                                                |  |                         | (251    | ) |      |   | (3,000   | )    |  |   |         |  
|Proceeds from dividend reinvestment and stock purchase plan                       |  |                         |        |   |      |   | 291      |      |  |   | 500      |  
|Purchase of treasury stock                                                        |  |                         |        |   |      |   | (114     | )    |  |   | (231     | )
|Proceeds from exercise of stock options                                           |  |                         | 415     |   |      |   | 168      |      |  |   | 13       |  
|Cash dividends paid                                                               |  |                         | (1,404  | ) |      |   | (1,301   | )    |  |   | (1,199   | )
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                         |  |                         | 17,928  |   |      |   | 21,764   |      |  |   | 28,733   |  
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                  |  |                         | (5,078  | ) |      |   | 2,980    |      |  |   | (3,130   | )
|                                                                                  |  |                         |        
|Cash and cash equivalents at beginning of year                                    |  |                         | 10,210  |   |      |   | 7,230    |      |  |   | 10,360   |  
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                          |  | $                       | 5,132   |   |      | $ | 10,210   |      |  | $ | 7,230    |  
|                                                                                  |  |                         |         |   |      |   |          |      |  |   |          |  



The accompanying notes are an integral
part of these consolidated financial statements.



5



---

DIMECO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



A summary of the significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows:



Nature of Operations and Basis of Presentation



Dimeco, Inc. (the Company) is a Pennsylvania company organized as the holding company of The Dime Bank (the Bank) and its wholly
owned subsidiary, TDB Insurance Services LLC. The Bank is a state-chartered bank and operates from five locations in northeastern Pennsylvania. The Company and its subsidiary derive substantially all of their income from banking and bank-related
services that include interest earnings on residential real estate, commercial mortgage, commercial, and consumer financings as well as interest earnings on investment securities. The Company provides deposit services including checking, savings,
and certificate of deposit accounts and investment and trust services. The Company is supervised by the Federal Reserve Board, while the Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation and the Pennsylvania
Department of Banking.



The consolidated financial statements
of the Company include its wholly owned subsidiary, the Bank. All inter-company items have been eliminated in preparing the consolidated financial statements. The investment in subsidiary on the parent company financial statements is carried at the
parent companys equity in the underlying net assets of the Bank.



The financial statements have been prepared in conformity with U.S. generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ significantly from those estimates.



Investment Securities



Investment securities are classified at the time of purchase, based on managements intention and ability, as securities held to maturity or
securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost adjusted for amortization of premium and accretion of discount, which are computed using the interest method and recognized as
adjustments of interest income. Certain other debt and equity securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available-for-sale securities are reported as
a separate component of stockholders equity, net of tax, until realized. Realized securities gains and losses are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when
earned.



Common stock of the Federal Home Loan Bank
(FHLB) and the Atlantic Central Bankers Bank represents ownership in institutions that are wholly owned by other financial institutions. These securities are accounted for at cost and are classified with other assets.



Mortgage Loans Held for Sale



In general, fixed rate residential mortgage loans originated by the Bank are
held for sale and are carried at the aggregate lower of cost or market. Such loans sold are generally serviced by the Bank.



6



---

|NOTE | 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|---- | ----------------------------------------------------------



Loans



Loans are stated at the principal amount outstanding, net of any unearned income, deferred loan fees, and the allowance for loan losses. Interest on
consumer loans is credited to operations over the term of each loan using a method which results in a level yield or the simple interest method. Interest income on mortgage loans is accrued on the amortized balance. Interest income on other loans is
accrued on the principal amount outstanding. Loan fees which represent an adjustment to interest yield are deferred and amortized over the life of the loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual
loans. Accrual of interest on loans is generally discontinued when it is determined that a reasonable doubt exists as to the collectibility of additional interest. When a loan is placed on nonaccrual status, unpaid interest is charged against
income. Payments received on nonaccrual loans are either applied to principal or reported as interest income according to managements judgment as to the collectibility of principal. Loans are returned to accrual status when past due interest
is collected and the collection of principal is probable.



Allowance for Loan Losses



The
allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio, as of the balance sheet date. The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based on
managements periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The estimates used in determining the adequacy of the
allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to changes in the near term.



Impaired loans are commercial and commercial real estate loans for which it is probable that the Company will not be able to
collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of impaired loans
is not the same as the definition of nonaccrual loans, although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the
loan as impaired if the loan is not a commercial or commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is
determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between
the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral.



Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans
and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a
case-by-case basis taking into consideration all of the circumstances surrounding the loan and the borrower including the length of the delay, the borrowers prior payment record, and the amount of shortfall in relation to the principal and
interest owed.



Premises and Equipment



Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is principally computed on the straight-line method over the estimated useful lives of the related assets, which range from 3 to 20 years for furniture and equipment and 5 to 31 years for office buildings and
improvements. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease terms, which range from 5 to 20 years. Expenditures for maintenance and repairs are charged against income as incurred.
Costs of major additions and improvements are capitalized.



7



---

|NOTE | 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|---- | ----------------------------------------------------------



Bank-Owned Life Insurance (BOLI)



The Company purchased life insurance policies on certain key employees. BOLI is recorded at its cash surrender value, or the amount that can be realized.



Other Real Estate



Real estate acquired by foreclosure is classified 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.



Income Taxes



The Company and the Bank file a consolidated federal income tax return.
Deferred tax assets or liabilities are computed based on the difference between the financial statement and the income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income tax expenses or benefits are based on
the changes in the deferred tax asset or liability from period to period.



Earnings Per Share



The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share are calculated utilizing net income as reported as the numerator and average shares outstanding as the denominator. The computation of
diluted earnings per share differs in that the dilutive effects of any options are adjusted for in the denominator.



Stock Options



The Company maintains stock option plans for key officers and nonemployee directors.



The Company accounts for its stock option plan under the provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Under this opinion, no compensation expense has been recognized with respect to the plans because the exercise price of the Companys employee stock options equals the market price of the underlying
stock on the grant date.



8



---

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Stock Options (Continued)



Had compensation expense for the stock option plans been recognized in
accordance with the fair value accounting provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, net income applicable to common stock and basic and diluted net income per common share for
the years ended December 31 would have been as follows (in thousands, except per share data):



|                                          |  |      |       |      |   |       |  |   |      
|----------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                          |  | 2004 |       | 2003 |   | 2002 
|Net income as reported                    |  | $    | 3,906 |      | $ | 3,854 |  | $ | 3,371
|Less pro forma expense related to options |  |      | 18    |      |   | 38    |  |   | 39   
|                                          |  |      |       |      |   |       |  |   |      
|Pro forma net income                      |  | $    | 3,888 |      | $ | 3,816 |  | $ | 3,332
|                                          |  |      |       |      |   |       |  |   |      
|Basic net income per common share:        |  |      |       |      |   |       |  |   |      
|As reported                               |  | $    | 2.54  |      | $ | 2.54  |  | $ | 2.24 
|Pro forma                                 |  | $    | 2.53  |      | $ | 2.52  |  | $ | 2.22 
|Diluted net income per common share       |  |      |       |      |   |       |  |   |      
|As reported                               |  | $    | 2.46  |      | $ | 2.45  |  | $ | 2.19 
|Pro forma                                 |  | $    | 2.45  |      | $ | 2.42  |  | $ | 2.16 



For purposes of
computing pro forma results, the Company estimated fair values of stock options using the Black-Scholes option-pricing model. The model requires use of subjective assumptions that can materially affect fair value estimates. Therefore, the pro forma
results are estimates of results of operations as if compensation expense had been recognized for the stock option plans. The fair value of each stock option granted was estimated using the following weighted-average assumptions for grants in 2004,
2003, and 2002, respectively: (1) expected dividend yields of 2.44 percent, 2.53 percent, and 3.81 percent; (2) risk-free interest rates of 4.22 percent, 3.91 percent, and 3.78 percent; (3) expected volatility of 17 percent, 25 percent, and 17
percent; and (4) expected lives of options of 9.9, 6.6, and 7.8 years.



Mortgage Servicing Rights (MSRs)



The Company has agreements for the express purpose of selling loans in the secondary market. The Company maintains servicing rights for most of these loans. Originated MSRs are recorded by allocating total costs incurred between the loan
and servicing rights based on their relative fair values. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio. MSRs are a component of other assets on the Consolidated Balance Sheet.



Comprehensive Income



The Company is required to present comprehensive income in a full set of
general-purpose financial statements for all periods presented. Other comprehensive income is composed of unrealized holding gains (losses) on the available-for-sale securities portfolio. The Company has elected to report the effects of other
comprehensive income as part of the Consolidated Statement of Changes in Stockholders Equity.





9



---

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Cash Flows



The Company has defined cash and cash equivalents as cash and due from
banks, interest-bearing deposits in other banks, and federal funds sold that have original maturities of 90 days or less.



Amounts paid for interest and income taxes are as follows (in thousands):



|                        |  |              |       |                         |   |      
|----------------------- |  | ------------ | ----- | ----------------------- | - | -----
|                        |  | InterestPaid |       | FederalIncome TaxesPaid
|Year Ended December 31, |  |              |       |                         |   |      
|2004                    |  | $            | 4,481 |                         | $ | 1,527
|2003                    |  | $            | 4,863 |                         | $ | 1,973
|2002                    |  | $            | 5,942 |                         | $ | 1,616



Recent
Accounting Pronouncements



In December 2004, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 123 (Revised 2004), Share-Based Payment. 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 July 1, 2005, and is currently evaluating the impact the
adoption of the standard will have on the Companys results of operations.



In October 2003, the American Institute of Certified Public Accountants issued SOP 03-3, Accounting for Loans or Certain Debt Securities Acquired in a Transfer.SOP 03-3 applies to a loan that is acquired where
it is probable, at acquisition, that a transferee will be unable to collect all contractually required payments receivable. SOP 03-3 requires the recognition, as accretable yield, of the excess of all cash flows expected at acquisition over the
investors initial investment in the loan as interest income on a level-yield basis over the life of the loan. The amount by which the loans contractually required payments exceed the amount of its expected cash flows at acquisition may
not be recognized as an adjustment to yield, a loss accrual, or a valuation allowance for credit risk. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. The adoption of SOP 03-3
is not expected to have a material impact on the consolidated financial statements.



10



---

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Reclassification of Comparative Amounts



Certain comparative amounts for prior years have been reclassified to
conform to current year presentations. The reclassified amounts did not affect net income or stockholders equity.



NOTE 2 - EARNINGS PER SHARE



There are no convertible securities that would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income 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.



|                                                                                                         |  |           |  |           |   |  |           |  
|-------------------------------------------------------------------------------------------------------- |  | --------- |  | --------- | - |  | --------- | -
|                                                                                                         |  | 2004      |  | 2003      |   |  | 2002      |  
|Weighted-average common shares outstanding                                                               |  | 1,537,511 |  | 1,515,596 |   |  | 1,504,376 |  
|                                                                                                         |  |           | 
|Average treasury stock shares                                                                            |  |          |  | (579      | ) |  | (2,076    | )
|                                                                                                         |  |           |  |           |   |  |           |  
|Weighted-average common shares and common stock equivalents used to calculate basic earnings per share   |  | 1,537,511 |  | 1,515,017 |   |  | 1,502,300 |  
|                                                                                                         |  |           | 
|Additional common stock equivalents (stock options) used to calculate diluted earnings per share         |  | 48,072    |  | 59,578    |   |  | 40,336    |  
|                                                                                                         |  |           |  |           |   |  |           |  
|Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share |  | 1,585,583 |  | 1,574,595 |   |  | 1,542,636 |  
|                                                                                                         |  |           |  |           |   |  |           |  



NOTE 3  STOCK DIVIDEND



On November 6, 2003, the Board of Directors approved a
100 percent stock split effected in the form of a dividend, payable December 1, 2003, to stockholders of record on November 14, 2003. Average shares outstanding and all per share amounts included in the consolidated financial statements are based on
the increased number of shares giving retroactive effect to the stock split effected in the form of a dividend.



11



---

NOTE 4 - INVESTMENT SECURITIES



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



|                                                  |  |               |        |                      |   |                       |  |   |                      |   |  |   |       
|------------------------------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | - | -------------------- | - |  | - | ------
|                                                  |  | 2004         
|                                                  |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedMarketValue
|AVAILABLE FOR SALE                                |  |               |        |                      |   |                       |  |   |                      |   |  |   |       
|U.S. government agency securities                 |  | $             | 18,461 |                      | $ | 3                     |  | $ | (161                 | ) |  | $ | 18,303
|Mortgage-backed securities                        |  |               | 93     |                      |   |                      |  |   | (1                   | ) |  |   | 92    
|Obligations of states and political subdivisions: |  |               |        |                      |   |                       |  |   |                      |   |  |   |       
|Taxable                                           |  |               | 1,761  |                      |   |                      |  |   | (9                   | ) |  |   | 1,752 
|Tax-exempt                                        |  |               | 3,408  |                      |   | 68                    |  |   | (4                   | ) |  |   | 3,472 
|Corporate securities                              |  |               | 6,192  |                      |   | 102                   |  |   |                     |   |  |   | 6,294 
|Commercial paper                                  |  |               | 25,459 |                      |   |                      |  |   |                     |   |  |   | 25,459
|                                                  |  |               |        |                      |   |                       |  |   |                      |   |  |   |       
|Total debt securities                             |  |               | 55,374 |                      |   | 173                   |  |   | (175                 | ) |  |   | 55,372
|                                                  |  |               |        |                     
|Equity securities                                 |  |               | 214    |                      |   | 77                    |  |   | (1                   | ) |  |   | 290   
|                                                  |  |               |        |                      |   |                       |  |   |                      |   |  |   |       
|Total                                             |  | $             | 55,588 |                      | $ | 250                   |  | $ | (176                 | ) |  | $ | 55,662
|                                                  |  |               |        |                      |   |                       |  |   |                      |   |  |   |       
|                                                  | 
|                                                  |  | 2003         
|                                                  |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedMarketValue
|AVAILABLE FOR SALE                                |  |               |        |                      |   |                       |  |   |                      |   |  |   |       
|U.S. government agency securities                 |  | $             | 34,749 |                      | $ | 109                   |  | $ | (55                  | ) |  | $ | 34,803
|Mortgage-backed securities                        |  |               | 122    |                      |   |                      |  |   | (4                   | ) |  |   | 118   
|Obligations of states and political subdivisions: |  |               |        |                      |   |                       |  |   |                      |   |  |   |       
|Taxable                                           |  |               | 1,993  |                      |   |                      |  |   | (8                   | ) |  |   | 1,985 
|Tax-exempt                                        |  |               | 6,449  |                      |   | 163                   |  |   | (6                   | ) |  |   | 6,606 
|Corporate securities                              |  |               | 9,959  |                      |   | 473                   |  |   | (4                   | ) |  |   | 10,428
|Commercial paper                                  |  |               | 9,989  |                      |   |                      |  |   |                     |   |  |   | 9,989 
|                                                  |  |               |        |                      |   |                       |  |   |                      |   |  |   |       
|Total debt securities                             |  |               | 63,261 |                      |   | 745                   |  |   | (77                  | ) |  |   | 63,929
|                                                  |  |               |        |                     
|Equity securities                                 |  |               | 286    |                      |   | 144                   |  |   | (2                   | ) |  |   | 428   
|                                                  |  |               |        |                      |   |                       |  |   |                      |   |  |   |       
|Total                                             |  | $             | 63,547 |                      | $ | 889                   |  | $ | (79                  | ) |  | $ | 64,357
|                                                  |  |               |        |                      |   |                       |  |   |                      |   |  |   |       



