Exhibit 13

DIMECO, INC. 2008 ANNUAL REPORT



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FINANCIAL HIGHLIGHTS



|                                             |  |      |         |   |      |   |         |                      |  |       |   
|-------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -------------------- |  | ----- | --
|(amounts in thousands, except per share)     |  | 2008 |         |   | 2007 |   |         | % Increase(decrease) | 
|Performance for the year ended December 31,  |  |      |         |   |      |   |         |                      |  |       |   
|Interest income                              |  | $    | 28,175  |   |      | $ | 29,951  |                      |  | (5.9  | )%
|Interest expense                             |  | $    | 10,665  |   |      | $ | 12,601  |                      |  | (15.4 | )%
|Net interest income                          |  | $    | 17,510  |   |      | $ | 17,350  |                      |  | .9    | % 
|Net income                                   |  | $    | 6,401   |   |      | $ | 6,612   |                      |  | (3.2  | )%
|                                             |  |      |        
|Shareholders' Value (per share)              |  |      |         |   |      |   |         |                      |  |       |   
|Net incomebasic                             |  | $    | 4.17    |   |      | $ | 4.34    |                      |  | (3.9  | )%
|Net incomediluted                           |  | $    | 4.05    |   |      | $ | 4.18    |                      |  | (3.1  | )%
|Dividends                                    |  | $    | 1.32    |   |      | $ | 1.19    |                      |  | 10.9  | % 
|Book value                                   |  | $    | 28.53   |   |      | $ | 26.23   |                      |  | 8.8   | % 
|Market value                                 |  | $    | 38.00   |   |      | $ | 46.26   |                      |  | (17.9 | )%
|Market value/book value ratio                |  |      | 133.2   | % |      |   | 176.4   | %                    |  | (24.5 | )%
|Price/earnings multiple                      |  |      | 9.1     | X |      |   | 10.7    | X                    |  | (15.0 | )%
|Dividend yield                               |  |      | 3.47    | % |      |   | 2.57    | %                    |  | 35.0  | % 
|                                             |  |      |        
|Financial Ratios                             |  |      |         |   |      |   |         |                      |  |       |   
|Return on average assets                     |  |      | 1.43    | % |      |   | 1.58    | %                    |  | (9.5  | )%
|Return on average equity                     |  |      | 15.28   | % |      |   | 17.54   | %                    |  | (12.9 | )%
|Shareholders' equity/asset ratio             |  |      | 9.41    | % |      |   | 9.19    | %                    |  | 2.4   | % 
|Dividend payout ratio                        |  |      | 31.65   | % |      |   | 27.42   | %                    |  | 15.4  | % 
|Nonperforming assets/total assets            |  |      | 1.81    | % |      |   | .26     | %                    |  | 596.2 | % 
|Allowance for loan loss as a % of loans      |  |      | 1.42    | % |      |   | 1.56    | %                    |  | (9.0  | )%
|Net charge-offs/average loans                |  |      | .26     | % |      |   | .06     | %                    |  | 333.3 | % 
|Allowance for loan loss/nonaccrual loans     |  |      | 1392.1  | % |      |   | 942.7   | %                    |  | 47.7  | % 
|Allowance for loan loss/non-performing loans |  |      | 86.6    | % |      |   | 476.3   | %                    |  | (81.8 | )%
|Risk-based capital                           |  |      | 11.9    | % |      |   | 11.6    | %                    |  | 2.6   | % 
|                                             |  |      |        
|Financial Position at December 31,           |  |      |         |   |      |   |         |                      |  |       |   
|Assets                                       |  | $    | 472,478 |   |      | $ | 434,322 |                      |  | 8.8   | % 
|Loans, net of unearned                       |  | $    | 380,207 |   |      | $ | 344,758 |                      |  | 10.3  | % 
|Deposits                                     |  | $    | 381,989 |   |      | $ | 364,600 |                      |  | 4.8   | % 
|Stockholders' equity                         |  | $    | 44,468  |   |      | $ | 39,923  |                      |  | 11.4  | % 



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Dear Shareholder:

I am extremely pleased to present the 2008 report of Dimeco, Inc. Although much of the years national news was centered around failed institutions, a meltdown on Wall Street, a severe recession, and the need for
government intervention, your company was nowhere near those headlines.

We have often spoken about our belief in and dedication to,
community banking. This statement could never be more true. We, like community banks in general, were not engaged in subprime lending, exotic investments, undue risk taking, or the greed that permeated many institutions. While others were deviating
from sensible practices, Dimeco remained true to its philosophy of following prudent banking principles. Our resolve proved, once again, to be correct and our foundation in sound banking principles is a bright beacon for many. For shareholders and
customers, we provide strength and stability. Our goal is to always be there, to help see you through, no matter what the economic climate.

We met the challenges of 2008 with smart decisions and a principled direction. Our deposits were priced competitively, yet realistically, taking into consideration the wants of the customer together with our desire to increase this
important funding source. Both our products and our pricing were well received, and our deposit base grew by almost 5%.

At the same time,
our lending function also did extremely well. The economy of our marketplace was generally steady for most of the year. During this period our lenders were busy originating loans, the majority of which were commercial in nature. The result of those
efforts was an increase in our loan portfolio of more than 10%.

In addition to loan and deposit increases, we grew in other areas as well.
Technology continues its course as an ever-increasing driver of our business. During the year we rolled out our remote banking service. This technology allows customers to electronically conduct their deposit business from their offices, providing
speed and efficiency in managing this important cash flow operation. Additionally, we pursued initiatives directed toward being more ecologically responsible. We introduced eDocs, an electronic means for customers to access their
statements. These actions obviously save paper, but also speed the response time in providing customers their information.

Internally, we
did our part as well. Through the use of imaging software, our staff can now access daily reports on our computer screens rather than printing paper reports. Moreover, we initiated remote capture at each of our branches. Said simply, this is a
process whereby the daily transactions of our customers are captured in each of our branches in the form of digital images. These images are then sent electronically via a secure network for processing. These continuing efforts provide efficiencies
but more importantly allow us to make better use of our precious natural resources.

Reacting to the numerous changes at the national level
required our almost constant vigilance. During 2008, the Federal Reserve decreased key interest rates an astounding seven times. With each of these rate cuts came lower interest income from our adjustable rate loans, while a large portion of our
interest expense was centered in longer term time deposits. These actions resulted in a squeeze of our net interest margin as federal authorities attempted to address our national economy. When the year ended, we posted a very respectable net income
of $6.4 million. This level of profitability was a decrease of only 3% from the year before.



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Despite this small decrease in income, we regard 2008 as a huge success. First, it must be remembered
that 2007 was the best ever in our companys history, a difficult accomplishment to repeat, even in the best of economies. Secondly, given the current economic climate, and the fact that numerous other financial institutions struggle just to
survive, our performance numbers should continue to place us in the upper range of our peer group.