12



---

NOTE 4 - INVESTMENT SECURITIES (Continued)



|                                                              |  |               |     |                      |   |                       |  |                      |   |  |   |    
|------------------------------------------------------------- |  | ------------- | --- | -------------------- | - | --------------------- |  | -------------------- | - |  | - | ---
|                                                              |  | 2004         
|                                                              |  | AmortizedCost |     | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedMarketValue
|HELD TO MATURITY                                              |  |               |     |                      |   |                       |  |                      |   |  |   |    
|Obligations of states and political subdivisions - tax-exempt |  | $             | 198 |                      | $ | 18                    |  | $                    |  |  | $ | 216
|                                                              |  |               |     |                      |   |                       |  |                      |   |  |   |    
|                                                              | 
|                                                              |  | 2003         
|                                                              |  | AmortizedCost |     | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedMarketValue
|HELD TO MATURITY                                              |  |               |     |                      |   |                       |  |                      |   |  |   |    
|Obligations of states and political subdivisions - tax-exempt |  | $             | 197 |                      | $ | 31                    |  | $                    |  |  | $ | 228
|                                                              |  |               |     |                      |   |                       |  |                      |   |  |   |    



The following table
shows the Companys fair value and gross unrealized losses, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2004 (in thousands).



|                                                 |  |                         |        |                          |   |                      |  |                       |     |                      |   |                       |  |   |        |  |   |    
|------------------------------------------------ |  | ----------------------- | ------ | ------------------------ | - | -------------------- |  | --------------------- | --- | -------------------- | - | --------------------- |  | - | ------ |  | - | ---
|                                                 |  | Less than Twelve Months |        | Twelve Months or Greater |   | Total               
|                                                 |  | EstimatedMarketValue    |        | GrossUnrealizedLosses    |   | EstimatedMarketValue |  | GrossUnrealizedLosses |     | EstimatedMarketValue |   | GrossUnrealizedLosses
|U.S. government agencies                         |  | $                       | 14,811 |                          | $ | 161                  |  | $                     |    |                      | $ |                      |  | $ | 14,811 |  | $ | 161
|Mortgage-backed securities                       |  |                         | 70     |                          |   | 1                    |  |                       |    |                      |   |                      |  |   | 70     |  |   | 1  
|Obligations of states and political subdivisions |  |                         | 401    |                          |   | 10                   |  |                       | 262 |                      |   | 3                     |  |   | 663    |  |   | 13 
|                                                 |  |                         |        |                          |   |                      |  |                       |     |                      |   |                       |  |   |        |  |   |    
|Total debt securities                            |  |                         | 15,282 |                          |   | 172                  |  |                       | 262 |                      |   | 3                     |  |   | 15,544 |  |   | 175
|                                                 |  |                         |        |                          |   |                     
|Equity securities                                |  |                         | 21     |                          |   | 1                    |  |                       |    |                      |   |                      |  |   | 21     |  |   | 1  
|                                                 |  |                         |        |                          |   |                      |  |                       |     |                      |   |                       |  |   |        |  |   |    
|Total                                            |  | $                       | 15,303 |                          | $ | 173                  |  | $                     | 262 |                      | $ | 3                     |  | $ | 15,565 |  | $ | 176
|                                                 |  |                         |        |                          |   |                      |  |                       |     |                      |   |                       |  |   |        |  |   |    



The policy of the
Company is to recognize an other-than-temporary impairment of equity securities where the fair value has been significantly below cost for three consecutive quarters. For fixed maturity investments with unrealized losses due to interest rates where
the Company has the positive intent and ability to hold the investment for a period of time sufficient to allow a market recovery, declines in value below cost are not assumed to be other than temporary. The Company reviews its position quarterly
and has asserted that at December 31, 2004, the declines outlined in the above table represent temporary declines and the Company does have the intent and ability either to hold those securities to maturity or to allow a market recovery.



The Company has concluded that any impairment of its investment
securities portfolio is not other than temporary but is the result of interest rate changes, sector credit changes, or Company-specific rating changes that are not expected to result in the noncollection of principal and interest during the period.



13



---

NOTE 4 - INVESTMENT SECURITIES (Continued)



The amortized cost and estimated market values of debt securities at December 31, 2004, by contractual maturity, are shown
below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands).



|                                       |  |                    |        |                      |   |               |  |                      |     |  |   |    
|-------------------------------------- |  | ------------------ | ------ | -------------------- | - | ------------- |  | -------------------- | --- |  | - | ---
|                                       |  | Available for Sale |        | Held to Maturity    
|                                       |  | AmortizedCost      |        | EstimatedMarketValue |   | AmortizedCost |  | EstimatedMarketValue
|Due in one year or less                |  | $                  | 28,981 |                      | $ | 29,036        |  | $                    |    |  | $ |   
|Due after one year through five years  |  |                    | 8,031  |                      |   | 8,067         |  |                      | 198 |  |   | 216
|Due after five years through ten years |  |                    | 8,155  |                      |   | 8,085         |  |                      |    |  |   |   
|Due after ten years                    |  |                    | 10,207 |                      |   | 10,184        |  |                      |    |  |   |   
|                                       |  |                    |        |                      |   |               |  |                      |     |  |   |    
|Total debt securities                  |  | $                  | 55,374 |                      | $ | 55,372        |  | $                    | 198 |  | $ | 216
|                                       |  |                    |        |                      |   |               |  |                      |     |  |   |    



Proceeds from sales of
investment securities during 2004 and 2003 were $174 and $33, respectively, and the resulting gross and net gains of $68 and $13 were realized. In 2004 and 2002, the Company recorded an investment security gain of $27 and $12, respectively,
resulting from a business combination where the Company received a combination of the common stock of the acquirer in a non-monetary exchange and cash proceeds of $73 and $7.



Investment securities with an amortized cost of $45,892 and $45,969 and estimated market values of $45,909 and $46,633 at
December 31, 2004 and 2003, respectively, were pledged to secure deposits, short-term borrowings, and for other purposes as required by law.



14



---

NOTE 5 - LOANS



Major classifications of loans are as follows (in thousands):



|                                                                             |  |      |         |      |   |        
|---------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                             |  | 2004 |         | 2003
|Loans secured by real estate:                                                |  |      |         |      |   |        
|Construction and development                                                 |  | $    | 662     |      | $ | 396    
|Secured by farmland                                                          |  |      | 1,786   |      |   | 1,644  
|Secured by 1 - 4 family residential properties:                              |  |      |         |      |   |        
|Revolving, open-end loans secured by 1 -4 family residential properties      |  |      | 1,820   |      |   | 1,367  
|All other loans secured by 1 - 4 family residential properties               |  |      | 53,026  |      |   | 50,986 
|Secured by nonfarm, nonresidential properties                                |  |      | 133,259 |      |   | 112,443
|Commercial and industrial loans                                              |  |      | 41,848  |      |   | 32,263 
|Loans to individuals for household, family, and other personal expenditures: |  |      |         |      |   |        
|Ready credit loans                                                           |  |      | 451     |      |   | 292    
|Other installment loans                                                      |  |      | 17,632  |      |   | 19,349 
|Other loans:                                                                 |  |      |         |      |   |        
|Agricultural loans                                                           |  |      | 606     |      |   | 470    
|All other loans                                                              |  |      | 2,674   |      |   | 1,140  
|                                                                             |  |      |         |      |   |        
|Total loans                                                                  |  |      | 253,764 |      |   | 220,350
|Less unearned income                                                         |  |      | 623     |      |   | 741    
|                                                                             |  |      |         |      |   |        
|Loans, net of unearned income                                                |  | $    | 253,141 |      | $ | 219,609
|                                                                             |  |      |         |      |   |        



Real estate loans
serviced for others which are not included in the Consolidated Balance Sheet totaled $77,542 and $69,382 at December 31, 2004 and 2003, respectively.



Nonperforming loans consist of commercial, mortgage, and consumer loans which are on a nonaccrual basis or contractually past due 90 days or more as to
interest or principal payment but are not on nonaccrual status because they are well secured or in process of collection or identified by management to meet the definition of an impaired loan. The following table presents information concerning
nonperforming loans (in thousands):



|                                                   |  |      |       |      |   |      
|-------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                   |  | 2004 |       | 2003
|Ninety days or more past due and accruing interest |  | $    | 293   |      | $ | 175  
|Nonaccrual                                         |  |      | 261   |      |   | 316  
|Impaired loans                                     |  |      | 461   |      |   | 2,530
|                                                   |  |      |       |      |   |      
|Total nonperforming loans                          |  | $    | 1,015 |      | $ | 3,021
|                                                   |  |      |       |      |   |      



Interest income on
loans would have been increased by $5, $57, and $11 during 2004, 2003, and 2002, respectively, if nonaccrual loans had performed in accordance with their original terms.



The Company had impaired loans of $461 and $2,530 as of December 31, 2004 and 2003, respectively, with related allowance for
loan losses of $14 and $37, respectively. For the years ended December 31, 2004, 2003, and 2002, average impaired loans were $473, $2,575, and $705, respectively. Interest recognized on impaired loans for the years ended December 31, 2004, 2003, and
2002, was $28, $66, and $20, respectively.



15



---

NOTE 5 - LOANS (Continued)



Changes in the allowance for loan losses are as follows (in thousands):



|                                 |  |      |        |   |      |   |       |      |  |   |       |  
|-------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                 |  | 2004 |        |   | 2003 |   |       | 2002 | 
|Balance, beginning of year       |  | $    | 3,014  |   |      | $ | 2,818 |      |  | $ | 2,373 |  
|Provision charged to operations  |  |      | 1,126  |   |      |   | 960   |      |  |   | 675   |  
|Recoveries credited to allowance |  |      | 150    |   |      |   | 58    |      |  |   | 69    |  
|Losses charged to allowance      |  |      | (1,118 | ) |      |   | (822  | )    |  |   | (299  | )
|                                 |  |      |        |   |      |   |       |      |  |   |       |  
|Balance, end of year             |  | $    | 3,172  |   |      | $ | 3,014 |      |  | $ | 2,818 |  
|                                 |  |      |        |   |      |   |       |      |  |   |       |  



In the normal course
of business, loans are extended to officers and directors and corporations in which they are beneficially interested as stockholders, officers, or directors. A summary of loan activity for those officers and directors with aggregate loan balances in
excess of $60,000 for the year ended December 31, 2004, is as follows (in thousands):



|       |  |           |       |                  |   |       |  |   |      
|------ |  | --------- | ----- | ---------------- | - | ----- |  | - | -----
|2003   |  | Additions |       | AmountsCollected |   | 2004 
|$6,159 |  | $         | 2,737 |                  | $ | 1,327 |  | $ | 7,569



The Companys
primary business activity is with customers located within its local trade area. Generally, the Company grants commercial, residential, and personal loans. The Company also selectively funds and purchases commercial and residential loans outside of
its local trade area provided such loans meet the Companys credit policy guidelines. At December 31, 2004 and 2003, the Company had approximately $49 million and $38 million, respectively, of outstanding loans to summer camps and recreational
facilities in the northeastern United States. Although the Company has a diversified loan portfolio at December 31, 2004 and 2003, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate
trade area.



|NOTE | 6 - PREMISES AND EQUIPMENT
|---- | --------------------------



A summary by asset classification is as follows (in thousands):



|                                               |  |      |        |      |   |      
|---------------------------------------------- |  | ---- | ------ | ---- | - | -----
|                                               |  | 2004 |        | 2003
|Land                                           |  | $    | 584    |      | $ | 433  
|Premises and improvements                      |  |      | 4,983  |      |   | 3,682
|Furniture and equipment                        |  |      | 3,216  |      |   | 2,843
|Leasehold improvements                         |  |      | 1,421  |      |   | 1,411
|                                               |  |      |        |      |   |      
|Total, at cost                                 |  |      | 10,204 |      |   | 8,369
|Less accumulated depreciation and amortization |  |      | 4,624  |      |   | 4,190
|                                               |  |      |        |      |   |      
|Net premises and equipment                     |  | $    | 5,580  |      | $ | 4,179
|                                               |  |      |        |      |   |      



Depreciation and
amortization expense was $486, $463, and $454, in 2004, 2003, and 2002, respectively.



16



---

NOTE 7 - DEPOSITS



Deposits are summarized as follows (in thousands):



|                                  |  |      |         |      |   |        
|--------------------------------- |  | ---- | ------- | ---- | - | -------
|                                  |  | 2004 |         | 2003
|Demand - noninterest-bearing      |  | $    | 30,380  |      | $ | 29,523 
|Demand - interest-bearing         |  |      | 39,141  |      |   | 37,645 
|Money market                      |  |      | 31,536  |      |   | 17,087 
|Savings                           |  |      | 41,725  |      |   | 41,607 
|Time deposits of $100,000 or more |  |      | 40,406  |      |   | 48,384 
|Other time deposits               |  |      | 87,354  |      |   | 87,961 
|                                  |  |      |         |      |   |        
|Total                             |  | $    | 270,542 |      | $ | 262,207
|                                  |  |      |         |      |   |        



The following table
summarizes the maturity distribution of time deposits (in thousands):



|      |  |   |        
|----- |  | - | -------
|2005  |  | $ | 97,439 
|2006  |  |   | 9,533  
|2007  |  |   | 10,061 
|2008  |  |   | 5,546  
|2009  |  |   | 5,181  
|      |  |   |        
|Total |  | $ | 127,760
|      |  |   |        



The following table
summarizes the maturity distribution of certificates of deposit of $100,000 or more (in thousands):



|                            |  |      |       
|--------------------------- |  | ---- | ------
|                            |  | 2004
|Three months or less        |  | $    | 10,748
|Four through six months     |  |      | 13,307
|Seven through twelve months |  |      | 8,605 
|Over twelve months          |  |      | 7,746 
|                            |  |      |       
|Total                       |  | $    | 40,406
|                            |  |      |       



Interest expense on
certificates of deposit of $100,000 or more amounted to $946, $1,081, and $1,330, for the years ended December 31, 2004, 2003, and 2002, respectively.



NOTE 8 - SHORT-TERM BORROWINGS



Short-term borrowings consist of borrowings from the FHLB of Pittsburgh and securities sold under agreements to repurchase. Average amounts outstanding
during the year represent daily average balances, and average interest rates represent interest expense divided by the related average balance.



17



---

NOTE 8 - SHORT-TERM BORROWINGS (Continued)



The outstanding balances and related information for short-term borrowings are summarized as follows (in thousands):



|                                            |  |        |        |      |      |   |        |   |        |  |      |  
|------------------------------------------- |  | ------ | ------ | ---- | ---- | - | ------ | - | ------ |  | ---- | -
|                                            |  | 2004   |        |      | 2003 |  
|                                            |  | Amount |        | Rate |      |   | Amount |   | Rate   | 
|Balance at year-end                         |  | $      | 12,033 |      | 1.22 | % |        | $ | 11,800 |  | 0.89 | %
|Average balance outstanding during the year |  | $      | 13,142 |      | 0.98 | % |        | $ | 11,369 |  | 0.98 | %
|Maximum amount outstanding at any month-end |  | $      | 16,087 |      |      |   |        | $ | 15,142 |  |      |  



The Bank has pledged,
as collateral for the borrowings from the FHLB, all stock in the FHLB and certain other qualifying collateral. Investment securities with amortized costs of $21,132 and $17,823 and market values of $21,148 and $18,148, respectively, at December 31,
2004 and 2003, were pledged as collateral for the securities sold under agreements to repurchase.



The Bank has the capability to borrow additional funds through its credit arrangement with the FHLB. The FHLB borrowings are subject to annual renewal,
incur no service charges, and are secured by a blanket security agreement on certain investment securities, qualifying residential mortgages, and the Banks investment in FHLB stock. At December 31, 2004, the Banks remaining borrowing
capacity with the FHLB was approximately $61 million.



NOTE 9 - OTHER
BORROWED FUNDS



FHLB advances consist of separate fixed
rate and convertible select-fixed to float rate loans as follows (in thousands):



|                  |  |      |   |  |      |        |      |   |      
|----------------- |  | ---- | - |  | ---- | ------ | ---- | - | -----
|Maturity          |  | Rate |   |  | 2004 |        | 2003
|June 28, 2006     |  | 3.31 | % |  | $    | 2,000  |      | $ |     
|June 28, 2007     |  | 3.78 | % |  |      | 2,000  |      |   |     
|May 5, 2014       |  | 4.52 | % |  |      | 1,906  |      |   |     
|March 11, 2016    |  | 3.47 | % |  |      | 2,847  |      |   |     
|November 25, 2024 |  | 4.87 | % |  |      | 1,596  |      |   |     
|February 18, 2010 |  | 5.91 | % |  |      | 1,000  |      |   | 1,000
|                  |  |      |   |  |      |        |      |   |      
|Total             |  |      |   |  | $    | 11,349 |      | $ | 1,000
|                  |  |      |   |  |      |        |      |   |      



The advance maturing
in 2010 is convertible to a variable rate advance on specific dates at the discretion of the FHLB. Should the FHLB convert this advance, the Bank has the option of accepting the variable rate or repaying the advance without penalty.



NOTE 10 - DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN



The Company maintains a Dividend Reinvestment and Stock Purchase Plan (the
Plan). Participation is available to all common stockholders. The Plan provides each participant with a simple and convenient method of purchasing additional common shares without payment of any brokerage commission or other service
fees.



A participant in the Plan may elect to reinvest
dividends on all or part of his or her shares to acquire additional common stock. A participant may withdraw from the Plan at any time. Stockholders purchased 12,848 shares in 2004 and 18,958 shares in 2003 through the Plan.



18



---

NOTE 11 - EMPLOYEE BENEFITS



Retirement Plan



The Bank maintains a section 401(k) employee savings and investment plan for substantially all employees and officers of the Bank. The Banks
contribution to the plan is based on 100 percent matching of voluntary contributions up to 3 percent and 50 percent matching on the next 2 percent of individual compensation. Additionally, the Bank may contribute a discretionary amount each year.
For each of the years of 2004, 2003, and 2002, the Board of Directors authorized an additional 4 percent, 5 percent, and 4 percent of each eligible employees compensation, respectively. Employee contributions are vested at all times, and Bank
contributions are fully vested after five years. Contributions for 2004, 2003, and 2002 to this plan amounted to $199, $182, and $142, respectively.



Supplemental Retirement Plan



The Bank maintains a Salary Continuation Plan for the executive officers of the Bank to provide guaranteed consecutive postretirement payments totaling a
predetermined amount over a ten-year period based on a five-year vesting schedule beginning the date of the agreement between the Bank and the executive. Expenses for the years ended December 31, 2004, 2003, and 2002, amounted to $76, $70, and $59,
respectively, and are included as a component of salaries and employee benefits. An assumption of 8.5 percent was used as the discount rate in determining the present value of the estimated liability or the Salary Continuation Plan.



Stock Option Plan



The Company maintains a stock incentive plan and a stock option plan that
provide for granting incentive stock options to key officers and other employees of the Company and Bank, as determined by the Stock Option Committee, and nonqualified stock options to nonemployee directors of the Company. A total of 120,000 and
50,000 shares, respectively, of either authorized and unissued shares or authorized shares issued by and subsequently reacquired by the Company as treasury stock shall be issuable under the plans. The plans shall terminate after the tenth
anniversary of the date of shareholder ratification. The per share exercise price of any option granted will not be less than the fair market value of a share of common stock on the date the option is granted. The options granted are primarily
vested 33 percent after one year, 33 percent after two years, and 34 percent after three years.



The following table presents share data related to the stock option plans:



|                        |  |         |   |  |                                |       |      |         |   |                                |   |      
|----------------------- |  | ------- | - |  | ------------------------------ | ----- | ---- | ------- | - | ------------------------------ | - | -----
|                        |  | 2004    |   |  | Weighted- AverageExercisePrice |       | 2003 |         |   | Weighted- AverageExercisePrice
|Outstanding, beginning  |  | 121,530 |   |  | $                              | 14.39 |      | 127,000 |   |                                | $ | 13.58
|Granted                 |  | 1,000   |   |  |                                | 35.00 |      | 7,000   |   |                                |   | 27.01
|Exercised               |  | (22,860 | ) |  |                                | 13.64 |      | (12,470 | ) |                                |   | 13.23
|Forfeited               |  |        |   |  |                                |      |      |        |   |                                |   |     
|                        |  |         |   |  |                                |       |      |         |   |                                |   |      
|Outstanding, ending     |  | 99,670  |   |  | $                              | 14.77 |      | 121,530 |   |                                | $ | 14.39
|                        |  |         |   |  |                                |       |      |         |   |                                |   |      
|Exercisable at year-end |  | 92,620  |   |  | $                              | 13.83 |      | 109,810 |   |                                | $ | 13.38
|                        |  |         |   |  |                                |       |      |         |   |                                |   |      



19



---

NOTE 11 - EMPLOYEE BENEFITS (Continued)



Stock Option Plan (Continued)



The following table summarizes characteristics of stock options outstanding at December 31, 2004:



|               |  |             |  |             |  |                      |       |        |        |                      |   |      
|-------------- |  | ----------- |  | ----------- |  | -------------------- | ----- | ------ | ------ | -------------------- | - | -----
|               |  | Outstanding |  | Exercisable
|Exercise Price |  | Shares      |  | AverageLife |  | AverageExercisePrice |       | Shares |        | AverageExercisePrice
|$        13.00 |  | 28,500      |  | 5.21        |  | $                    | 13.00 |        | 28,500 |                      | $ | 13.00
|$        13.25 |  | 54,830      |  | 5.21        |  | $                    | 13.25 |        | 54,830 |                      | $ | 13.25
|$        16.50 |  | 5,000       |  | 5.21        |  | $                    | 16.50 |        | 5,000  |                      | $ | 16.50
|$        21.30 |  | 4,000       |  | 5.21        |  | $                    | 21.30 |        | 2,640  |                      | $ | 21.30
|$        23.00 |  | 2,000       |  | 5.21        |  | $                    | 23.00 |        | 660    |                      | $ | 23.00
|$        25.75 |  | 1,340       |  | 5.21        |  | $                    | 25.75 |        |       |                      | $ |     
|$        26.50 |  | 1,000       |  | 5.21        |  | $                    | 26.50 |        | 330    |                      | $ | 26.50
|$        32.55 |  | 2,000       |  | 8.83        |  | $                    | 32.55 |        | 660    |                      | $ | 32.55
|$        35.00 |  | 1,000       |  | 9.85        |  | $                    | 35.00 |        |       |                      | $ |     
|               |  |             |  |             |  |                      |       |        |        |                      |   |      
|               |  | 99,670      |  |             |  |                      |       |        | 92,620 |                      |   |      
|               |  |             |  |             |  |                      |       |        |        |                      |   |      



NOTE 12 - INCOME TAXES



Federal income tax expense consists of the following (in
thousands):



|                  |  |      |       |      |   |       |  |   |       |  
|----------------- |  | ---- | ----- | ---- | - | ----- |  | - | ----- | -
|                  |  | 2004 |       | 2003 |   | 2002  | 
|Currently payable |  | $    | 1,508 |      | $ | 1,694 |  | $ | 1,798 |  
|Deferred taxes    |  |      | 264   |      |   | 6     |  |   | (249  | )
|                  |  |      |       |      |   |       |  |   |       |  
|Total provision   |  | $    | 1,772 |      | $ | 1,700 |  | $ | 1,549 |  
|                  |  |      |       |      |   |       |  |   |       |  



The components of the
net deferred tax assets and liabilities at December 31 are as follows (in thousands):



|                                         |  |      |     |      |   |    
|---------------------------------------- |  | ---- | --- | ---- | - | ---
|                                         |  | 2004 |     | 2003
|Deferred tax assets:                     |  |      |     |      |   |    
|Allowance for loan losses                |  | $    | 804 |      | $ | 807
|Deferred compensation                    |  |      | 3   |      |   | 7  
|Salary continuation plan                 |  |      | 165 |      |   | 139
|Mortgage servicing rights                |  |      |    |      |   | 24 
|                                         |  |      |     |      |   |    
|Total                                    |  |      | 972 |      |   | 977
|                                         |  |      |     |      |   |    
|Deferred tax liabilities:                |  |      |     |      |   |    
|Premises and equipment                   |  |      | 574 |      |   | 314
|Deferred loan origination fees, net      |  |      | 172 |      |   | 179
|Unrealized gain on nonmonetary exchange  |  |      | 9   |      |   | 3  
|Unrealized gain on investment securities |  |      | 25  |      |   | 275
|                                         |  |      |     |      |   |    
|Total                                    |  |      | 780 |      |   | 771
|                                         |  |      |     |      |   |    
|Net deferred tax assets                  |  | $    | 192 |      | $ | 206
|                                         |  |      |     |      |   |    



No valuation allowance
was established at December 31, 2004 and 2003, in view of the Companys ability to carryback taxes paid in previous years and certain tax strategies and anticipated future taxable income as evidenced by the Companys earnings potential.



20



---

NOTE 12 - INCOME TAXES (Continued)



A reconciliation between the expected statutory income tax rate and the effective income tax rate follows (in thousands):



|                              |  |        |       |   |                  |      |   |        |   |       |                  |  |      |        |  |   |                  |   |  |      |  
|----------------------------- |  | ------ | ----- | - | ---------------- | ---- | - | ------ | - | ----- | ---------------- |  | ---- | ------ |  | - | ---------------- | - |  | ---- | -
|                              |  | 2004   |       |   | 2003             |      |   | 2002   |  
|                              |  | Amount |       |   | % ofPretaxIncome |      |   | Amount |   |       | % ofPretaxIncome |  |      | Amount |  |   | % ofPretaxIncome |  
|Provision at statutory rate   |  | $      | 1,930 |   |                  | 34.0 | % |        | $ | 1,888 |                  |  | 34.0 | %      |  | $ | 1,673            |   |  | 34.0 | %
|Tax-exempt income             |  |        | (100  | ) |                  | (1.8 | ) |        |   | (112  | )                |  | (2.0 | )      |  |   | (110             | ) |  | (2.2 | )
|BOLI earnings                 |  |        | (78   | ) |                  | (1.4 | ) |        |   | (52   | )                |  | (0.9 | )      |  |   | (30              | ) |  | (0.6 | )
|Nondeductible interest        |  |        | 6     |   |                  | 0.1  |   |        |   | 8     |                  |  | 0.1  |        |  |   | 10               |   |  | 0.2  |  
|Other, net                    |  |        | 14    |   |                  | 0.3  |   |        |   | (32   | )                |  | (0.6 | )      |  |   | 6                |   |  | 0.1  |  
|                              |  |        |       |   |                  |      |   |        |   |       |                  |  |      |        |  |   |                  |   |  |      |  
|Effective income tax and rate |  | $      | 1,772 |   |                  | 31.2 | % |        | $ | 1,700 |                  |  | 30.6 | %      |  | $ | 1,549            |   |  | 31.5 | %
|                              |  |        |       |   |                  |      |   |        |   |       |                  |  |      |        |  |   |                  |   |  |      |  



NOTE 13 - COMMITMENTS AND
CONTINGENT LIABILITIES



Commitments



In the normal course of business, there are outstanding
commitments and contingent liabilities such as commitments to extend credit, financial guarantees, and letters of credit that are not reflected in the accompanying consolidated financial statements. The Company does not anticipate any losses as a
result of these transactions. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet. The contract or notional amounts of those instruments
reflect the extent of involvement the Company has in the particular classes of financial instruments.



Financial instruments whose contract amounts represent credit risk are as follows (in thousands):



|                             |  |      |        |      |   |       
|---------------------------- |  | ---- | ------ | ---- | - | ------
|                             |  | 2004 |        | 2003
|Commitments to extend credit |  | $    | 31,957 |      | $ | 23,581
|Standby letters of credit    |  | $    | 2,012  |      | $ | 2,807 



Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.



Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These
instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the
issuance of these letters are recognized at the expiration of the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments.



21



---

NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES (Continued)



Commitments (Continued)



At December 31, 2004, the minimum rental commitments for all noncancelable
leases are as follows (in thousands):



|                    |  |   |    
|------------------- |  | - | ---
|2005                |  | $ | 229
|2006                |  |   | 184
|2007                |  |   | 157
|2008                |  |   | 81 
|2009                |  |   | 45 
|2010 and thereafter |  |   | 188
|                    |  |   |    
|Total               |  | $ | 884
|                    |  |   |    



Contingent
Liabilities



The Company and its subsidiary are
involved in various legal actions from the normal course of business activities. Management believes the liability, if any, arising from such actions will not have a material adverse effect on the Companys financial position.



NOTE 14 - REGULATORY RESTRICTIONS



Cash and Due From Banks



The district Federal Reserve Bank requires the Bank to maintain certain
average reserve balances. As of December 31, 2004 and 2003, the Bank had required reserves of $225 and $2,368, respectively, composed of vault cash and a depository amount held directly with the Federal Reserve Bank.



Dividends



The Pennsylvania Banking Code restricts the availability of capital funds
for payment of dividends by all state-chartered banks to the surplus of the Bank. Accordingly, at December 31, 2004, the balance in the capital surplus account totaling approximately $1,756 is unavailable for dividends.



22



---

NOTE 15 - REGULATORY CAPITAL REQUIREMENTS



Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each is required
to maintain certain minimum dollar amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average total assets.



In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (FDICIA) established five capital
categories ranging from well capitalized to critically undercapitalized. Should any institution fail to meet the requirements to be considered adequately capitalized, it would become subject to a series of
increasingly restrictive regulatory actions.



As of December
31, 2004 and 2003, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 Leverage
capital ratios must be at least 10 percent, 6 percent, and 5 percent, respectively.



The Companys actual capital ratios are presented in the following table, which shows the Company met all regulatory capital requirements. The capital position of the Bank does not differ significantly from the
Companys (in thousands).



|                                        |  |        |        |       |       |   |        |   |        |  |       |  
|--------------------------------------- |  | ------ | ------ | ----- | ----- | - | ------ | - | ------ |  | ----- | -
|                                        |  | 2004   |        |       | 2003  |  
|                                        |  | Amount |        | Ratio |       |   | Amount |   | Ratio  | 
|Total Capital(to Risk-Weighted Assets)  |  |        |        |       |       |   |        |   |        |  |       |  
|                                        |  |        |        |      
|Actual                                  |  | $      | 32,784 |       | 11.71 | % |        | $ | 29,771 |  | 12.43 | %
|For Capital Adequacy Purposes           |  | $      | 22,396 |       | 8.00  | % |        | $ | 19,163 |  | 8.00  | %
|To Be Well Capitalized                  |  | $      | 27,995 |       | 10.00 | % |        | $ | 23,954 |  | 10.00 | %
|                                        |  |        |        |      
|Tier I Capital(to Risk-Weighted Assets) |  |        |        |       |       |   |        |   |        |  |       |  
|                                        |  |        |        |      
|Actual                                  |  | $      | 29,577 |       | 10.57 | % |        | $ | 26,712 |  | 11.15 | %
|For Capital Adequacy Purposes           |  | $      | 11,198 |       | 4.00  | % |        | $ | 9,582  |  | 4.00  | %
|To Be Well Capitalized                  |  | $      | 16,797 |       | 6.00  | % |        | $ | 14,372 |  | 6.00  | %
|                                        |  |        |        |      
|Tier I Capital(to Average Assets)       |  |        |        |       |       |   |        |   |        |  |       |  
|                                        |  |        |        |      
|Actual                                  |  | $      | 29,577 |       | 9.52  | % |        | $ | 26,712 |  | 9.31  | %
|For Capital Adequacy Purposes           |  | $      | 12,433 |       | 4.00  | % |        | $ | 11,476 |  | 4.00  | %
|To Be Well Capitalized                  |  | $      | 15,542 |       | 5.00  | % |        | $ | 14,346 |  | 5.00  | %



23



---

NOTE 16 - FAIR VALUE DISCLOSURE



The estimated fair values of the Companys financial instruments are as follows (in thousands):



|                             |  |                |         |            |   |                |  |            |         |  |   |        
|---------------------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                             |  | 2004           |         | 2003      
|                             |  | Carrying Value |         | Fair Value |   | Carrying Value |  | Fair Value
|Financial assets:            |  |                |         |            |   |                |  |            |         |  |   |        
|Cash and cash equivalents    |  | $              | 5,132   |            | $ | 5,132          |  | $          | 10,210  |  | $ | 10,210 
|Mortgage loans held for sale |  |                | 112     |            |   | 112            |  |            | 654     |  |   | 662    
|Investment securities:       |  |                |         |            |   |                |  |            |         |  |   |        
|Available for sale           |  |                | 55,662  |            |   | 55,662         |  |            | 64,357  |  |   | 64,357 
|Held to maturity             |  |                | 198     |            |   | 216            |  |            | 197     |  |   | 228    
|Net loans                    |  |                | 249,969 |            |   | 253,787        |  |            | 216,595 |  |   | 223,506
|Accrued interest receivable  |  |                | 1,106   |            |   | 1,106          |  |            | 1,295   |  |   | 1,295  
|Regulatory stock             |  |                | 951     |            |   | 951            |  |            | 528     |  |   | 528    
|Bank-owned life insurance    |  |                | 5,065   |            |   | 5,065          |  |            | 4,861   |  |   | 4,861  
|Mortgage servicing rights    |  |                | 700     |            |   | 700            |  |            | 616     |  |   | 616    
|                             |  |                |         |           
|Financial liabilities:       |  |                |         |            |   |                |  |            |         |  |   |        
|Deposits                     |  | $              | 270,542 |            | $ | 270,551        |  | $          | 262,207 |  | $ | 263,551
|Short-term borrowings        |  |                | 12,033  |            |   | 12,033         |  |            | 11,800  |  |   | 11,800 
|Other borrowed funds         |  |                | 11,349  |            |   | 11,385         |  |            | 1,000   |  |   | 1,006  
|Accrued interest payable     |  |                | 609     |            |   | 609            |  |            | 678     |  |   | 678    



Financial instruments
are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.