The most gratifying news of the year
comes to you, our shareholders. At the conclusion of the year, our performance provided stockholders equity growth of over 11%. Adhering to sound practices, while focusing on enhancing your investment, continues to be our primary goal. Once
again, after continued profitability, our Board of Directors expanded your cash dividend. This years increase was 10.9%, a return that has been enthusiastically received. This was the third consecutive year that dividends were not only raised,
but were also increased by double digit percentages. We believe that these actions speak to the strength of our institution as well as our commitment to you.

From a global perspective, 2008 was filled with challenges and distractions. With each passing month came news of struggling industries and a deteriorating economy. Most major media erroneously summarized the cause of
the economic downturn to be that of the banking industry at large. We know that certainly was not the case. Our responsibilities were centered around giving calming advice, together with more direct and correct information. It is times like these
when we earn our keep. In all areas of the company our staff reassured customers that we, and community banks in general, remained in good stead.

The FDIC did its part by increasing deposit insurance from $100,000 to $250,000, albeit only temporarily until December 31, 2009. Additionally, we elected to participate in the FDIC Temporary Liquidity Guarantee Program, so as to
provide unlimited deposit insurance for all balances in noninterest-bearing checking accounts. These efforts, and more, were directed at instilling confidence in these economically emotional times. With a positive attitude and a realistic approach,
we believe we can continue our success and while doing so, provide essential banking to assist our customers thereby assisting you in reaching your investment goals.

The year 2008 saw the opening of our new Lake Region Office. This facility is an expansion of our branch network, and gives us an even greater presence in the perpetually growing Lake Wallenpaupack area. Already this
office is seeing a great deal of activity, both retail and commercial. Equally important for this facility, it is the new home of both our Trust and Investments Departments. The entire arena of wealth management is active and growing, both in terms
of clientele and the staff needed to deliver customer service. Having outgrown our facilities in the Honesdale office, both departments have relocated to the Lake Region facility. We welcome you to visit these new offices for your banking,
investment, and trust needs.

We remain upbeat in all of our activities and delivery of service despite the uncertainties of our national
and global economies. To be this successful in such tenuous times comes about only as the result of the actions of a knowledgeable, caring and concerned staff. Each member of our team is to be commended, not only for their participation in making
2008 a very good year, but also for the extra time they dedicated to our customers to comfort, console, and counsel. Our Board of Directors played an active and significant role as well. They, along with senior management, constantly monitored the
changing economic climate, keeping the company on track to weather the storm. We ensured that information was continually disseminated throughout the year to all involved so that management at all levels was adequately informed to properly serve our
customers. This guidance and direction provided the course necessary to be successful.



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The future, obviously, has yet to be written. However, our future will be what we make of it.
Granted, issues will occur that will be beyond our control. But with careful planning, common sense, and a steadfast approach, I am confident that continued success is in our future. Our resolve for what lies ahead will be grounded in our
philosophies of the past. Seizing opportunities as they are presented while avoiding undue risk in delivering core banking solutions with superior service will be the mainstay of our continued success.

We are most grateful for your investment and your loyalty. In times like these our partnership shines brightly. Our continued commitment to you is the
enhancement of the value you have entrusted to us. For our mutual benefit, I encourage your referrals of banking business and corporate stock ownership.

As always, your comments and questions are welcome.

Sincerely,

/s/ Gary C. Beilman

Gary C. Beilman

President and Chief Executive Officer



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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, 2008 and 2007. 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. TDB Insurance Services, LLC, a limited liability company, offering title insurance services, was
formed by the Bank and is owned 100% by the Bank. 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, fees on services performed 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 six full-service branches in Honesdale, Hawley,
Damascus, Greentown, Dingmans Ferry and Palmyra Township, Pennsylvania, two off-site automatic teller machines, one each in Wayne and Pike County, Pennsylvania and an operations center in Wayne County, Pennsylvania. Principal market areas include
Wayne and Pike Counties, Pennsylvania and Sullivan County, New York. The Bank employed 105 full-time employees and 26 part-time employees at December 31, 2008.

FORWARD-LOOKING STATEMENT

This Management Discussion and Analysis section of the Annual Report
contains certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In the normal course of business, we, in an effort to help keep our shareholders and the public informed about our operations, may from
time to time issue or make certain statements, either in writing or orally, that are or contain forward-looking statements, as that term is defined in the U.S. federal securities laws. Generally, these statements relate to business plans or
strategies, projections involving anticipated revenues, earnings, profitability or other aspects of operating results or other future developments in our affairs or the industry in which we conduct business. Forward-looking statements may be
identified by reference to a future period or periods or by the use of forward-looking terminology such as anticipate, believe, expect, intend, plan, estimate or similar
expressions.

Although we believe that the anticipated results or other expectations reflected in our forward-looking statements are based
on reasonable assumptions, we can give no assurance that those results or expectations will be attained. Forward-looking statements involve risks, uncertainties and assumptions (some of which are beyond our control), and as a result actual results
may differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from forward-looking statements include, but are not limited to the following, as well as those discussed elsewhere herein:



| |  |  | our investments in our businesses and in related technology could require additional incremental spending, and might not produce expected deposit and loan growth
and anticipated contributions to our earnings;
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| |  |  | general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for loan
and lease losses or a reduced demand for credit or fee-based products and services;
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| |  |  | changes in the interest rate environment could reduce net interest income and could increase credit losses;
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| |  |  | the conditions of the securities markets could change, which could adversely affect, among other things, the value or credit quality of our assets, the
availability and terms of funding necessary to meet our liquidity needs and our ability to originate loans and leases;
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| |  |  | changes in the extensive laws, regulations and policies governing financial holding companies and their subsidiaries could alter our business environment or
affect our operations;
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| |  |  | the potential need to adapt to industry changes in information technology systems, on which we are highly dependent, could present operational issues or require
significant capital spending;
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| |  |  | competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased availability of
financial services from non-banks, technological developments such as the internet or bank regulatory reform; and
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| |  |  | acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action,
could further adversely affect business and economic conditions in the United States generally and in our principal markets, which could have an adverse effect on our financial performance and that of our borrowers and on the financial markets and
the price of our common stock.
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You should not put undue reliance on any forward-looking statements. Forward-looking
statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events except to the extent required by federal securities laws.

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 of the Notes to Consolidated Financial Statements.

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, meaning 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 estimated using projected, discounted cash flows by means of a computer pricing model which is based on objective characteristics of the portfolio and
commonly used industry assumptions.

Deferred Tax Assets

The Company uses 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 11 of the Notes to Consolidated Financial Statements.



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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.

In the following discussion, all dollars are
stated in thousands, with the exception of per share numbers.

STATEMENT OF CONDITION

The year 2008 was another growth year for Dimeco, Inc., with total assets of $472,478 at the end of the year. This balance represents an increase of $38,156 or 8.8% over balances one year
earlier. As has been the trend, the loan portfolio experienced the greatest part of this increase in assets and was funded by a combination of greater deposits, repurchase agreements and longer term financing along with net income.