Fair value is defined as the amount at which a financial
instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the
market price per trading unit of the instrument.



If no
readily available market exists, the fair value estimates for financial instruments should be based upon managements judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other
factors as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates that are inherently uncertain, the resulting estimated fair values may
not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.



As certain assets such as deferred tax assets and premises
and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.



24



---

NOTE 16 - FAIR VALUE DISCLOSURE (Continued)



The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted
market prices were not available based upon the following assumptions:



Cash and Cash Equivalents, Accrued Interest Receivable, Regulatory Stock, Short-Term Borrowings, and Accrued Interest Payable



The fair value is equal to the current carrying value.



Mortgage Loans Held for Sale



The fair value of mortgage loans held for sale is equal to the available quoted market price. If no quoted market price is available, fair value is
estimated using the quoted market price for similar securities.



Investment Securities



The fair value
of investment securities available for sale and held to maturity is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.



Loans, Deposits, Other Borrowed Funds and Mortgage Servicing
Rights



The fair value for loans and mortgage
servicing rights is estimated by discounting contractual cash flows and adjusting for prepayment estimates. Discount rates are based upon rates generally charged for such loans with similar characteristics. Demand, savings, and money market deposit
accounts are valued at the amount payable on demand as of year-end. Fair values for time deposits and other borrowed funds are estimated using a discounted cash flow calculation that applies contractual costs currently being offered in the existing
portfolio to current market rates being offered for deposits of similar remaining maturities.



Bank-Owned Life Insurance



The fair value is equal to the cash surrender value of the life insurance policies.



Commitments to Extend Credit and Standby Letters of Credit



These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The
carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently
charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are presented in Note 13.





25



---

NOTE 17 - PARENT COMPANY



Following are condensed financial statements for the parent company:



CONDENSED BALANCE SHEET



(In thousands)



|                                           |  |              |        |      |   |       
|------------------------------------------ |  | ------------ | ------ | ---- | - | ------
|                                           |  | December 31,
|                                           |  | 2004         |        | 2003
|Assets                                     |  |              |        |      |   |       
|Cash and due from banks                    |  | $            | 1,294  |      | $ | 917   
|Investment securities available for sale   |  |              | 290    |      |   | 428   
|Investment in bank subsidiary              |  |              | 27,419 |      |   | 26,009
|Other assets                               |  |              | 1,115  |      |   | 356   
|                                           |  |              |        |      |   |       
|Total Assets                               |  | $            | 30,118 |      | $ | 27,710
|                                           |  |              |        |      |   |       
|Liabilities                                |  |              |        |      |   |       
|Dividends payable                          |  | $            | 387    |      | $ | 343   
|Other liabilities                          |  |              | 35     |      |   | 59    
|                                           |  |              |        |      |   |       
|Total Liabilities                          |  |              | 422    |      |   | 402   
|                                           |  |             
|Stockholders equity                       |  |              | 29,696 |      |   | 27,308
|                                           |  |              |        |      |   |       
|Total Liabilities and Stockholders Equity |  | $            | 30,118 |      | $ | 27,710
|                                           |  |              |        |      |   |       



CONDENSED STATEMENT OF
INCOME



(In thousands)



|                                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                             |  | Year Ended December 31, |      
|                                                                             |  | 2004                    |       |   | 2003 |   |       | 2002 | 
|Dividends from bank subsidiary                                               |  | $                       | 2,050 |   |      | $ | 1,300 |      |  | $ | 1,131 |  
|Dividends on investment securities                                           |  |                         | 9     |   |      |   | 12    |      |  |   | 12    |  
|Investment securities gains                                                  |  |                         | 95    |   |      |   | 13    |      |  |   | 12    |  
|                                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|Total income                                                                 |  |                         | 2,154 |   |      |   | 1,325 |      |  |   | 1,155 |  
|                                                                             |  |                         |      
|Other noninterest expense                                                    |  |                         | 103   |   |      |   | 91    |      |  |   | 75    |  
|                                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|Net income before undistributed earnings of bank subsidiary and income taxes |  |                         | 2,051 |   |      |   | 1,234 |      |  |   | 1,080 |  
|                                                                             |  |                         |      
|Undistributed earnings of bank subsidiary                                    |  |                         | 1,853 |   |      |   | 2,595 |      |  |   | 2,271 |  
|Income tax benefit                                                           |  |                         | (2    | ) |      |   | (25   | )    |  |   | (20   | )
|                                                                             |  |                         |       |   |      |   |       |      |  |   |       |  
|Net Income                                                                   |  | $                       | 3,906 |   |      | $ | 3,854 |      |  | $ | 3,371 |  
|                                                                             |  |                         |       |   |      |   |       |      |  |   |       |  



26



---

NOTE 17 - PARENT COMPANY (Continued)



CONDENSED STATEMENT OF CASH FLOWS



(In thousands)



|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                  |  | Year Ended December 31, |       
|                                                                                  |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|Operating Activities                                                              |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income                                                                        |  | $                       | 3,906  |   |      | $ | 3,854  |      |  | $ | 3,371  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |        |   |      |   |        |      |  |   |        |  
|Undistributed earnings of bank subsidiary                                         |  |                         | (1,853 | ) |      |   | (2,595 | )    |  |   | (2,271 | )
|Investment securities gains                                                       |  |                         | (95    | ) |      |   | (13    | )    |  |   | (12    | )
|Other, net                                                                        |  |                         | (760   | ) |      |   | (140   | )    |  |   | (180   | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash provided by operating activities                                         |  |                         | 1,198  |   |      |   | 1,106  |      |  |   | 908    |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Investing Activities                                                              |  |                         |        |   |      |   |        |      |  |   |        |  
|Purchases of investment securities                                                |  |                         | (6     | ) |      |   |       |      |  |   | (126   | )
|Proceeds from sales of investment securities                                      |  |                         | 174    |   |      |   | 33     |      |  |   | 7      |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash provided by (used for) investing activities                              |  |                         | 168    |   |      |   | 33     |      |  |   | (119   | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Financing Activities                                                              |  |                         |        |   |      |   |        |      |  |   |        |  
|Cash dividends paid                                                               |  |                         | (1,404 | ) |      |   | (1,301 | )    |  |   | (1,199 | )
|Purchase of treasury stock                                                        |  |                         |       |   |      |   | (114   | )    |  |   | (231   | )
|Proceeds from exercise of stock options                                           |  |                         | 415    |   |      |   | 168    |      |  |   | 13     |  
|Proceeds from dividend reinvestment and stock purchase plan                       |  |                         |       |   |      |   | 291    |      |  |   | 500    |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash used for financing activities                                            |  |                         | (989   | ) |      |   | (956   | )    |  |   | (917   | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Increase (decrease) in cash and cash equivalents                                  |  |                         | 377    |   |      |   | 183    |      |  |   | (128   | )
|                                                                                  |  |                         |       
|Cash at beginning of year                                                         |  |                         | 917    |   |      |   | 734    |      |  |   | 862    |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Cash at end of year                                                               |  | $                       | 1,294  |   |      | $ | 917    |      |  | $ | 734    |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  



27



---

NOTE 18  QUARTERLY DATA (Unaudited)



The Companys selected quarterly financial data is presented in the following tables (in thousands, except per share
data):



|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|--------------------------------------------------- |  | ------------------ | --------- | --------- | - | -------------- |  | ------------- | --------- |  | - | ---------
|                                                    |  | Three Months Ended
|                                                    |  | March 2004         |           | June 2004 |   | September 2004 |  | December 2004
|Total interest income                               |  | $                  | 3,732     |           | $ | 3,820          |  | $             | 4,051     |  | $ | 4,205    
|Total interest expense                              |  |                    | 1,028     |           |   | 1,053          |  |               | 1,110     |  |   | 1,221    
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Net interest income                                 |  |                    | 2,704     |           |   | 2,767          |  |               | 2,941     |  |   | 2,984    
|Provision for loan losses                           |  |                    | 377       |           |   | 488            |  |               | 261       |  |   |         
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Net interest income after provision for loan losses |  |                    | 2,327     |           |   | 2,279          |  |               | 2,680     |  |   | 2,984    
|Total noninterest income                            |  |                    | 716       |           |   | 685            |  |               | 694       |  |   | 838      
|Total noninterest expense                           |  |                    | 1,822     |           |   | 1,832          |  |               | 1,871     |  |   | 2,000    
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Income before income taxes                          |  |                    | 1,221     |           |   | 1,132          |  |               | 1,503     |  |   | 1,822    
|Income taxes                                        |  |                    | 371       |           |   | 348            |  |               | 465       |  |   | 588      
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Net income                                          |  | $                  | 850       |           | $ | 784            |  | $             | 1,038     |  | $ | 1,234    
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Per share data:                                     |  |                    |           |           |   |                |  |               |           |  |   |          
|Net income                                          |  |                    |           |           |   |                |  |               |           |  |   |          
|Basic                                               |  | $                  | 0.56      |           | $ | 0.51           |  | $             | 0.67      |  | $ | 0.80     
|Diluted                                             |  | $                  | 0.53      |           | $ | 0.49           |  | $             | 0.65      |  | $ | 0.78     
|Weighted-average shares outstanding                 |  |                    |           |           |   |                |  |               |           |  |   |          
|Basic                                               |  |                    | 1,529,925 |           |   | 1,535,347      |  |               | 1,538,727 |  |   | 1,545,940
|Diluted                                             |  |                    | 1,599,794 |           |   | 1,601,086      |  |               | 1,599,004 |  |   | 1,587,911



28



---

NOTE 18  QUARTERLY DATA (Unaudited) (Continued)



|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|--------------------------------------------------- |  | ------------------ | --------- | --------- | - | -------------- |  | ------------- | --------- |  | - | ---------
|                                                    |  | Three Months Ended
|                                                    |  | March 2003         |           | June 2003 |   | September 2003 |  | December 2003
|Total interest income                               |  | $                  | 3,789     |           | $ | 3,884          |  | $             | 3,838     |  | $ | 3,810    
|Total interest expense                              |  |                    | 1,247     |           |   | 1,225          |  |               | 1,157     |  |   | 1,070    
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Net interest income                                 |  |                    | 2,542     |           |   | 2,659          |  |               | 2,681     |  |   | 2,740    
|Provision for loan losses                           |  |                    | 192       |           |   | 257            |  |               | 230       |  |   | 281      
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Net interest income after provision for loan losses |  |                    | 2,350     |           |   | 2,402          |  |               | 2,451     |  |   | 2,459    
|Total noninterest income                            |  |                    | 611       |           |   | 569            |  |               | 700       |  |   | 815      
|Total noninterest expense                           |  |                    | 1,596     |           |   | 1,632          |  |               | 1,732     |  |   | 1,843    
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Income before income taxes                          |  |                    | 1,365     |           |   | 1,339          |  |               | 1,419     |  |   | 1,431    
|Income taxes                                        |  |                    | 436       |           |   | 423            |  |               | 399       |  |   | 442      
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Net income                                          |  | $                  | 929       |           | $ | 916            |  | $             | 1,020     |  | $ | 989      
|                                                    |  |                    |           |           |   |                |  |               |           |  |   |          
|Per share data:                                     |  |                    |           |           |   |                |  |               |           |  |   |          
|Net income                                          |  |                    |           |           |   |                |  |               |           |  |   |          
|Basic                                               |  | $                  | 0.62      |           | $ | 0.61           |  | $             | 0.67      |  | $ | 0.64     
|Diluted                                             |  | $                  | 0.60      |           | $ | 0.56           |  | $             | 0.63      |  | $ | 0.62     
|Weighted-average shares outstanding                 |  |                    |           |           |   |                |  |               |           |  |   |          
|Basic                                               |  |                    | 1,510,170 |           |   | 1,511,450      |  |               | 1,513,312 |  |   | 1,521,423
|Diluted                                             |  |                    | 1,559,808 |           |   | 1,623,566      |  |               | 1,625,430 |  |   | 1,592,154



29



---

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATION



This consolidated review and analysis of Dimeco, Inc. (the Company) is intended to assist the reader in evaluating the performance of the Company for the
years ended December 31, 2004 and 2003. This information should be read in conjunction with the consolidated financial statements and accompanying notes to the consolidated financial statements.



Dimeco, Inc., headquartered in Honesdale, Pennsylvania, is the one-bank holding company of
The Dime Bank (the Bank), which is wholly-owned by the Company. The Bank formed and owns 100% of a limited liability company, TDB Insurance Services, LLC, offering title insurance services. Both the Company and the Bank derive their
primary income from the operation of a commercial bank, including earning interest on loans and investment securities and providing investment and trust services. The Banks main expenses are related to interest paid on deposits and other
borrowings along with salary and benefits for employees. The Bank operates five full service branches in Honesdale, Hawley, Damascus, Greentown and Dingmans Ferry, Pennsylvania and two off-site automatic teller machines, one each in Wayne and Pike
County, Pennsylvania. Principal market areas include Wayne and Pike Counties, Pennsylvania and Sullivan County, New York. The Bank employed 90 full time employees and 29 part time employees at December 31, 2004.



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 that may be made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.



CRITICAL ACCOUNTING POLICIES



The Companys accounting policies are integral to understanding the
results reported. The accounting policies are described in detail in Note 1 of the Notes to Consolidated Financial Statements. Our most complex accounting policies require managements judgment to ascertain the valuation of assets,
liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure that valuation methods are well controlled and applied consistently from period to period. In addition, the policies
and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments.



Allowance for Loan Losses



Arriving at an appropriate level of allowance for loan losses involves a high degree of
judgment. The Companys allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.