Cash and cash equivalents declined $3,819 or 48.9% from December 31, 2007 to December 31, 2008. The Bank maintains balances at the Federal
Reserve Bank of Philadelphia in order to facilitate the payments system and at the end of 2008 this process required $2,721 less than a year earlier. In addition, the Bank purchased software in 2008 that assists branch personnel in maintaining the
least level of cash on hand to effectively manage branch operations. Using this tool, we were able to lower cash balances by $206 at December 31, 2008 as compared to the end of 2007. With interest rates paid on federal funds sold at the all
time lowest level, we chose to not have any balances in federal funds sold at the end of the year, electing instead to invest in bonds or loans and to utilize our borrowing ability for temporary cash needs.

Investment securities available for sale decreased $1,139 or 1.7% at December 31, 2008 from balances one year earlier. As the year of 2008 unfolded
and markets became more volatile, we became much more selective in purchasing bonds and commercial paper. In the first quarter of 2008 we took advantage of some favorable pricing to increase balances of U.S. government agency bonds resulting in an
increase of $2,546 or 31.8% greater balances at December 31, 2008 than a year earlier. As the year progressed, we decreased our balances of commercial paper due to a combination of uncertainty in the credit quality of many of the issuers along
with a severe decline in the number of issues offered in the market. Balances of commercial paper declined $16,382 or 44.5% from December 31, 2007 to the end of 2008 with the majority of these funds invested in tax-exempt municipal bonds,
high-quality corporate bonds or loans. Balances of tax-exempt municipal bonds increased $8,675 or 69.7% in 2008. Although the financial markets raised concern during the year regarding insurers of these bonds, we invest in municipal bonds based on
the underlying credit quality of the issuer with the insurance offered on the purchase as an additional benefit. Using this philosophy, we purchased bank qualified municipal bonds that carried good investment quality and a favorable interest rate as
compared to other offerings at the time of purchase. In making these purchases, we have extended the maturity of our investment portfolio and believe that by this action we continued to maintain favorable balance sheet management. Investments in
corporate securities increased by $4,383 or 120.0% from December 31, 2007 to December 31, 2008. During the fourth quarter we took advantage of market volatility and purchased corporate bonds of highly rated companies at favorable interest
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Loan activity continued our historical trend of growth during 2008 resulting in an increase of
$35,449 or 10.3% greater than balances of December 31, 2007. The majority of this growth was in the commercial real estate category with these loans increasing $19,055 or 9.6%. The Bank continued to originate commercial mortgages within our
niche in childrens camps along with lending to businesses in several other industries to acquire or improve their facilities. Commercial and industrial loans increased $3,059 or 7.8%. This growth was represented by numerous smaller dollar
amount loans to a wide variety of businesses. During the year we originated $14,979 of residential mortgages, including $8,059 of loans to be sold in the secondary market. We underwrite residential mortgage loans in accordance with the guidelines
for sale in the secondary market. We service our communities by originating loans in rural areas that do not qualify for reasons other than credit quality. Originations of these loans resulted in balances of residential mortgages increasing by
$6,473 or 9.3% during 2008. The Bank has always underwritten residential mortgages using the same conservative philosophy that we have followed since inception of the institution more than 100 years ago. We have never relaxed those guidelines and
therefore did not experience the same issues that became national news during the year. We have always believed that our role as a community bank is to enhance the communities we serve, including being a conservative lender in order to help families
live in affordable homes. Construction and development loans increased $5,018 or 59.8% during 2008. These loans were granted for smaller projects where substantial equity was injected by the borrowers. In addition, these borrowers have demonstrated
their ability with other successful real estate ventures.

Premises and equipment increased $4,493 or 70.3% due primarily to costs of
$4,672 associated with the construction of our new branch facility in Palmyra Township, Wayne County, Pennsylvania. The new branch is located in close proximity to Lake Wallenpaupack, a very active recreational area. Commercial businesses have grown
in this area and management believes that this branch will attract new customers while offering the appropriate physical location to maintain several large commercial customers we currently service from this vicinity. The facility includes space for
the trust and investments departments which have grown substantially in the past five years along with additional space for future growth. In addition, the remodeling of the main bank office in Honesdale was completed in the summer of 2008. This
project included increasing parking, repaving the entire parking lot, updating the original HVAC system and remodeling several areas of the building at a cost of $852. Normal capital expenditures were also incurred with depreciation of $533
offsetting costs incurred during the year.

At December 31, 2008 we had a balance of $1,955 in other real estate owned. The Company
did not have any activity of this nature since 2004. During 2008 we took a deed in lieu of foreclosure on an automobile dealership due to the problems that the United States automobile industry is experiencing. These problems have directly affected
sales of automobiles in our market. Management believes that this asset is properly valued based on a recent real estate appraisal showing that the market value is in excess of book value. We have no intent to enter into any distressed sales of this
facility, which may affect the time we own this non-earning asset.

Deposits increased by $17,389 or 4.8% as of December 31, 2008 as
compared to a year earlier. Noninterest-bearing deposits increased $2,863 or 8.2% with new relationships developed during the year. Interest-bearing deposits increased $14,526 or 4.4% during 2008 with the greatest increase in time deposits. These
increases affect all categories of time deposits. Balances in the CDARS program, brokered certificates of deposit that insure the depositor on balances up to $50 million, have shown the greatest increases with these balances ending the year $7,448
or 125.6% higher than a year earlier. Due to the highly publicized bank failures in 2008, we believe that our customers are greatly concerned over preservation of principal. These deposits have increased significantly from personal account holders
and fiduciaries who are concerned over the safekeeping of assets entrusted to their control. During the year, our competitors have offered premium interest rates on certificates of deposit and in an effort to maintain some of those deposits, we
offered a premium rate product for approximately one month and generated $14,415 of new deposits. Our strategy is to continue to offer special certificate of deposit rates to maintain or grow deposits or to utilize our borrowing capacity when
competitors are offering interest rates that do not fit in our asset/liability plan. Savings deposits increased $4,138 or 13.2% during 2008 while balances of money market deposits declined $4,250 or 9.2%. There was some migration into higher
yielding certificates of deposit during the year which was offset by customers moving money into FDIC insured deposits from other sources, affecting all deposit categories. We have seen increases of some customers balances from Wayne County,
Pennsylvania due to monies received from gas leases in that area during the year. This new source of deposits has brought significant funds into the area and we believe that we are garnering a good percentage of those funds either through additional
deposits or investment accounts.



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Short-term borrowings increased $8,461 or 103.1% to end the year at $16,671. Balances in our
Financial Manager account, which is a commercial sweep product, increased $2,295 or 28.0% over the period as customer balances increased due to seasonality of customers businesses. Short-term borrowings at the Federal Home Loan Bank of
Pittsburgh (FHLB) were $6,166 at the end of 2008 with no corresponding balance at December 31, 2007. As part of our asset/liability strategy we have decided to selectively utilize this borrowing ability at market interest rates
rather than paying over market rates when our competitors have specially priced certificates of deposit.