Management uses both historical and current information relating to the loan portfolio as well as general economic information in order to determine our estimation of the
prevailing business environment. The probability of collection of loans is affected by changing economic conditions and various external factors which may impact the portfolio in ways currently unforeseen. We monitor this information in an effort to
assess the adequacy of the allowance for loan losses. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Companys
methodology of assessing the adequacy of the reserve for loan losses refer to Note 1.



---

Mortgage Servicing Rights



The Bank originates residential mortgages that are sold in the secondary market. It is the Banks normal practice to retain the
servicing of these loans. This means that the customers whose loans have been sold in the secondary market still make their monthly payments to the Bank. As a result of these mortgage loan sales, the Bank capitalizes a value allocated to the
servicing rights categorized in other assets and recognizes other income from the sale and servicing of these loans. The capitalized servicing rights are amortized against noninterest income in proportion to the estimated net servicing income over
the remaining periods of the underlying financial assets.



Capitalized
servicing rights are evaluated for impairment periodically based upon the fair value of the rights as compared to amortized cost. The rights are deemed to be impaired when the fair value of the rights is less than the amortized cost. The fair value
of the servicing rights is determined using quoted prices for similar assets with similar characteristics when available or estimated based on projected discounted cash flows using market based assumptions. The Bank primarily uses the discounted
cash flow method.



Deferred Tax Assets



We use an estimate of future earnings to support our position that the benefit of our
deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced.
Our deferred tax assets are described further in Note 12 of the Notes to Consolidated Financial Statements.



Other than Temporary Impairment of Investments



Investments are evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and
duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term other than temporary is not intended to indicate that the decline is permanent. It
indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value is
determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.



All dollars are stated in thousands, with the exception of per share numbers.



STATEMENT OF CONDITION



Total assets of $325,721 at December 31, 2004 represented an increase of $21,417 or 7.0% over balances one year earlier. This increase occurred mainly in the loan
portfolio, with more opportunities for quality loans arising during 2004.



Cash
and cash equivalents declined $5,078 or 49.7% from December 31, 2003 to December 31, 2004. Balances of cash and due from banks decreased $3,354 during this period due mainly to implementation of a computer software program which enables the Bank to
reclassify for regulatory purposes certain deposits from transaction accounts to non-transaction accounts. The Federal Reserve requires banks to maintain higher balances for transaction accounts than for non-transaction accounts; therefore the
reclassification of these deposits has allowed the Bank to lower the cash and due from banks balance necessary to comply with current regulations. Management is comfortable that the current level of cash is sufficient to meet liquidity needs.
Balances of immediately available federal funds sold and interest-bearing balances in other banks decreased due to temporary cash needs. These funds are used for daily cash appropriations and balances will fluctuate in line with cash requirements.



Investment securities available for sale declined $8,695 or 13.5% at December
31, 2004 from balances one year earlier. Due to the high loan demand during the year, funds from maturities and calls of securities in



---

the portfolio were selectively diverted to fund loans. Interest earned on loans traditionally returns a greater rate of return than can be recognized in the
investment portfolio. Maturities and calls of U.S. Government agency securities, tax-exempt securities and corporate securities were reinvested in short-term commercial paper when not used for loans in order to maintain acceptable liquidity levels.
When we have funds available for reinvestment in the future, we will determine whether these types of securities offer an appropriate return commensurate with the interest rate risk accepted to invest in longer time frames. Management expects to
return funds to the investment portfolio as deposit growth is recognized.



Loans increased $33,532 or 15.3% from December 31, 2003 to December 31, 2004 with the majority of the growth centered in commercial loans, related both to real estate lending and other commercial uses. The Bank has developed over the past
twenty years an expertise in lending to the recreational camping industry. Due to our customers recognition of this specialization, the Bank has garnered relationships with camps throughout the northeastern United States. This segment
represented $14,887 of loan growth in 2004. Commercial loans were also granted to businesses in several other segments including the real estate investment, hotel/motel and retail sales industries during 2004. In anticipation of the opening of the
Dingmans Ferry office, our commercial loan officers originated $15,956 of loans in this market. Loan demand was even greater than noted in the balance sheet as demonstrated by the sale of $9,977 of commercial camp loans which were originated by the
Bank and participated to other financial institutions during 2004. These loans were participated in order to maintain our internal guideline regarding the concentration ratio of loans in one sector. Residential real estate loans increased $2,040 or
4.0% and home equity real estate loans also increased slightly with continued refinancing of consumer debt. As anticipated, the Bank saw a decline of $1,717 or 8.9% in installment loans during 2004. Consumers utilized low rate financing offered by
auto makers and credit card issuers for purchases and also frequently paid off other consumer debt as part of refinancing residential mortgages.



Premises and equipment expanded to $5,580 after increasing $1,401 or 33.5% during 2004. The Bank opened its fifth community banking office in December 2004. The
cost of this branch facility, along with our annual reinvestment in technology, is the main component of growth in this category.



Deposits increased $8,335 or 3.2% during 2004. The majority of this growth was in interest-bearing deposits. Management offered attractive interest rates on the money
market product to entice customers to move funds from other depositories and to offer an alternative to longer term fixed rates of interest in the current rising interest rate environment. This strategy resulted in an increase of $14,449 or 84.6% in
money market accounts. As a result of this strategy, balances in certificates of deposit accounts declined $8,585 or 6.3%. Included in this decline, balances of jumbo certificates of deposit were $7,978 or 16.5% lower over the period. This type of
deposit frequently attracts larger dollar municipal accounts for which all local institutions bid. Local competition has been very aggressive in pricing for these accounts; management did not bid at rates outside of internally developed strategies
for pricing and was not the highest bidder for several larger accounts in 2004. We believe that customers who were concerned about risk in the capital markets in recent years have now renewed their confidence in the market and are returning funds
there. In addition, they are becoming more comfortable investing in insurance products that offer higher returns than traditional bank certificates of deposit. In spite of these events, we anticipate increases in deposit balances in 2005 due to the
opening of a new community banking office in December 2004 and enhanced marketing efforts to attract more dollars from both current and potential new customers. One new product is certificates of deposit offered through the Certificate of Deposit
Registry Service (CDARS). Through membership in an elite group of banks, the Bank can offer customers FDIC insurance coverage on balances up to $10 million. We expect to attract large dollar certificates of deposit through this program in 2005.



Other borrowed funds increased $10,349 in 2004 as a result of fixed rate
advances from the Federal Home Loan Bank of Pittsburgh (FHLB). These borrowings were used both to fund specific loan requests from established customers for fixed rate financing and to provide additional funds to fulfill cash requirement needs.
Management is cognizant of the interest rate risk associated with originating loans in a low interest rate period but maintains our philosophy of nurturing relationships with long time customers; by utilizing these fixed rate borrowings from the
FHLB we were able to address both concerns.



---

CAPITAL RESOURCES



Stockholders Equity of $29,696 at December 31, 2004 represents an increase of $2,388 or 8.7% from a year earlier. The primary source of the expansion came from net
income of $3,906, representing earnings of $2.54 per share and a return on average equity of 13.72%. The Board of Directors voted to return $1,448, representing $.94 per share and 37.1% of earnings, to shareholders in the form of cash dividends.
This level of dividends represents an increase of $.07 per share or 8.0% more than was paid in 2003. Officers and directors chose to exercise 22,860 options granted since 2000. These exercises increased equity by $415. Declines in the market value
of investments available for sale resulted in a charge of $485, net of taxes, to accumulated other comprehensive income. On October 21, 2004 the Board of Directors announced its intention to repurchase up to 5% of the outstanding common stock. We
believe that this action will augment shareholder value by increasing the book value and net income per share while offering the potential to mitigate any dilutive effects of the Companys stock option plan. The plan offers the Company a one
year window in which to repurchase shares. We expect to purchase shares as they become available and the cash position of the Company warrants.



The Companys capital position at December 31, 2004 as it relates to regulatory guidelines is presented below:



|                     |  |              |   |  |                  |   |  |                      |  
|-------------------- |  | ------------ | - |  | ---------------- | - |  | -------------------- | -
|                     |  | Dimeco, Inc. |   |  | Well-Capitalized |   |  | Minimum Requirements |  
|Leverage Ratio       |  | 9.52         | % |  | 5.00             | % |  | 4.00                 | %
|Tier I Capital Ratio |  | 10.57        | % |  | 6.00             | % |  | 4.00                 | %
|Total Capital Ratio  |  | 11.71        | % |  | 10.00            | % |  | 8.00                 | %



LIQUIDITY



Liquidity within the Company is viewed mainly through an analysis of the Consolidated
Statement of Cash Flows which is included in the audited financial statements. The financial service industry is dependent on each companys ability to maintain proper levels of short and long term liquidity. The key is to maintain appropriate
levels of liquidity to allow for customers cash needs from both a lending and deposit perspective, to maintain sufficient cash for operating expenses and to have amounts available to take advantage of earning opportunities as they arise.



Dimeco, Inc. defines cash and cash equivalents as cash on hand and in banks
along with overnight investments in federal funds sold. Balances of these accounts totaled $5,132 or 1.6% of total assets at December 31, 2004. Operating activities generated $5,526 of cash and financing activities added $17,928 in 2004 while
investing activities used $28,532. Other funds used came as a result of a decrease in cash and cash equivalents of $5,078 during the year.



Both short-term and long-term liquidity is generated through principal and interest payments on loans, increases in borrowed funds and deposits, sales and maturities of
investment securities, sales of residential loans in the secondary market and from operating income. Uses of this liquidity are originations of loans both for addition to our portfolio and for sales in the secondary market, capital projects such as
the construction of the branch office in Dingmans Ferry, operating expenses and payment of dividends. The deposit base, through our ability to maintain current deposits and garner new funds, has historically been the primary source of liquidity for
the Company. It continues to be the main source of funds but has been augmented by the Banks ability to borrow from the FHLB. In 2004, the Bank took advantage of this ability and borrowed $10,600 in order to meet liquidity needs, while
maintaining an additional available credit line of $61,000 available to it. This line is generally viewed as a long term source of liquidity but is also used regularly in lower dollar amounts to borrow overnight funds as needed.



Management believes that the Company has sufficient liquidity to meet both its short and long
term needs. We understand that liquidity may be adversely affected by many factors including unexpected deposit outflows, aggressive competitive pricing by other financial intermediaries and other cash requirements. We are aware of our dependence on
customers deposits to sustain our liquidity levels. As mentioned earlier, we believe that people are becoming more comfortable investing in capital markets and insurance products but, through marketing efforts and the opening of our fifth
community branch, we will be able to maintain the majority of current deposits and gain new deposits.



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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Market risk is inherent in the financial services industry. It encompasses the risk of loss
associated with adverse changes in market interest rates and prices. As an organization, we have placed the management of this risk in the Asset/Liability Committee (ALCO). During 2004, this committee was comprised of all members of senior
management including the President, CEO, CFO, Senior Lending Officer and Vice President, Human Resource/Marketing. The committee follows guidelines enumerated in the ALCO policy which was developed to achieve earnings consistent with established
goals while maintaining acceptable levels of interest rate risk, adequate levels of liquidity and adherence to regulatory mandates. The committee reports to the Board of Directors on at least a quarterly basis.



Asset market risk is most prevalent in the investment portfolio and to a lesser degree, in
mortgage loans held for sale. As interest rates are increasing, it becomes more important that the Company consider the market risk of investments available for sale, particularly if the need to liquidate these assets would be imminent. Investment
in long term securities at current rates may hamper future amounts to be garnered if the need arises to sell for liquidity. Management has maintained a portfolio containing investments such as shorter maturity commercial paper or in U.S. Government
agency securities that contain interest rate steps over the life of the investment. Although virtually all investments are held in the available for sale category, management anticipates holding all investments to maturity and has historically not
had the need to sell for liquidity needs. Market risk inherent in loans held for sale has been mitigated by controlling the length of time between origination and sale of these loans. The balance of loans in this category is generally less than $1
million.



To address credit risk, both the loan portfolio and the investment
portfolio have stringent guidelines as to the quality of acceptable investments.



Liability market risk is associated with the adverse affects of our pricing strategies compared to competitors pricing strategies. The markets in which we have offices are generally located in areas where other financial institutions
also operate branches. If there is not enough flexibility in our pricing models to quickly move interest rates of both loans and deposits, we may lose accounts to other financial intermediaries. The ALCO is cognizant of the ability of interest rates
to adversely affect assets, liabilities, capital and interest income and expense. In particular, two analytical tools are used to ascertain our ability to manage this market risk. The first is the Statement of Interest Sensitivity Gap. 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 Analysiswhich attempts to determine the
affect on income of various shifts in the interest rate environment. In both reports, there are inherent assumptions that must be used. These assumptions include the maturity or repricing times of deposits, even though all deposits, other than time
deposits, have no stated maturity along with 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 very good tools to assist in management of the
Company. Similar versions of these same reports are used by all financial institutions. Both measurements are as of December 31, 2004.



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|                                                                |  |                                       |        |   |                      |   |         |             |  |   |          |   |  |       |        |   |  |   |        
|--------------------------------------------------------------- |  | ------------------------------------- | ------ | - | -------------------- | - | ------- | ----------- |  | - | -------- | - |  | ----- | ------ | - |  | - | -------
|                                                                |  | STATEMENT OF INTEREST SENSITIVITY GAP
|(In thousands)                                                  |  | 90 daysor less                        |        |   | >90 daysbut < 1 year |   |         | 1 - 5 years |  |   | >5 years |   |  | Total
|Assets:                                                         |  |                                       |        |   |                      |   |         |             |  |   |          |   |  |       |        |   |  |   |        
|Interest-bearing deposits in other banks and federal funds sold |  | $                                     | 993    |   |                      | $ |        |             |  | $ |         |   |  | $     |       |   |  | $ | 993    
|Mortgage loans held for sale                                    |  |                                       | 112    |   |                      |   |        |             |  |   |         |   |  |       |       |   |  |   | 112    
|Investment securities available for sale(1)(4)(6)               |  |                                       | 30,584 |   |                      |   | 14,624  |             |  |   | 7,051    |   |  |       | 4,354  |   |  |   | 56,613 
|Investment securities held to maturity(1)                       |  |                                       |       |   |                      |   |        |             |  |   | 198      |   |  |       |       |   |  |   | 198    
|Loans(1)(5)                                                     |  |                                       | 44,067 |   |                      |   | 68,116  |             |  |   | 98,309   |   |  |       | 43,634 |   |  |   | 254,126
|                                                                |  |                                       |        |   |                      |   |         |             |  |   |          |   |  |       |        |   |  |   |        
|Rate sensitive assets                                           |  | $                                     | 75,756 |   |                      | $ | 82,740  |             |  | $ | 105,558  |   |  | $     | 47,988 |   |  | $ | 312,042
|                                                                |  |                                       |        |   |                      |   |         |             |  |   |          |   |  |       |        |   |  |   |        
|Liabilities:                                                    |  |                                       |        |   |                      |   |         |             |  |   |          |   |  |       |        |   |  |   |        
|Interest-bearing deposits:                                      |  |                                       |        |   |                      |   |         |             |  |   |          |   |  |       |        |   |  |   |        
|Interest-bearing demand(2)                                      |  | $                                     | 3,131  |   |                      | $ | 9,785   |             |  | $ | 26,225   |   |  | $     |       |   |  | $ | 39,141 
|Money market(3)                                                 |  |                                       | 5,361  |   |                      |   | 15,768  |             |  |   | 10,407   |   |  |       |       |   |  |   | 31,536 
|Savings(2)                                                      |  |                                       | 3,338  |   |                      |   | 10,431  |             |  |   | 27,956   |   |  |       |       |   |  |   | 41,725 
|Time deposits                                                   |  |                                       | 30,910 |   |                      |   | 66,529  |             |  |   | 30,321   |   |  |       |       |   |  |   | 127,760
|Short-term borrowings                                           |  |                                       | 12,033 |   |                      |   |        |             |  |   |         |   |  |       |       |   |  |   | 12,033 
|Other borrowings                                                |  |                                       |       |   |                      |   |        |             |  |   | 4,000    |   |  |       | 7,349  |   |  |   | 11,349 
|                                                                |  |                                       |        |   |                      |   |         |             |  |   |          |   |  |       |        |   |  |   |        
|Rate sensitive liabilities                                      |  | $                                     | 54,773 |   |                      | $ | 102,513 |             |  | $ | 98,909   |   |  | $     | 7,349  |   |  | $ | 263,544
|                                                                |  |                                       |        |   |                      |   |         |             |  |   |          |   |  |       |        |   |  |   |        
|Interest sensitivity gap                                        |  | $                                     | 20,983 |   |                      | $ | (19,773 | )           |  | $ | 6,649    |   |  | $     | 40,639 |   |  | $ | 48,498 
|Cumulative gap                                                  |  | $                                     | 20,983 |   |                      | $ | 1,210   |             |  | $ | 7,859    |   |  | $     | 48,498 |   |  |   |        
|Cumulative gap to total assets                                  |  |                                       | 6.44   | % |                      |   | 0.37    | %           |  |   | 2.41     | % |  |       | 14.89  | % |  |   |        