Other borrowed funds increased
$6,637 or 37.6% during 2008 due primarily to additional borrowings of $7,872 from the FHLB including $5,000 of borrowings done in lieu of increasing deposit rates and $2,872 which was borrowed in order to facilitate specific fixed rate loans booked
during the year. These borrowings were offset by regularly scheduled payments of $1,235 made during the year. In order to meet the needs of our commercial loan customers for fixed rate financing while managing interest rate risk, we borrowed from
the FHLB to fund these loans and included a prepayment penalty in the loan documents to equal the penalty which would be incurred for early payment of these borrowings from the FHLB.

CAPITAL RESOURCES

Stockholders Equity of $44,468 at December 31, 2008 represented an
increase of $4,545 or 11.4% from the previous year end. Net income of $6,401 was the primary source of this increase, representing earnings per share of $4.17 and a return on average equity of 15.3%. Dividends of $2,035, or $1.32 per share, were
returned to shareholders. Several officers and directors exercised stock options during the year, adding $556 to stockholders equity. In addition, upon adoption of Emerging Issues Task Force 06-04 guidance, we booked a one-time decrease of $358 in
retained earnings for the cumulative effect of a change in the accounting for post-retirement benefits under the executive officer salary continuation plan.

The Companys capital position at December 31, 2008 as it relates to regulatory guidelines is presented below:



|                     |  |              |  |                  |  |                     
|-------------------- |  | ------------ |  | ---------------- |  | --------------------
|                     |  | Dimeco, Inc. |  | Well-Capitalized |  | Minimum Requirements
|                     |  |              | 
|Leverage Ratio       |  | 9.90%        |  | 5.00%            |  | 4.00%               
|                     |  |              | 
|Tier I Capital Ratio |  | 10.65%       |  | 6.00%            |  | 4.00%               
|                     |  |              | 
|Total Capital Ratio  |  | 11.91%       |  | 10.00%           |  | 8.00%               

Neither Dimeco, Inc. nor The Dime Bank participated in the Troubled Asset Relief Program /Capital
Purchase Program offered by the U.S. Treasury in the fourth quarter of 2008. Our Board and management did not feel that the Company would benefit by participation in the program since we have maintained a strong capital position and had no immediate
need for the additional capital. We also chose not to participate in the Temporary Liquidity Guarantee Program whereby the Federal Deposit Insurance Corporation (FDIC) would guarantee unsecured debt. We did, however, accept participation
in the Transaction Account Guarantee Program. This program gives us the ability to offer the FDICs temporary full guarantee on certain noninterest-bearing transaction accounts through December 31, 2009 under current regulations. We
believe that this program will give additional confidence to those depositors with balances in excess of $250 in these accounts and that the additional cost of the program is worthwhile in these economic times.



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LIQUIDITY

The liquidity risk in financial institutions is based upon the institutions ability to have sources of funds available to meet its needs for the outflow of cash at any specific time. Liquidity begins with cash
and cash equivalents, which Dimeco, Inc. defines as cash on hand and in banks, along with overnight investments in federal funds sold. Balances of these accounts totaled $3,993 or .8% of total assets at December 31, 2008. This amount is
supplemented by various other sources of liquidity. We analyze our liquidity at least quarterly using cash and cash equivalents along with other sources of liquidity which include 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 operating income. In addition, in reviewing our liquidity position, we consider our borrowing capacity. The Bank has a credit line of
$76,429 at the FHLB with $45,965 available at December 31, 2008. We also have the ability to pledge securities and borrow from the Federal Reserve Bank and have an agreement with one of our correspondent banks that would allow us to borrow
additional funds if needed. Uses of liquidity include origination of loans for addition to our portfolio and for sales in the secondary market, purchases of investment securities, capital projects, operating expenses and payment of dividends. A
review of the Consolidated Statement of Cash Flows indicates the sources of funds generated and used during the past three years. 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.

Companies in the financial service industry are dependent on their ability to maintain proper levels of short-term and long-term liquidity. Both short-term and long-term liquidity are generated through the methods
enumerated above. Another manner that is available to the Company to garner funds is by issuance of additional common stock. The primary source of liquidity for the Company has been through origination of deposits, both with our ability to maintain
current deposits and garner new funds. It continues to be the main source of funds, but has been augmented by the Banks ability to borrow from outside sources. The borrowing capacity at the FHLB is viewed as both a long-term and short-term
source of liquidity. In the short term, it provides the ability to borrow overnight or for other short-term funds as needed. The FHLB also has long-term funding products which augment those needs that are longer term in nature.

Management believes that the Company has sufficient liquidity to meet both its short-term 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. We are also aware of customer concerns relating to bank failures in the past year along with constant news reports of uncertainty regarding the banking industry. We have increased our level of disseminating local information
regarding our financial position and reiterated the fact that we did not get involved in subprime lending or risky investments. We believe that the FDICs increased insurance levels have assisted us to maintain deposits in light of this
increased customer concern of the financial services industry.



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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is inherent in the financial services industry, encompassing 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). This committee is comprised of ten members including all senior officers, vice presidents representing each product offering
and information technology along with the community banking officer and the marketing officer. 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 in mortgage loans held for sale. Given the most recent declines in interest rates, it has become very difficult to locate and
purchase investments with the credit quality required by our guidelines which offer yields that management believes will offer long term benefit for the Company. We increased purchases of well rated tax-free municipal bonds as the most appropriate
investments available in the market. Management has maintained a portfolio which includes investments in short-term maturity commercial paper and U.S. government agencies that contain interest rate step-ups over the life of the investment along with
callable municipal bonds. Although 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 $500.

To address credit risk, both the loan portfolio and the investment portfolio have stringent guidelines as to the credit quality of acceptable investments. These guidelines are dictated by the
safety and soundness provisions of the regulations which govern the Bank and the Company.

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 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. During 2008 we have seen interest rates offered by competitors on both loans and deposits which do not fit our
guidelines. As for loans, we did adjust interest rates on customers loans when warranted based on credit quality and did not always offer lower rates on other loans, sometimes with the customer refinancing elsewhere. As for liabilities, we
have offered special certificate of deposit products at times. However, at other times we borrowed funds from the FHLB at current market rates rather than meet inflated interest rates offered by competitors. We believe that by working within our
guidelines we will be able to achieve greater profitability.

The ALCO is cognizant of the ability of interest rates to adversely affect
assets, liabilities, capital, interest income and interest 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 in which funds can be reinvested or repriced. The second report is the Analysis of Sensitivity to Changes in Market Interest Rateswhich is used to determine
the affect on income of various shifts in the interest rate environment. Both reports include inherent assumptions in order to process the information. Management is aware that these assumptions affect the results and that actual results may differ
from the results of these tools. These assumptions include an estimate of the maturity or repricing times of deposits, even though all deposits, other than time deposits, have no stated maturity and the reference that interest rate shifts will be
parallel, with the rates of assets and liabilities shifting in the same amount in the same time frame. In reality, various assets and various liabilities will react differently to changes in interest rates, with some lagging behind the change and
some anticipating the upcoming change and reacting before any actual change occurs. Each tool also suggests that there is a propensity to replace assets and liabilities with similar assets and liabilities rather than taking into consideration
managements ability to reallocate the balance sheet. In addition, the models used do not include any elements to determine how an action by management to increase or decrease interest rates charged on loans or paid on deposits or to increase
other borrowings will affect the results of the analysis. Despite these limitations, these analyses are good tools to use in a consistent fashion to assist in the management of the Company. Similar versions of these same reports are used by most
financial institutions. Both measurements are as of December 31, 2008.