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|(1) | Investments and loans are included in the earlier of the period in which interest rates are next scheduled to adjust or in which they are due. No adjustment has been
made for scheduled repayments or for anticipated prepayments.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Interest-bearing demand deposits, Passbook savings and Statement savings are segmented based on the percentage of decay method. The decay rates used include 8.00%
0-3 months, 12.50% 4-6 months, 12.50% 7-12 months and 67.00% 13-36 months.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Money market deposits are segmented based on the percentage of decay method. The decay rates used include 17.00% 0-3 months, 25.00% 4-6 months, 25.00% 7-12 months
and 33.00% 13-36 months.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(6) | Among Dimecos investment portfolios are step-up securities. These securities are characterized by having tiered (usually increasing) interest rates over their
life. Due to this feature these securities have been reallocated from their matuity date to their next step-up date. The specific impact of this policy by timeframe is as follows: 90 days or less increased $1,000 >90 days but
< 1 year increased $12,351 1 - 5 years decreased $1,016 and >5 years decreased $12,335.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



This report shows the Company to be in an asset sensitive position of $20,983 in less than or equal to three months, meaning that there are more assets which will reprice
in this period than liabilities. Traditionally management focuses attention to the net gap of the balance sheet in the second time frame, assets which mature in less than or equal to one year. Our statement shows the Company to be slightly asset
sensitive in the amount of $1,210. We believe that in a rising interest rate period it is advantageous to be asset sensitive, giving greater opportunity for reinvestment as interest rates rise. The most conservative position is perfectly balanced in
any time frame.



The following table presents the Companys potential
sensitivity in net interest income, net income and equity value at risk, or the potential of adverse change in the economic value of equity (EVE) with rates up or down 100 and 200 basis points. EVE is the present value of assets minus the present
value of liabilities at a point in time.



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ANALYSIS OF SENSITIVITY TO CHANGES IN MARKET INTEREST RATES



|                    |  |                  |        |   |                  |       |    |        |   |       |      |  |       |        |  |   |        |   |  |        |    |  |   |       |   |  |       |   
|------------------- |  | ---------------- | ------ | - | ---------------- | ----- | -- | ------ | - | ----- | ---- |  | ----- | ------ |  | - | ------ | - |  | ------ | -- |  | - | ----- | - |  | ----- | --
|                    |  | 100 basis points |        |   | 200 basis points |      
|                    |  | Up               |        |   | Down             |       |    | Up     |   |       | Down | 
|                    |  | Amount           |        |   | %                |       |    | Amount |   |       | %    |  |       | Amount |  |   | %      |   |  | Amount |    |  | % |      
|Net interest income |  | $                |       |   |                  |      |    |        | $ | (183  | )    |  | (1.49 | )%     |  | $ | 43     |   |  | 0.35   | %  |  | $ | (481  | ) |  | (3.92 | )%
|Net income          |  | $                | 11     |   |                  | 0.25  | %  |        | $ | (131  | )    |  | (2.93 | )%     |  | $ | 49     |   |  | 1.10   | %  |  | $ | (338  | ) |  | (7.56 | )%
|EVE                 |  | $                | (1,772 | ) |                  | (4.87 | )% |        | $ | 1,814 |      |  | 4.98  | %      |  | $ | (4,551 | ) |  | (12.50 | )% |  | $ | 3,252 |   |  | 8.93  | % 



The greatest risk to the Company from
an income perspective is a decline in market interest rates of 200 basis points. Given the current position of the interest rate cycle, management does not believe that interest rates will decline 200 basis points. In the EVE measurement, an
increase of 200 basis points would affect the Company greater. Although we believe that interest rates will continue to rise in 2005 and equity will be affected in other comprehensive income as a result of these changes, all of these measurements
are within internal acceptable limits.



ALLOWANCE FOR LOAN LOSSES



The allowance for loan losses represents the amount that management
estimates is adequate to provide for probable losses inherent in the loan portfolio. It is the largest subjective measurement in the financial statements. The balance is derived as losses are charged against the allowance while recoveries are
credited to it with charges to provision expense providing the amount necessary to maintain the appropriate balance per our analysis. As of December 31, 2004, the Companys allowance totaled $3,172 which represented 1.25% of the loan portfolio.



As noted, the allowance is established through a provision for loan losses
which is charged to operations. The provision is based on managements periodic evaluation of the adequacy of the allowance for loan losses, taking into consideration the overall risk characteristics of the portfolio, our specific loan loss
experience, current and projected economic conditions, industry loan experience and other relevant factors. The estimates, including the amounts and timing of future cash flows relating to impaired loans, used to determine the adequacy of the
allowance are particularly susceptible to significant change. The total allowance for loan losses is a combination of a specific allowance for identified problem loans, a formula allowance and a qualitative allowance. The specific allowance is
determined by measuring impairment based upon the practices outlined in Statement of Financial Accounting Standards (FAS) No. 114, Accounting by Creditors for Impairment of a Loanand by FAS No. 118, Accounting by Creditors for
Impairment of a Loan  Income Recognition and Disclosures.This standard prescribes methods to measure impairment and income recognition as well as documenting disclosure requirements. The formula allowance is calculated by applying factors
to outstanding loans by type and risk weighting, excluding those loans for which a specific allowance has been determined. These loss factors are determined by management using historical loss information, current economic factors, portfolio
concentration analysis, current delinquency ratios and an evaluation of the experience level of the loan officers in conjunction with evaluations of specific loans during the loan review process. The qualitative portion of the allowance is
determined based upon managements evaluation of a number of factors including: national and local economic business conditions, collateral values within the portfolio, credit quality trends and managements evaluation of our particular
loan portfolio as a whole.



The Company employs an experienced outside
professional loan review agency to perform the loan review function. In order to test the majority of the asset category, a review of commercial loan relationships which approximate 55% of the portfolio is performed. This review is based upon
current financial information of the customer, an analysis of loan concentrations, financial ratio comparisons, adherence to payment schedule, regulatory evaluations and peer comparisons. Management evaluates all other loans utilizing similar
guidelines. After careful evaluation of all factors, a risk weight is assigned and an amount is calculated for each category of reviewed loans. Groups of smaller dollar amount loans are evaluated as a homogeneous pool with similar factors used to
evaluate the appropriateness of the allowance for those loans.



---

SUMMARY OF LOAN LOSS EXPERIENCE



|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|----------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|(In thousands)                                                                            |  | 2004 |       |   | 2003 |   |       | 2002 |  |   | 2001  |   |  | 2000 |      
|Balance January 1,                                                                        |  | $    | 3,014 |   |      | $ | 2,818 |      |  | $ | 2,373 |   |  | $    | 2,088 |   |  | $ | 1,834 |  
|Charge-offs:                                                                              |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial                                                                                |  |      | 32    |   |      |   | 69    |      |  |   | 100   |   |  |      | 218   |   |  |   | 170   |  
|Real estate                                                                               |  |      | 860   |   |      |   | 558   |      |  |   | 48    |   |  |      | 208   |   |  |   | 442   |  
|Installment                                                                               |  |      | 226   |   |      |   | 195   |      |  |   | 151   |   |  |      | 199   |   |  |   | 165   |  
|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total charge-offs                                                                         |  |      | 1,118 |   |      |   | 822   |      |  |   | 299   |   |  |      | 625   |   |  |   | 777   |  
|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Recoveries:                                                                               |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial                                                                                |  |      | 4     |   |      |   | 4     |      |  |   | 6     |   |  |      | 11    |   |  |   | 38    |  
|Real estate                                                                               |  |      | 89    |   |      |   | 2     |      |  |   | 23    |   |  |      | 8     |   |  |   | 22    |  
|Installment                                                                               |  |      | 57    |   |      |   | 52    |      |  |   | 40    |   |  |      | 24    |   |  |   | 41    |  
|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total recoveries                                                                          |  |      | 150   |   |      |   | 58    |      |  |   | 69    |   |  |      | 43    |   |  |   | 101   |  
|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net charge-offs                                                                           |  |      | 968   |   |      |   | 764   |      |  |   | 230   |   |  |      | 582   |   |  |   | 676   |  
|                                                                                          |  |      |       |   |     
|Additions charged to operations                                                           |  |      | 1,126 |   |      |   | 960   |      |  |   | 675   |   |  |      | 867   |   |  |   | 930   |  
|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Balance December 31,                                                                      |  | $    | 3,172 |   |      | $ | 3,014 |      |  | $ | 2,818 |   |  | $    | 2,373 |   |  | $ | 2,088 |  
|                                                                                          |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Ratio of net charge-offs during the period to average loans outstanding during the period |  |      | 0.41  | % |      |   | 0.37  | %    |  |   | 0.13  | % |  |      | 0.37  | % |  |   | 0.46  | %
|                                                                                          |  |      |       |   |     
|Allowance for loan loss as a % of average loans outstanding                               |  |      | 1.34  | % |      |   | 1.47  | %    |  |   | 1.63  | % |  |      | 1.50  | % |  |   | 1.42  | %



CONTRACTUAL OBLIGATIONS,
COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS



The following table sets
forth contractual obligations of the Company which represent required and potential cash outflows as of December 31, 2004. Further discussion of the nature of each obligation is included in the referenced note to the financial statements as of
December 31, 2004:



|                                   |  |               |  |                 |         |                  |   |                   |  |               |        |  |   |       |  |   |        
|---------------------------------- |  | ------------- |  | --------------- | ------- | ---------------- | - | ----------------- |  | ------------- | ------ |  | - | ----- |  | - | -------
|                                   |  |               |  | Payments Due In |         | Total           
|(In thousands)                     |  | NoteReference |  | One Yearor Less |         | One toThreeYears |   | Three toFiveYears |  | OverFiveYears |       
|Deposits without a stated maturity |  |               |  | $               | 142,782 |                  | $ |                  |  | $             |       |  | $ |      |  | $ | 142,782
|Time deposits                      |  | 7             |  | $               | 97,439  |                  | $ | 19,594            |  | $             | 10,727 |  | $ |      |  | $ | 127,760
|Short-term borrowings              |  | 8             |  | $               | 12,033  |                  | $ |                  |  | $             |       |  | $ |      |  | $ | 12,033 
|Other borrowed funds               |  | 9             |  | $               |        |                  | $ | 4,000             |  | $             |       |  | $ | 7,349 |  | $ | 11,349 
|Operating leases                   |  | 13            |  | $               | 229     |                  | $ | 341               |  | $             | 126    |  | $ | 188   |  | $ | 884    



The following table details the
amounts and expected maturities of significant commitments as of December 31, 2004. Further discussion of these commitments is included in Note 13 to the financial statements as of December 31, 2004:



|                              |  |                  |        |                   |   |                    |  |                |     |       |   |       |  |   |       
|----------------------------- |  | ---------------- | ------ | ----------------- | - | ------------------ |  | -------------- | --- | ----- | - | ----- |  | - | ------
|                              |  | One Year or Less |        | One toThree Years |   | Three toFive Years |  | OverFive Years |     | Total
|Commitments to extend credit: |  |                  |        |                   |   |                    |  |                |     |       |   |       |  |   |       
|Commercial                    |  | $                | 18,078 |                   | $ | 2,256              |  | $              | 105 |       | $ | 2,490 |  | $ | 22,929
|Residential real estate       |  | $                | 3,440  |                   | $ | 109                |  | $              |    |       | $ |      |  | $ | 3,549 
|Revolving home equity         |  | $                | 39     |                   | $ | 44                 |  | $              | 107 |       | $ | 1,796 |  | $ | 1,986 
|Other                         |  | $                | 1,701  |                   | $ | 1,790              |  | $              |    |       | $ |      |  | $ | 3,491 
|Standby letters of credit     |  | $                | 2,012  |                   | $ |                   |  | $              |    |       | $ |      |  | $ | 2,012 



---

RESULTS OF OPERATIONS



2004 Compared to 2003



The year 2004 resulted in growth of $52 or 1.3% in net income as compared to the results of operation for the previous year. Although this rate of growth is somewhat less
than has been recognized in previous years, management views the results of operation for 2004 as favorable given several events experienced during the year. The Company experienced elevated overhead expenses relating to expansion of the Company and
for expenses relating to extinguishment of a problem loan.



Net Interest
Income



Net interest income is the amount that interest earned on assets
exceeds interest paid on deposits and borrowings. The following discussion regarding net interest income should be read in conjunction with the schedule Distribution of Assets, Liabilities and Stockholders Equity: Interest Rates and
Interest Differentialand Rate/Volume Analysis of Changes in Net Interest Income.



Interest and fees earned on loans increased $983 or 7.6% in 2004 as compared to 2003 as a result of average loan portfolio growth of $31,880 combined with a decline of .43% in the average rate earned on loans. In
order to facilitate our customers transition into new borrowings for expansion of their businesses, commercial real estate loans are frequently granted with interest rates fixed for a two to three year period and then reverting to annual adjustment
based on changes in the prime interest rate. The timing effects of rate changes on these loans are a main reason for this decrease in the average interest rate. In addition, competitive factors forced interest rate modifications on several large
commercial credits.



Interest earned on taxable investment securities declined
$457 or 21.4% from 2003 to 2004. Management administers the balance sheet to handle opportunities for investing in assets that offer the highest interest rate while maintaining asset quality. Due to high loan demand combined with slower growth in
deposits, management utilized maturities of investments to partially fund loan growth. The average balance of the investment portfolio decreased $9,110 or 15.9% while the average interest rate earned declined from 3.71% to 3.46% during 2004. Various
investments which were purchased in prior years, earning higher interest rates, matured during the year and were reinvested at current interest rates or rebalanced to fund loan growth. In an effort to position the portfolio for higher interest rates
in the future, during 2004 management purchased securities that were either short term or offered opportunities for rate increases over their lives. This strategy limits the interest rate risk associated with purchasing longer term investments
during the current lower interest rate period and offers the potential to lock higher rates in the future.



Interest expense in total declined $287 or 6.1% in 2004 as compared to 2003. Variations in individual components of this change are discussed separately. Interest related to savings deposits declined $100 or 28.7%
from 2003 to 2004 with the entire amount related to lowering the average interest rate on all deposits by .24%. Simultaneously, average balances of interest-bearing checking accounts increased $18,681 or 40.9% during the period with the majority of
the growth in money market accounts. This growth, coupled with payment of a slightly higher average interest rate of .12% for these deposits, was responsible for the increase in this interest expense of $207. Management priced this particular
deposit account higher for larger balance accounts in order to attract new deposits that were potentially leaving financial institutions to be invested in similar type accounts with brokerage firms. Although this interest rate was higher than
traditionally paid, it was less than rates paid to borrow from FHLB and offered the potential for deepening relationships with our customers. Interest expense related to time deposits decreased $491 or 13.2% due to a decline of $5,602 or 4.3% in the
average balance combined with a decline of .26% in the average rates paid for these deposits. As discussed above, management increased rates paid for money market accounts and some customers transferred balances to this type of account in
anticipation of higher interest rates during the first half of 2004. In July 2004 a certificate of deposit product special was offered with a premium interest rate paid on deposits greater than $10 to customers who maintained a checking account with
the Bank. This product attracted $11,164 of deposits both from existing customers reinvesting matured deposits and from new customers. The marketplace has been extremely competitive in pricing certificates of deposit and this offering was made to
maintain and hopefully increase our market share while locking in rates in this rising rate environment.