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STATEMENT OF INTEREST SENSITIVITY GAP



|                                                                |  |                |         |                      |   |            |  |          |          |       |   |         |  |   |        
|--------------------------------------------------------------- |  | -------------- | ------- | -------------------- | - | ---------- |  | -------- | -------- | ----- | - | ------- |  | - | -------
|                                                                |  | 90 daysor less |         | >90 daysbut < 1 year |   | 1 - 5years |  | >5 years |          | Total
|Assets                                                          |  |                |         |                      |   |            |  |          |          |       |   |         |  |   |        
|Interest-bearing deposits in other banks and federal funds sold |  | $              | 368     |                      | $ | -          |  | $        | -        |       | $ | -       |  | $ | 368    
|Investment securities                                           |  |                | -       |                      |   | -          |  |          | -        |       |   | -       |  |   | -      
|available for sale(4) (6)                                       |  |                | 29,933  |                      |   | 1,223      |  |          | 10,614   |       |   | 25,505  |  |   | 67,275 
|Loans(1) (5)                                                    |  |                | 74,051  |                      |   | 121,651    |  |          | 103,056  |       |   | 81,883  |  |   | 380,641
|                                                                |  |                |         |                      |   |            |  |          |          |       |   |         |  |   |        
|                                                                |  |                |         |                      |  
|Rate sensitive assets                                           |  | $              | 104,352 |                      | $ | 122,874    |  | $        | 113,670  |       | $ | 107,388 |  | $ | 448,284
|                                                                |  |                |         |                      |   |            |  |          |          |       |   |         |  |   |        
|                                                                |  |                |         |                      |  
|Liabilities                                                     |  |                |         |                      |   |            |  |          |          |       |   |         |  |   |        
|Interest-bearing deposits:                                      |  |                |         |                      |   |            |  |          |          |       |   |         |  |   |        
|Interest-bearing demand(2)                                      |  | $              | 3,257   |                      | $ | 10,179     |  | $        | 27,279   |       | $ | -       |  | $ | 40,715 
|Money market(3)                                                 |  |                | 7,127   |                      |   | 20,963     |  |          | 13,835   |       |   | -       |  |   | 41,925 
|Savings(2)                                                      |  |                | 2,844   |                      |   | 8,889      |  |          | 23,823   |       |   | -       |  |   | 35,556 
|Time deposits                                                   |  |                | 53,718  |                      |   | 119,173    |  |          | 53,276   |       |   | -       |  |   | 226,167
|Short-term borrowings                                           |  |                | 13,671  |                      |   | 3,000      |  |          | -        |       |   | -       |  |   | 16,671 
|Other borrowings                                                |  |                | 417     |                      |   | 1,280      |  |          | 13,539   |       |   | 9,062   |  |   | 24,298 
|                                                                |  |                |         |                      |   |            |  |          |          |       |   |         |  |   |        
|                                                                |  |                |         |                      |  
|Rate sensitive liabilities                                      |  | $              | 81,034  |                      | $ | 163,484    |  | $        | 131,752  |       | $ | 9,062   |  | $ | 385,332
|                                                                |  |                |         |                      |   |            |  |          |          |       |   |         |  |   |        
|                                                                |  |                |         |                      |  
|Interest sensitivity gap                                        |  | $              | 23,318  |                      | $ | (40,610)   |  | $        | (18,082) |       | $ | 98,326  |  | $ | 62,952 
|Cumulative gap                                                  |  | $              | 23,318  |                      | $ | (17,292)   |  | $        | (35,374) |       | $ | 62,952  |  |   |        
|Cumulative gap to total assets                                  |  |                | 4.94%   |                      |   | (3.66%)    |  |          | (7.49%)  |       |   | 13.32%  |  |   |        



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

|(2) | Interest-bearing demand deposits and savings are segmented based on the percentage of decay method. The decay rates used include 8% 90 days or less,
25%  >90 days but <1 year and 67% 1-5 years.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Money market deposits are segmented based on the percentage of decay method. The decay rates used include 90 days or less 17%, >90 days but
< 1 year 50% and 1-5 years 33%.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | 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) | Investments are included in the earlier period in which interest rates are next scheduled to adjust or in which they are due. Included are U.S. Government Agency
step-up bonds characterized by having tiered interest rates over their life. Due to this feature these securities have been reallocated from their maturity date to their next step-up date. The specific impact of this policy by timeframe is as
follows: 0 to 3 months increased $1,003, 1-5 years increased $999 and >5 years decreased $2,002. In addition, municipal bonds and corporate bonds with market values of $3,275 and $2,605, respectively, have been
reallocated from the > 5 year category to the 90 days or less because they are variable interest rate bonds, some of which have a put feature.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This report shows the Company to be in an asset sensitive position of $23,318 in 90 days or less, meaning that there are more assets which will reprice in this period than liabilities.
Traditionally management focuses the greatest attention to the net gap of the balance sheet in the second time frame, assets and liabilities which mature in less than or equal to one year. Our statement shows that the Company becomes liability
sensitive in this cumulative time frame, with $17,292 of net liabilities repricing in the next twelve months. Declines in market interest rates during 2008 mean that all variable interest rate balances should be lowering as they mature, offering
repricing opportunities. This liability sensitive position offers the opportunity to reprice liabilities to lower rates and has the potential to increase net interest income. Management has established a range of sensitivity that we feel depicts
prudent banking practice and we manage the balance sheet to be within that range. The most conservative position is perfectly balanced in any time frame.



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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.

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 |  | $                | 443     |      | 2.91%   |                  | $ | (466) |  | (3.06)% |  |        |  | $ | 801     |        | 5.26 %  |   | $ | (1,494) |  | (9.82)% 
|Net income          |  | $                | 310     |      | 7.69%   |                  | $ | (322) |  | (8.01)% |  |        |  | $ | 558     |        | 13.85 % |   | $ | (1,010) |  | (25.10)%
|EVE                 |  | $                | (1,938) |      | (3.64)% |                  | $ | 3,324 |  | 6.24%   |  |        |  | $ | (3,948) |        | (7.41)% |   | $ | 6,672   |  | 12.52 % 

The greatest risk to the Company from an income perspective is an immediate decline in market
interest rates of 200 basis points. With a sudden shift of that magnitude we would experience a decline of $1,010 or 25.1% of net income. With market interest rates at their current levels, we believe that a decline of this magnitude is nearly
impossible. In the EVE measurement, an increase of 200 basis points would affect the Company by lowering equity by $3,948 or 7.4%, a level that is within our established tolerance limits. Management believes that we have the ability to affect the
changes in income and equity by taking actions which are not factored in this analysis.

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 one of the largest subjective measurements in the financial statements. The balance is derived by charging losses 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, 2008, the balance of the Companys allowance was $5,416 which represented 1.42% of the loan portfolio at that date and 1.51% of the average loans outstanding during
2008.

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 using two separate methods. First, we apply 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 the experience level of the loan officers in conjunction with evaluations of specific loans during
the loan review process. The second formula evaluates selected loans on an individual basis and allocates specific amounts to the allowance based on our internal risk assessment. 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.



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The Company employs an experienced outside professional loan review agency to perform the loan review
function. In order to test the majority of the commercial loan category, a review of these relationships is performed to include 70% of this average portfolio. 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 rating
is assigned and an amount is calculated for each category of reviewed loans. Groups of smaller dollar 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



|                                                                                          |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|----------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                                                                          |  | 2008 |       | 2007 |   | 2006  |  | 2005 |       | 2004
|Balance January 1,                                                                        |  | $    | 5,392 |      | $ | 4,469 |  | $    | 3,973 |      | $ | 3,172 |  | $ | 3,014
|Charge-offs:                                                                              |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|Loans secured by real estate:                                                             |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|Construction and development                                                              |  |      | -     |      |   | -     |  |      | -     |      |   | -     |  |   | -    
|Other                                                                                     |  |      | 691   |      |   | -     |  |      | 181   |      |   | -     |  |   | 860  
|Commercial and industrial                                                                 |  |      | 139   |      |   | 146   |  |      | 37    |      |   | 106   |  |   | 32   
|Installment loans to individuals                                                          |  |      | 107   |      |   | 117   |  |      | 86    |      |   | 132   |  |   | 162  
|Other loans                                                                               |  |      | 71    |      |   | 97    |  |      | 67    |      |   | 68    |  |   | 64   
|                                                                                          |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|Total charge-offs                                                                         |  |      | 1,008 |      |   | 360   |  |      | 371   |      |   | 306   |  |   | 1,118
|                                                                                          |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|                                                                                          |  |      |       |      |  
|Recoveries:                                                                               |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|Loans secured by real estate:                                                             |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|Construction and development                                                              |  |      | -     |      |   | -     |  |      | -     |      |   | -     |  |   | -    
|Other                                                                                     |  |      | 1     |      |   | 19    |  |      | 6     |      |   | 141   |  |   | 89   
|Commercial and industrial                                                                 |  |      | 6     |      |   | 4     |  |      | 5     |      |   | 46    |  |   | 4    
|Installment loans to individuals                                                          |  |      | 28    |      |   | 73    |  |      | 38    |      |   | 48    |  |   | 34   
|Other loans                                                                               |  |      | 47    |      |   | 57    |  |      | 33    |      |   | 22    |  |   | 23   
|                                                                                          |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|Total recoveries                                                                          |  |      | 82    |      |   | 153   |  |      | 82    |      |   | 257   |  |   | 150  
|                                                                                          |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|Net charge-offs                                                                           |  |      | 926   |      |   | 207   |  |      | 289   |      |   | 49    |  |   | 968  
|                                                                                          |  |      |       |      |  
|Additions charged to operations                                                           |  |      | 950   |      |   | 1,130 |  |      | 785   |      |   | 850   |  |   | 1,126
|                                                                                          |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|                                                                                          |  |      |       |      |  
|Balance at December 31,                                                                   |  | $    | 5,416 |      | $ | 5,392 |  | $    | 4,469 |      | $ | 3,973 |  | $ | 3,172
|                                                                                          |  |      |       |      |   |       |  |      |       |      |   |       |  |   |      
|                                                                                          |  |      |       |      |  
|Ratio of net charge-offs during the period to average loans outstanding during the period |  |      | .26%  |      |   | .06%  |  |      | .10%  |      |   | .02%  |  |   | .41% 
|                                                                                          |  |      |       |      |  
|Allowance for loan loss as a % of loans outstanding                                       |  |      | 1.42% |      |   | 1.56% |  |      | 1.46% |      |   | 1.40% |  |   | 1.25%

Included in the footnotes to the financial statements are schedules which include the total loans
which were past due 90 days or more or in nonaccrual and/or impaired status. At December 31, 2008 we classified one loan as impaired in the amount of $267. At December 31, 2007, there were two loans in impaired status totaling $1,023. The
level of loans past due 90 days or more at December 31, 2008 was $5,864, a great increase over similar balances one year earlier. Three commercial loan customers balances make up 83.5% of this total. These loans are well secured by real
estate, with loan to value ratios below our required standards. Management does not believe that we have any one loan that would require a material charge to the allowance for loan losses. Loans in nonaccrual status were $389 at December 31,
2008. The majority of these loans were secured by real estate and in the process of collection.



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OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of business, the Company engages in a variety of financial transactions that in accordance with generally accepted accounting principles are not recorded on its consolidated financial statements.
These off-balance sheet arrangements primarily consist of loan commitments and lines of credit, including commercial lines that we use to meet the financing needs of our customers. These off-balance sheet arrangements involve, to varying degrees,
elements of credit, interest rate, and liquidity risk. During the year ended December 31, 2008, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on its consolidated financial
condition, results of operations or cash flows.

RESULTS OF OPERATIONS

2008 Compared to 2007

Net income for the year ended December 31, 2008 was $6,401, a
decline of $211 or 3.2% from a year earlier. The year 2008 presented us with interest rate challenges greater than we have experienced in previous years. In addition, several expenses were higher due to increased operating costs in conjunction with
the opening of our sixth branch in December 2008. The following discussion will address each area of the income statement.

Net Interest Income

Net interest income was $17,510, an increase of $160 or .9% over 2007 as declining interest rates reduced our cost of funds more rapidly
than our interest income. This 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 income declined $1,776 or 5.9% ($1,651 or 5.5% on a tax equivalent
basis) in 2008 as compared to 2007 with interest rates decreasing throughout the year, ending with a total decline of 4.00% in the prime rate of interest at year end. Interest and fees earned on loans decreased $665 or 2.6% as these rates declined
over the period. As can be seen in the following reports, the average balances of loans increased by $34,413 or 10.6% while the average rate received on the portfolio declined to 7.08% from 8.04% one year earlier. The ratio of variable or adjustable
rate loans included in our loan portfolio was 74.4% at December 31, 2008, with the majority of these loans tied to changes in the prime rate of interest. Most loans have a spread to the prime rate of between 25 and 250 basis points but lag
actual market changes for up to two years. We expect to continue to see a decline in the average rates earned on the loan portfolio as the variable rate loans hit their repricing date and other loans mature and are replaced by loans at current
market rates.

Interest earned on taxable investment securities declined $1,213 or 37.3% in 2008 as compared to 2007. The average balance
of taxable investment securities, which declined $13,649 or 22.2%, contributed to a decrease of $720 of income. Declines in market interest rates contributed to the remainder of the decrease in taxable investment income since at the end of 2007 we
had 55.5% of debt securities invested in short-term commercial paper with maturities of less than 90 days as compared to 31.4% of the these securities at the end of 2008. We have historically used these investments to complement our liquidity needs
while receiving a better rate of interest as compared to other short-term investments. In light of credit quality issues that emerged during 2008 with many issuers of commercial paper, we decreased balances of these investments and increased
investment in short-term highly rated corporate bonds, longer term municipal securities and in U.S. government agency bonds. This strategy increased the average balance of tax exempt obligations of states and political subdivisions by $5,327 or
58.5% which accounted for $323 greater tax equivalent income in 2008 while slightly higher interest rates added $46 to this income category.