---

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS EQUITY;

INTEREST RATES AND INTEREST DIFFERENTIAL



|                                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|-------------------------------------------------------------------------------- |  | ----------------- | ------- | --------------- | ---- | ---------- |  | ------ | ------------------ |  | --------------- | ------- | ---------- | - | ------ | ----------------- | ------ | --------------- |  | ---------- | ------- |  | - | ------ |  | ------ | -
|                                                                                 |  | 2004              |         |                 | 2003 |            |  | 2002   |                   
|                                                                                 |  | AverageBalance(3) |         | Revenue/Expense |      | Yield/Rate |  |        | AverageBalance (3) |  | Revenue/Expense |         | Yield/Rate |   |        | AverageBalance(3) |        | Revenue/Expense |  | Yield/Rate |        
|ASSETS                                                                           |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Interest-earning assets:                                                         |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Total Loans(1)(4)                                                                |  | $                 | 237,089 |                 | $    | 13,847     |  | 5.84   | %                  |  | $               | 205,209 |            | $ | 12,864 |                   | 6.27   | %               |  | $          | 172,368 |  | $ | 12,472 |  | 7.24   | %
|Investment securities:                                                           |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Taxable(5)                                                                       |  |                   | 48,344  |                 |      | 1,674      |  | 3.46   | %                  |  |                 | 57,454  |            |   | 2,131  |                   | 3.71   | %               |  |            | 61,700  |  |   | 2,571  |  | 4.17   | %
|Exempt from federal income tax(2)                                                |  |                   | 5,422   |                 |      | 352        |  | 6.50   | %                  |  |                 | 6,702   |            |   | 447    |                   | 6.67   | %               |  |            | 6,500   |  |   | 470    |  | 7.23   | %
|Interest-bearing deposits                                                        |  |                   | 610     |                 |      | 9          |  | 1.48   | %                  |  |                 | 124     |            |   | 1      |                   | 0.81   | %               |  |            | 2,196   |  |   | 34     |  | 1.55   | %
|Federal funds sold                                                               |  |                   | 3,196   |                 |      | 46         |  | 1.44   | %                  |  |                 | 2,675   |            |   | 30     |                   | 1.12   | %               |  |            | 4,971   |  |   | 81     |  | 1.63   | %
|                                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Total interest-earning assets/ interest income                                   |  |                   | 294,661 |                 |      | 15,928     |  | 5.41   | %                  |  |                 | 272,164 |            |   | 15,473 |                   | 5.69   | %               |  |            | 247,735 |  |   | 15,628 |  | 6.31   | %
|                                                                                 |  |                   |         |                 |      |            |  |        |                   
|Cash and due from banks                                                          |  |                   | 5,608   |                 |      |            |  |        |                    |  |                 | 7,380   |            |   |        |                   |        |                 |  |            | 6,507   |  |   |        |  |        |  
|Premises and equipment, net                                                      |  |                   | 4,639   |                 |      |            |  |        |                    |  |                 | 4,234   |            |   |        |                   |        |                 |  |            | 4,088   |  |   |        |  |        |  
|Other assets, less allowance for loan losses                                     |  |                   | 6,320   |                 |      |            |  |        |                    |  |                 | 3,835   |            |   |        |                   |        |                 |  |            | 1,403   |  |   |        |  |        |  
|                                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Total assets                                                                     |  | $                 | 311,228 |                 |      |            |  |        |                    |  | $               | 287,613 |            |   |        |                   |        |                 |  | $          | 259,733 |  |   |        |  |        |  
|                                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                             |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Interest-bearing liabilities:                                                    |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Savings                                                                          |  | $                 | 42,516  |                 | $    | 248        |  | 0.58   | %                  |  | $               | 42,565  |            | $ | 348    |                   | 0.82   | %               |  | $          | 39,413  |  | $ | 532    |  | 1.35   | %
|Interest-bearing checking                                                        |  |                   | 64,304  |                 |      | 520        |  | 0.81   | %                  |  |                 | 45,623  |            |   | 313    |                   | 0.69   | %               |  |            | 35,952  |  |   | 317    |  | 0.88   | %
|Time deposits                                                                    |  |                   | 124,913 |                 |      | 3,233      |  | 2.59   | %                  |  |                 | 130,515 |            |   | 3,724  |                   | 2.85   | %               |  |            | 122,846 |  |   | 4,358  |  | 3.55   | %
|Short-term borrowings                                                            |  |                   | 13,142  |                 |      | 129        |  | 0.98   | %                  |  |                 | 11,369  |            |   | 112    |                   | 0.99   | %               |  |            | 10,886  |  |   | 143    |  | 1.31   | %
|Other borrowed funds                                                             |  |                   | 6,873   |                 |      | 282        |  | 4.10   | %                  |  |                 | 3,055   |            |   | 202    |                   | 6.61   | %               |  |            | 4,000   |  |   | 268    |  | 6.70   | %
|                                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Total interest-bearing liabilities/ interest expense                             |  |                   | 251,748 |                 |      | 4,412      |  | 1.75   | %                  |  |                 | 233,127 |            |   | 4,699  |                   | 2.02   | %               |  |            | 213,097 |  |   | 5,618  |  | 2.64   | %
|                                                                                 |  |                   |         |                 |      |            |  |        |                   
|Noninterest-bearing deposits                                                     |  |                   | 29,264  |                 |      |            |  |        |                    |  |                 | 26,430  |            |   |        |                   |        |                 |  |            | 21,294  |  |   |        |  |        |  
|Other liabilities                                                                |  |                   | 1,749   |                 |      |            |  |        |                    |  |                 | 1,998   |            |   |        |                   |        |                 |  |            | 2,075   |  |   |        |  |        |  
|                                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Total liabilities                                                                |  |                   | 282,761 |                 |      |            |  |        |                    |  |                 | 261,555 |            |   |        |                   |        |                 |  |            | 236,466 |  |   |        |  |        |  
|                                                                                 |  |                   |         |                 |      |            |  |        |                   
|Stockholders Equity                                                             |  |                   | 28,467  |                 |      |            |  |        |                    |  |                 | 26,058  |            |   |        |                   |        |                 |  |            | 23,267  |  |   |        |  |        |  
|                                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Total Liabilities and Stockholders Equity                                       |  | $                 | 311,228 |                 |      |            |  |        |                    |  | $               | 287,613 |            |   |        |                   |        |                 |  | $          | 259,733 |  |   |        |  |        |  
|                                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|                                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Net interest income/interest spread                                              |  |                   |         |                 | $    | 11,516     |  | 3.66   | %                  |  |                 |         |            | $ | 10,774 |                   | 3.67   | %               |  |            |         |  | $ | 10,010 |  | 3.67   | %
|                                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Margin Analysis:                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Interest income/earning assets                                                   |  |                   |         |                 | $    | 15,928     |  | 5.41   | %                  |  |                 |         |            | $ | 15,473 |                   | 5.69   | %               |  |            |         |  | $ | 15,628 |  | 6.31   | %
|Interest expense/earning assets                                                  |  |                   |         |                 |      | 4,412      |  | 1.50   | %                  |  |                 |         |            |   | 4,699  |                   | 1.73   | %               |  |            |         |  |   | 5,618  |  | 2.27   | %
|                                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Net interest income/earning assets                                               |  |                   |         |                 | $    | 11,516     |  | 3.91   | %                  |  |                 |         |            | $ | 10,774 |                   | 3.96   | %               |  |            |         |  | $ | 10,010 |  | 4.04   | %
|                                                                                 |  |                   |         |                 |      |            |  |        |                    |  |                 |         |            |   |        |                   |        |                 |  |            |         |  |   |        |  |        |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                   |         |                 |      |            |  | 117.05 | %                  |  |                 |         |            |   |        |                   | 116.74 | %               |  |            |         |  |   |        |  | 116.25 | %

---

Certain amounts for prior years have been reclassified
in order to conform to current presentation.

|(1) | Nonaccrual loans are not included.
|--- | ----------------------------------

|(2) | Income on interest-earning assets is based on a taxable equivalent basis using a federal income tax rate of 34%.
|--- | ----------------------------------------------------------------------------------------------------------------

|(3) | Average balances are calculated using daily balances.
|--- | -----------------------------------------------------

|(4) | Interest on loans includes fee income.
|--- | --------------------------------------

|(5) | Includes equity investments in FHLB and ACBB
|--- | --------------------------------------------



---

RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME



|                                   |  |                       |      |   |                       |   |        |               |         |   |           |        |  |   |      |   |  |   |        |   |  |   |       |  
|---------------------------------- |  | --------------------- | ---- | - | --------------------- | - | ------ | ------------- | ------- | - | --------- | ------ |  | - | ---- | - |  | - | ------ | - |  | - | ----- | -
|                                   |  | 2004 Compared to 2003 |      |   | 2003 Compared to 2002 |  
|(in thousands)                     |  | TotalVariance         |      |   | Caused by             |   |        | TotalVariance |         |   | Caused by |       
|                                   |  | Rate(1)               |      |   | Volume                |   |        |               | Rate(1) |   |           | Volume | 
|Interest income:                   |  |                       |      |   |                       |   |        |               |         |   |           |        |  |   |      |   |  |   |        |   |  |   |       |  
|Loans (gross)                      |  | $                     | 983  |   |                       | $ | (1,016 | )             |         | $ | 1,999     |        |  | $ | 392  |   |  | $ | (1,984 | ) |  | $ | 2,376 |  
|Investment securities:             |  |                       |      |   |                       |   |        |               |         |   |           |        |  |   |      |   |  |   |        |   |  |   |       |  
|Taxable                            |  |                       | (457 | ) |                       |   | (119   | )             |         |   | (338      | )      |  |   | (440 | ) |  |   | (263   | ) |  |   | (177  | )
|Exempt from federal income tax     |  |                       | (95  | ) |                       |   | (10    | )             |         |   | (85       | )      |  |   | (23  | ) |  |   | (38    | ) |  |   | 15    |  
|Interest-bearing deposits          |  |                       | 8    |   |                       |   | 4      |               |         |   | 4         |        |  |   | (33  | ) |  |   | (1     | ) |  |   | (32   | )
|Federal funds sold                 |  |                       | 16   |   |                       |   | 10     |               |         |   | 6         |        |  |   | (51  | ) |  |   | (14    | ) |  |   | (37   | )
|                                   |  |                       |      |   |                       |   |        |               |         |   |           |        |  |   |      |   |  |   |        |   |  |   |       |  
|Total interest-earning assets      |  |                       | 455  |   |                       |   | (1,131 | )             |         |   | 1,586     |        |  |   | (155 | ) |  |   | (2,300 | ) |  |   | 2,145 |  
|                                   |  |                       |      |   |                       |   |        |               |         |   |           |        |  |   |      |   |  |   |        |   |  |   |       |  
|Interest expense:                  |  |                       |      |   |                       |   |        |               |         |   |           |        |  |   |      |   |  |   |        |   |  |   |       |  
|Savings                            |  |                       | (100 | ) |                       |   | (100   | )             |         |   |          |        |  |   | (184 | ) |  |   | (227   | ) |  |   | 43    |  
|Interest-bearing checking          |  |                       | 207  |   |                       |   | 79     |               |         |   | 128       |        |  |   | (4   | ) |  |   | (89    | ) |  |   | 85    |  
|Time deposits                      |  |                       | (491 | ) |                       |   | (331   | )             |         |   | (160      | )      |  |   | (634 | ) |  |   | (906   | ) |  |   | 272   |  
|Short-term borrowings              |  |                       | 17   |   |                       |   | 1      |               |         |   | 17        |        |  |   | (31  | ) |  |   | (37    | ) |  |   | 6     |  
|Other borrowings                   |  |                       | 80   |   |                       |   | (172   | )             |         |   | 252       |        |  |   | (66  | ) |  |   | (3     | ) |  |   | (63   | )
|                                   |  |                       |      |   |                       |   |        |               |         |   |           |        |  |   |      |   |  |   |        |   |  |   |       |  
|Total interest-bearing liabilities |  |                       | (287 | ) |                       |   | (523   | )             |         |   | 237       |        |  |   | (919 | ) |  |   | (1,262 | ) |  |   | 343   |  
|                                   |  |                       |      |   |                       |   |        |               |         |   |           |        |  |   |      |   |  |   |        |   |  |   |       |  
|Net change in net interest income  |  | $                     | 742  |   |                       | $ | (608   | )             |         | $ | 1,349     |        |  | $ | 764  |   |  | $ | (1,038 | ) |  | $ | 1,802 |  
|                                   |  |                       |      |   |                       |   |        |               |         |   |           |        |  |   |      |   |  |   |        |   |  |   |       |  

---

|(1) | Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances due to the interest sensitivity of assets and
liabilities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Provision for Loan Losses



The provision for loan losses increased $166 or 17.3% in 2004 as compared to 2003. As
discussed above, the loan portfolio increased 15.3% over the time period. A commercial loan which was in nonaccrual status continued to experience financial difficulties in 2004. Due to a re-appraisal of the business and accompanying real estate,
the Bank found it necessary to charge-off an additional $732. After adjusting the provision expense in prior quarters, management determined that there was no expense necessary in the fourth quarter 2004. The assets on which the problem loan was
collateralized were sold in the fourth quarter, a charge was made to the allowance and the loan was removed from the books. This unusual charge-off combined with the increase in the loan portfolio during the year is the primary cause for higher
expense in 2004. Management reviews the adequacy of the allowance for loan losses on a quarterly basis and has determined that the allowance, which represented 1.25% of loans at December 31, 2004, was adequate. A positive factor relating to the
adequacy is that the delinquency rate at December 31, 2004 was .57% compared to .76% the previous year end.



Noninterest Income



Service charges on
deposit accounts remains the largest source of noninterest income for the Company, representing income of $1,250, an increase of $194 or 18.4% over 2003 fees. The majority of this income is the result of fees charged in conjunction with an overdraft
protection plan. Although there has been regulatory scrutiny of these type plans, the Banks annual examinations have been favorable in relation to this product and we expect to continue to offer it in the future. Gains on sales of mortgage
loans in the secondary market decreased $374 or 44.8% in 2004 as compared to 2003, returning to a level similar to 2002 and years before. The year 2003 was a banner year for both refinances and new purchases as customers took advantage of the low
interest rate environment. Management anticipated this decline and expects that the current level will be maintained in the future. Brokerage commissions increased $207 or 141.8% in 2004 as compared to 2003. The transition of accounts into a new
investment program in the first quarter, attraction of new customers throughout the year with the hiring of an experienced Vice President in 2003 and the availability of new product offerings all combined to produce higher revenues. We expect



---

this level of income to continue and be enhanced as the program matures. As discussed above, management is concerned with the disintermediation of deposits
when customers are attracted back to equity and insurance investments. We plan to transition these customers into our investments department in order to maintain the relationship and produce noninterest income.



Noninterest Expense



Salaries and employee benefits increased $406 or 11.5% in 2004 as compared to 2003. Several factors contributed to increase these expenses.
The Company hired several key new employees including two Vice Presidents in 2003 in order to expand product offerings. Salaries and the related benefits for these individuals were paid for the entire year of 2004 and only part of 2003. With plans
made to open the Dingmans Ferry office in the fourth quarter 2004, eight new employees were hired in the second half of the year in order to train this new team in both operational procedures and philosophical ideals. Annual health insurance rates
continued to rise, representing another factor to increase expenses. Regulatory agencies publish peer analysis of similar sized banks across the country on a quarterly basis; according to their analysis at December 31, 2004, our personnel expense as
a percent of average assets of 1.27% place the bank in the top 26% of its peers. Average personnel expense per employee of $39 placed it in the top 8% of its peer group in the comparison.