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DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS EQUITY;

INTEREST RATES AND INTEREST DIFFERENTIAL



|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|-------------------------------------------------------------------------------- |  | ------------------ | ------- | --------------- | - | ---------- |  | ------- |  | ------------------ |  | --------------- | ------- | ---------- | - | ------ |  | ------------------ |  | --------------- |  | ---------- | ------- |  | - | ------ |  | -------
|                                                                                 |  | 2008               |         |                 |   | 2007       |  |         |  | 2006              
|                                                                                 |  | 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)                                                               |  | $                  | 359,119 |                 | $ | 25,442     |  | 7.08%   |  |                    |  | $               | 324,706 |            | $ | 26,107 |  | 8.04%              |  |                 |  | $          | 291,823 |  | $ | 21,601 |  | 7.40%  
|Investment securities:                                                           |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|Taxable (5)                                                                      |  |                    | 47,955  |                 |   | 2,036      |  | 4.25%   |  |                    |  |                 | 61,604  |            |   | 3,249  |  | 5.27%              |  |                 |  |            | 51,525  |  |   | 2,491  |  | 4.83%  
|Exempt from federal income tax (2)                                               |  |                    | 14,432  |                 |   | 921        |  | 6.38%   |  |                    |  |                 | 9,105   |            |   | 552    |  | 6.06%              |  |                 |  |            | 5,444   |  |   | 338    |  | 6.20%  
|Interest-bearing deposits                                                        |  |                    | 911     |                 |   | 22         |  | 2.41%   |  |                    |  |                 | 605     |            |   | 30     |  | 4.96%              |  |                 |  |            | 962     |  |   | 48     |  | 4.99%  
|Federal funds sold                                                               |  |                    | 3,505   |                 |   | 67         |  | 1.91%   |  |                    |  |                 | 3,946   |            |   | 201    |  | 5.09%              |  |                 |  |            | 5,570   |  |   | 283    |  | 5.08%  
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|Total interest-earning assets/interest income                                    |  |                    | 425,922 |                 |   | 28,488     |  | 6.69%   |  |                    |  |                 | 399,966 |            |   | 30,139 |  | 7.54%              |  |                 |  |            | 355,324 |  |   | 24,761 |  | 6.97%  
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    | 
|Cash and due from banks                                                          |  |                    | 5,395   |                 |   |            |  |         |  |                    |  |                 | 5,577   |            |   |        |  |                    |  |                 |  |            | 5,824   |  |   |        |  |        
|Premises and equipment, net                                                      |  |                    | 8,127   |                 |   |            |  |         |  |                    |  |                 | 5,743   |            |   |        |  |                    |  |                 |  |            | 5,840   |  |   |        |  |        
|Other assets, less allowance for loan losses                                     |  |                    | 8,534   |                 |   |            |  |         |  |                    |  |                 | 7,802   |            |   |        |  |                    |  |                 |  |            | 5,269   |  |   |        |  |        
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|Total Assets                                                                     |  | $                  | 447,978 |                 |   |            |  |         |  |                    |  | $               | 419,088 |            |   |        |  |                    |  |                 |  | $          | 372,257 |  |   |        |  |        
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    | 
|LIABILITIES AND STOCKHOLDERS EQUITY                                             |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|Interest-bearing liabilities:                                                    |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|Savings                                                                          |  | $                  | 34,485  |                 | $ | 182        |  | .53%    |  |                    |  | $               | 33,176  |            | $ | 246    |  | .74%               |  |                 |  | $          | 36,795  |  | $ | 265    |  | .72%   
|Interest-bearing checking                                                        |  |                    | 86,305  |                 |   | 1,078      |  | 1.25%   |  |                    |  |                 | 80,333  |            |   | 1,828  |  | 2.28%              |  |                 |  |            | 69,728  |  |   | 1,215  |  | 1.74%  
|Time deposits                                                                    |  |                    | 208,481 |                 |   | 8,243      |  | 3.95%   |  |                    |  |                 | 200,886 |            |   | 9,403  |  | 4.68%              |  |                 |  |            | 166,680 |  |   | 6,967  |  | 4.18%  
|Short-term borrowings                                                            |  |                    | 15,626  |                 |   | 237        |  | 1.52%   |  |                    |  |                 | 13,538  |            |   | 349    |  | 2.58%              |  |                 |  |            | 15,734  |  |   | 371    |  | 2.36%  
|Other borrowed funds                                                             |  |                    | 19,283  |                 |   | 925        |  | 4.80%   |  |                    |  |                 | 16,410  |            |   | 775    |  | 4.72%              |  |                 |  |            | 15,119  |  |   | 660    |  | 4.37%  
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|Total interest-bearing liabilities/interest expense                              |  |                    | 364,180 |                 |   | 10,665     |  | 2.93%   |  |                    |  |                 | 344,343 |            |   | 12,601 |  | 3.66%              |  |                 |  |            | 304,056 |  |   | 9,478  |  | 3.12%  
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    | 
|Noninterest-bearing deposits                                                     |  |                    | 38,014  |                 |   |            |  |         |  |                    |  |                 | 33,530  |            |   |        |  |                    |  |                 |  |            | 32,242  |  |   |        |  |        
|Other liabilities                                                                |  |                    | 3,887   |                 |   |            |  |         |  |                    |  |                 | 3,526   |            |   |        |  |                    |  |                 |  |            | 2,712   |  |   |        |  |        
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|Total Liabilities                                                                |  |                    | 406,081 |                 |   |            |  |         |  |                    |  |                 | 381,399 |            |   |        |  |                    |  |                 |  |            | 339,010 |  |   |        |  |        
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    | 
|Stockholders Equity                                                             |  |                    | 41,897  |                 |   |            |  |         |  |                    |  |                 | 37,689  |            |   |        |  |                    |  |                 |  |            | 33,247  |  |   |        |  |        
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|Total Liabilities and Stockholders Equity                                       |  | $                  | 447,978 |                 |   |            |  |         |  |                    |  | $               | 419,088 |            |   |        |  |                    |  |                 |  | $          | 372,257 |  |   |        |  |        
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|Net interest income/interest spread                                              |  |                    |         |                 | $ | 17,823     |  | 3.76%   |  |                    |  |                 |         |            | $ | 17,538 |  | 3.88%              |  |                 |  |            |         |  | $ | 15,283 |  | 3.85%  
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    | 
|Margin Analysis:                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|Interest income/earning assets                                                   |  |                    |         |                 | $ | 28,488     |  | 6.69%   |  |                    |  |                 |         |            | $ | 30,139 |  | 7.54%              |  |                 |  |            |         |  | $ | 24,761 |  | 6.97%  
|Interest expense/earning assets                                                  |  |                    |         |                 |   | 10,665     |  | 2.50%   |  |                    |  |                 |         |            |   | 12,601 |  | 3.15%              |  |                 |  |            |         |  |   | 9,478  |  | 2.67%  
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    | 
|Net interest income/earning assets                                               |  |                    |         |                 | $ | 17,823     |  | 4.19%   |  |                    |  |                 |         |            | $ | 17,538 |  | 4.39%              |  |                 |  |            |         |  | $ | 15,283 |  | 4.30%  
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    |  |                 |         |            |   |        |  |                    |  |                 |  |            |         |  |   |        |  |        
|                                                                                 |  |                    |         |                 |   |            |  |         |  |                    | 
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                    |         |                 |   |            |  | 116.95% |  |                    |  |                 |         |            |   |        |  | 116.15%            |  |                 |  |            |         |  |   |        |  | 116.86%