Associated with expansion into a new market area, both occupancy and furniture and equipment expense increased during 2004 as compared to
previous years. This increase in expense will continue in future periods and management expects this facility to generate additional income for future periods.



Data processing expenses rose $85 or 29.3% in 2004 as compared to 2003. The addition of new software platforms in the consumer loan, customer service and teller areas
accounted for the majority of additional expense. Software upgrades costing $20 were made to personal computers during 2004; these upgrades are not done on an annual basis and the cost per license is less than internal guidelines for capitalizing
payments, thus increasing expense for the year.



Other expense increased $171
or 11.6% in 2004 as compared to 2003. Included in this category are many expenses not separately enumerated. Several categories had more pronounced changes and are detailed in particular. Advertising expense increased $37 or 21.0% due to additional
exposure and the higher unit cost of advertising in the Dingmans Ferry market. Expense relating to operation of our ATM network increased $33 or 25.8% due to increased usage, generation of new cards and an increase in fees charged by the third party
vendor used for processing. Travel and entertainment expenses increased $26 or 48.4% due to attendance at a national convention in 2004 which was unmatched in previous years and an emphasis on officers calling on customers in 2004. Pennsylvania
shares tax is based on average equity over a five year period; due to profitability of the Company this tax increased $20 or 12.0% in 2004 as compared to 2003. Other smaller changes accounted for the remaining difference in expense.



2003 Compared to 2002



Net income continued to increase in 2003 with the year end amount of $3,854, representing
growth of $483 or 14.3% more than in 2002. Net interest income and noninterest income both showed gains in 2003 as compared to previous years.



Net Interest Income



The difference between interest earned on assets and interest paid on liabilities is the key component of earnings for the Company. The following discussion regarding net interest income should be read in conjunction
with the schedule Distribution of Assets, Liabilities and Stockholders Equity: Interest Rates and Interest Differentialand Rate/Volume Analysis of Changes in Net Interest Income.



Interest earned on loans increased $392 or 3.1% from 2002 to 2003 based on growth of $32,841
or 19.1% in the average size of the loan portfolio combined with a decrease of 97 basis points in the average interest rate charged for loans. Loans which have variable interest rates comprise 66% of the loan portfolio and the majority of those
loans reprice within a one year time frame. Competition for loans is keen in the markets we serve and our rates are reflective of this. We believe that by continuing to serve our customers to our mutual benefit, we will continue to maintain and even
increase our market penetration for loans.



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With the large loan demand seen in 2003, the average balance of taxable investment securities declined over the period
due to reinvestment of these funds in higher yielding loans. The investment portfolio has been consistently maintained to offer liquidity for loan demand or other corporate needs. The average balance of taxable investment securities decreased $4,246
or 6.9% from 2002 to 2003 while the average interest rate earned on the portfolio also declined from an average rate of 4.17% to 3.71% over the period. In order to maintain the liquidity position at acceptable levels while waiting for upward
movement in the interest rate curve, management accepted lower rates of return for reinvestment of bond calls or maturities. We believe that a short-term decrease in interest earned is better than taking the risk of investing in long-term securities
in the low interest rate environment and felt that this position would enable the Company to garner increased returns on investments as the market rises.



Deposits continued to grow in 2003, with average savings deposits increasing $3,152 or 8.0% while the average interest rate paid for the deposits declined 53 basis points
from 1.35% to .82% over the period. At the same time, interest-bearing deposits, including money market deposits, also increased with growth of $9,671 of average balances while the corresponding average interest rate paid for the deposits decreased
19 basis points from .88% in 2002 to .69% in 2003. Interest expense relating to time deposits also decreased $634 or 14.5% with average time deposits growing $7,669 or 6.2% while the average interest rate paid for these deposits declined 70 basis
points from 3.55% to 2.85%. The Rate/Volume Analysisof Changes in Net Interest Incomeindicates that the decreased interest expense in each category is due entirely to the lower interest rates paid for deposits in spite of higher
balances in each category.



Expense associated with short-term borrowings
during 2003 decreased $31 or 21.7% with the average volume of these liabilities increasing $483 or 4.4% while the average interest rate paid declined from 1.31% to .99%. Management lowered the interest rate paid on sweep accounts in line with
decreases in short-term investment rates.



Provision for Loan Losses



The provision for loan losses of $960 for the year ended December 31,
2003 represented an increase of $285 or 42.2% over the provision expense recorded in 2002. The loan portfolio increased $32,248 or 17.2% during 2003. Management reviews the adequacy of the allowance for loan losses on a quarterly basis and has
determined that the allowance, which represented 1.37% of total loans, was adequate. During 2002 an impaired commercial loan customer experienced difficulty in making scheduled payments on its loan which was to revert from interest only to a monthly
payment of principal and interest. Management modified the loan payment schedule to include payments based upon cash flow of the business. Their cash flow projections for operations were not realized and therefore they were able to pay interest only
payments in 2003. After completing updated appraisals on the real estate and business, we felt it prudent to charge off $424 of the loan. Loan delinquencies are monitored monthly and for the past two years the delinquency rate was generally less
than 1.00% at each month end.



Noninterest Income



Service charges on deposit accounts are the main component of noninterest income. In
February 2003, the Bank began offering an overdraft protection plan which entitles deposit customers the privilege of paying overdrawn checks up to a predetermined limit when repaid according to pre-established terms. Fees associated with this
service were $510 in 2003, this amount was the main reason for the increase of $456 or 76.0% over 2002 service charge income.



Net gains on the sale of mortgage loans held for sale expanded to $834 in 2003, representing a gain of $383 or 85.0% over 2002. The number of residential mortgage loans
sold in 2003 increased to 272 from 188 the previous year with a notable slowing in the number of originations during the fourth quarter of 2003. Customers took advantage of the perception that residential mortgage rates were at or near as low as
they would go, increasing the level of both new financing and refinances.



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The category of other noninterest income includes many miscellaneous revenue items including participation service
charges earned on servicing loans which are sold in the secondary market, fees for wiring funds, merchant credit card commissions and debit card interchange fees along with fees for other activities. The sale of investment products in conjunction
with a third party was begun in July 2003. Brokerage service commissions relating to these sales were $146 in 2003. Earnings on the cash surrender value of life insurance policies also increased in 2003 by $64 or 72.2% over the earnings in 2002
primarily as a result of the Bank purchasing an additional $3,000 of bank-owned life insurance in July 2003. Offsetting these increases in income, a contra account to noninterest income is the amortization of mortgage servicing rights which
increased $83 or 195.0% over 2002. Variations in all other income categories made up the remaining increase in other noninterest income.



Noninterest Expense



The largest noninterest expense for the Company is salaries and employee benefits. Totaling $3,524 for 2003, this category increased $520 or 17.3% over the 2002 amount. In order to accommodate new operations including
the sale of investment products and expanding loan originations in Pike County, Pennsylvania, the Company hired two new Vice Presidents along with several other employees to handle the larger volume of transactions relating to growth of both loans
and deposits. The number of full time equivalent employees increased from 89 in 2002 to 97 in 2003. At that level, the Company still outperformed its national peer group in salary and employee benefit expense with the average personnel expense per
employee $34 as compared to $42 which ranked the Bank in the top 9% if this peer group.



Professional fees increased $155 or 49.4% from 2002 to 2003. A significant item in 2003 which was not incurred in 2002 is related to the implementation of an overdraft protection plan. The Bank entered into an agreement with a third party
to provide the program software whereby we agreed to pay a percentage of earnings on the program for thirty months, amounting to $77 in 2003. The Company had such a positive experience with a profit improvement project begun in 1999 that management
decided to re-establish the program in 2003. We hired a consultant to facilitate the effort and paid $50 in 2003 for the service with the expectation of generating approximately 20% in annual increases of net income. In addition, the Company
instituted a training initiative in 2003 to boost the level of service provided by employees to our customers and paid a consultant $26 to implement the training. We believe that one of the best methods to retain customers is to offer the best
service in our markets.



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MARKET PRICES OF STOCK/DIVIDENDS PAID



The Companys stock is listed on the OTC Bulletin Board under the symbol DIMC. The book value per share at December 31,
2004 was $19.17 represented an increase of 7.2% over the 2003 book value of $17.89. There were approximately 758 shareholders of record at December 31, 2004. This number does not include persons or entities that hold their stock in nominee name
through various brokerage firms.



The following table sets forth high and low
sale prices per share of the common stock for the calendar quarters indicated, based upon information obtained from published sources.



MARKET PRICES OF STOCK / DIVIDENDS DECLARED



|               |  |      |       |      |   |                  |  |      |     |     |   |                   |  |   |       |  |   |     
|-------------- |  | ---- | ----- | ---- | - | ---------------- |  | ---- | --- | --- | - | ----------------- |  | - | ----- |  | - | ----
|               |  | 2004 |       | 2003
|               |  | High |       | Low  |   | DividendDeclared |  | High |     | Low |   | Dividend Declared
|First Quarter  |  | $    | 44.50 |      | $ | 40.05            |  | $    | .23 |     | $ | 25.75             |  | $ | 18.75 |  | $ | .215
|Second Quarter |  | $    | 45.00 |      | $ | 41.00            |  | $    | .23 |     | $ | 29.00             |  | $ | 25.50 |  | $ | .215
|Third Quarter  |  | $    | 42.50 |      | $ | 34.50            |  | $    | .23 |     | $ | 32.50             |  | $ | 28.75 |  | $ | .215
|Fourth Quarter |  | $    | 36.25 |      | $ | 34.00            |  | $    | .25 |     | $ | 45.00             |  | $ | 32.00 |  | $ | .225



Table reflects high and low stock
prices and dividends adjusted to reflect 100% stock split effected in the form of a dividend on 12/1/03.



The ability of the Company to pay dividends is dependent upon the ability of the Bank to pay dividends to the Company. Because the Bank is a depository institution insured by the FDIC it may not pay dividends or
distribute capital assets if it is in default on any assessment due the FDIC. Additionally, the Bank is subject to certain state banking regulations that limit the ability of the Bank to pay dividends to the Company. Under Federal Reserve policy,
the Company is required to maintain adequate regulatory capital and is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where it might not do so absent such a policy. These
regulations may have the effect of reducing the amount of future dividends declarable by the Company.



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SUMMARY OF SELECTED FINANCIAL DATA



|                                                    |  |      |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|(In thousands, except per share data)               |  | 2004 |           |   | 2003 |   |           | 2002 |  |   | 2001    |   |  | 2000 |        
|Summary of operations                               |  |      |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income                                     |  | $    | 15,808    |   |      | $ | 15,321    |      |  | $ | 15,468  |   |  | $    | 17,320  |   |  | $ | 15,943  |  
|Interest expense                                    |  | $    | 4,412     |   |      | $ | 4,699     |      |  | $ | 5,618   |   |  | $    | 7,893   |   |  | $ | 7,214   |  
|Net interest income                                 |  | $    | 11,396    |   |      | $ | 10,622    |      |  | $ | 9,850   |   |  | $    | 9,427   |   |  | $ | 8,729   |  
|Provision for loan losses                           |  | $    | 1,126     |   |      | $ | 960       |      |  | $ | 675     |   |  | $    | 867     |   |  | $ | 930     |  
|Net interest income after provision for loan losses |  | $    | 10,270    |   |      | $ | 9,662     |      |  | $ | 9,175   |   |  | $    | 8,560   |   |  | $ | 7,799   |  
|Other income                                        |  | $    | 2,933     |   |      | $ | 2,695     |      |  | $ | 1,719   |   |  | $    | 1,561   |   |  | $ | 1,173   |  
|Other expenses                                      |  | $    | 7,525     |   |      | $ | 6,803     |      |  | $ | 5,974   |   |  | $    | 5,829   |   |  | $ | 5,349   |  
|Income before income taxes                          |  | $    | 5,678     |   |      | $ | 5,554     |      |  | $ | 4,920   |   |  | $    | 4,292   |   |  | $ | 3,623   |  
|Income taxes                                        |  | $    | 1,772     |   |      | $ | 1,700     |      |  | $ | 1,549   |   |  | $    | 1,353   |   |  | $ | 1,144   |  
|                                                    |  |      |           |   |     
|Net income                                          |  | $    | 3,906     |   |      | $ | 3,854     |      |  | $ | 3,371   |   |  | $    | 2,939   |   |  | $ | 2,479   |  
|                                                    |  |      |           |   |     
|Per common share                                    |  |      |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Earnings per share - basic*                         |  | $    | 2.54      |   |      | $ | 2.54      |      |  | $ | 2.24    |   |  | $    | 1.98    |   |  | $ | 1.68    |  
|Earnings per share - diluted*                       |  | $    | 2.46      |   |      | $ | 2.45      |      |  | $ | 2.19    |   |  | $    | 1.95    |   |  | $ | 1.68    |  
|Cash dividends*                                     |  | $    | 0.94      |   |      | $ | 0.87      |      |  | $ | 0.82    |   |  | $    | 0.73    |   |  | $ | 0.63    |  
|Book value*                                         |  | $    | 19.17     |   |      | $ | 17.89     |      |  | $ | 16.25   |   |  | $    | 14.70   |   |  | $ | 13.22   |  
|Shares outstanding at year end                      |  |      | 1,548,994 |   |      |   | 1,526,134 |      |  |   | 753,600 |   |  |      | 746,285 |   |  |   | 738,988 |  
|                                                    |  |      |           |   |     
|Balance sheet data - end of year                    |  |      |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total assets                                        |  | $    | 325,721   |   |      | $ | 304,304   |      |  | $ | 280,952 |   |  | $    | 248,874 |   |  | $ | 214,993 |  
|Loans, net of unearned                              |  | $    | 253,141   |   |      | $ | 219,609   |      |  | $ | 187,361 |   |  | $    | 161,740 |   |  | $ | 154,947 |  
|Loans held for sale                                 |  | $    | 112       |   |      | $ | 654       |      |  | $ | 1,195   |   |  | $    | 527     |   |  | $ | 76      |  
|Investment securities:                              |  |      |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Available for sale                                  |  | $    | 55,662    |   |      | $ | 64,357    |      |  | $ | 78,880  |   |  | $    | 70,060  |   |  | $ | 48,263  |  
|Held to maturity                                    |  | $    | 198       |   |      | $ | 197       |      |  | $ | 426     |   |  | $    | 414     |   |  | $ | 503     |  
|Deposits                                            |  | $    | 270,542   |   |      | $ | 262,207   |      |  | $ | 239,359 |   |  | $    | 210,385 |   |  | $ | 184,305 |  
|Stockholders equity                                |  | $    | 29,696    |   |      | $ | 27,308    |      |  | $ | 24,519  |   |  | $    | 21,951  |   |  | $ | 19,537  |  
|                                                    |  |      |           |   |     
|Performance                                         |  |      |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on average assets                            |  |      | 1.26      | % |      |   | 1.34      | %    |  |   | 1.30    | % |  |      | 1.27    | % |  |   | 1.23    | %
|Return on average equity                            |  |      | 13.72     | % |      |   | 14.79     | %    |  |   | 14.49   | % |  |      | 14.01   | % |  |   | 13.50   | %
|Dividend payout ratio                               |  |      | 37.01     | % |      |   | 35.51     | %    |  |   | 36.30   | % |  |      | 36.71   | % |  |   | 37.22   | %
|Average equity to average assets ratio              |  |      | 9.15      | % |      |   | 9.06      | %    |  |   | 8.96    | % |  |      | 9.04    | % |  |   | 9.13    | %

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|* | Years before 2003 adjusted to reflect 100% stock split effected in the form of a dividend on 12/1/03.
|- | -----------------------------------------------------------------------------------------------------