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

|(2) | Income on tax-exempt assets is calculated 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.
|--- | ---------------------------------------------

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



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RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME



|                                   |  |                       |         |                       |        |               |  |           |       |        |   |       |  |   |       |  |   |      
|---------------------------------- |  | --------------------- | ------- | --------------------- | ------ | ------------- |  | --------- | ----- | ------ | - | ----- |  | - | ----- |  | - | -----
|                                   |  | 2008 Compared to 2007 |         | 2007 Compared to 2006
|                                   |  | TotalVariance         |         | Caused by             |        | TotalVariance |  | Caused by
|                                   |  |                       | Rate(1) |                       | Volume |               |  | Rate(1)   |       | Volume
|Interest income:                   |  |                       |         |                       |        |               |  |           |       |        |   |       |  |   |       |  |   |      
|Loans (gross)                      |  | $                     | (665)   |                       | $      | (3,432)       |  | $         | 2,767 |        | $ | 4,506 |  | $ | 2,072 |  | $ | 2,434
|Investment securities:             |  |                       |         |                       |        |               |  |           |       |        |   |       |  |   |       |  |   |      
|Taxable                            |  |                       | (1,213) |                       |        | (493)         |  |           | (720) |        |   | 758   |  |   | 271   |  |   | 487  
|Exempt from federal income tax(2)  |  |                       | 369     |                       |        | 46            |  |           | 323   |        |   | 214   |  |   | (13)  |  |   | 227  
|Interest-bearing deposits          |  |                       | (8)     |                       |        | (23)          |  |           | 15    |        |   | (18)  |  |   | -     |  |   | (18) 
|Federal funds sold                 |  |                       | (134)   |                       |        | (112)         |  |           | (22)  |        |   | (82)  |  |   | 1     |  |   | (83) 
|                                   |  |                       |         |                       |        |               |  |           |       |        |   |       |  |   |       |  |   |      
|Total interest-earning assets      |  |                       | (1,651) |                       |        | (4,014)       |  |           | 2,363 |        |   | 5,378 |  |   | 2,331 |  |   | 3,047
|                                   |  |                       |         |                       |        |               |  |           |       |        |   |       |  |   |       |  |   |      
|                                   |  |                       |         |                       |        |              
|Interest expense:                  |  |                       |         |                       |        |               |  |           |       |        |   |       |  |   |       |  |   |      
|Savings                            |  |                       | (64)    |                       |        | (74)          |  |           | 10    |        |   | (19)  |  |   | 7     |  |   | (26) 
|Interest-bearing checking          |  |                       | (750)   |                       |        | (886)         |  |           | 136   |        |   | 613   |  |   | 428   |  |   | 185  
|Time deposits                      |  |                       | (1,160) |                       |        | (1,516)       |  |           | 356   |        |   | 2,436 |  |   | 1,006 |  |   | 1,430
|Short-term borrowings              |  |                       | (112)   |                       |        | (166)         |  |           | 54    |        |   | (22)  |  |   | 30    |  |   | (52) 
|Other borrowings                   |  |                       | 150     |                       |        | 14            |  |           | 136   |        |   | 115   |  |   | 59    |  |   | 56   
|                                   |  |                       |         |                       |        |               |  |           |       |        |   |       |  |   |       |  |   |      
|Total interest-bearing liabilities |  |                       | (1,936) |                       |        | (2,628)       |  |           | 692   |        |   | 3,123 |  |   | 1,530 |  |   | 1,593
|                                   |  |                       |         |                       |        |               |  |           |       |        |   |       |  |   |       |  |   |      
|Net change in net interest income  |  | $                     | 285     |                       | $      | (1,386)       |  | $         | 1,671 |        | $ | 2,255 |  | $ | 801   |  | $ | 1,454
|                                   |  |                       |         |                       |        |               |  |           |       |        |   |       |  |   |       |  |   |      



|(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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Interest expense declined by $1,936 or 15.4% in 2008 as compared to 2007. Lower market interest rates
accounted for $2,628 of the decrease with greater balances offsetting that decline by $692, resulting in total interest expense of $10,665 in 2008. Although we were not able to mirror changes in market interest rates throughout the year, we have
decreased interest rates in every category by an average of 73 basis points. It was not possible to decrease the rates on lower costing liabilities in direct proportion to market rate declines because our rates were lower than the total rate of
decline. In this regard, we will continue to see tightening of interest rate spread because rates are at historical lows. Management has been diligent in trying to attract as many noninterest-bearing deposits as possible and is continuing with this
effort for 2009.

Provision for Loan Losses

The provision for loan losses declined $180 or 15.9% in 2008 as compared to 2007. Management calculates the appropriate balance for the allowance for loan losses to determine the annual provision expense. Many factors are considered in the
calculation of the appropriate level for the allowance including information collected from the loan review process, current economic indicators both on a local and national level and the historical rate of delinquency for our loan portfolio along
with other statistical and subjective information. In addition, the provision expense is affected by the amount of loans charged-off and recoveries of prior loan charge-offs the net amount of which was $926 in 2008. Included in this amount were
loans of $642 to one commercial borrower which were charged-off, thereby decreasing the necessary balance in the analysis. At the level of expense in both 2008 and 2007, we believe that the balance of allowance for loan losses was appropriate.



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Noninterest Income

Service charges on deposit accounts have historically been the largest contributor to noninterest income and continued to be in 2008. Fees generated from activities related to deposit accounts increased $55 or 3.4% in
2008 as compared to 2007. Fees charged in relation to overdrafts on checking accounts were $1,522 in 2008 compared to $1,467 in 2007. The fees charged for this privilege remained the same with greater use of this payment privilege in 2008 based on a
greater number of accounts eligible for the service. We also believe that more difficult economic conditions have caused greater use of this privilege.

It was necessary to book an adjustment for an other than temporary decline in market value of a security in December 2008 due to the announced merger price. This adjustment was $25 and was in addition to a
$3 loss incurred in the second quarter due to a merger.

Brokerage commissions increased $167 or 37.1% in 2008 as compared to 2007 with
this department continuing to attract new customers and gather greater dollars under management. Declines in the market values of customers equity positions will negatively affect the earnings of this department as long as this economic
climate continues. We believe that general economic conditions will also cause current and potential future clients to suspend investing. With this said, we expect a challenge in 2009 to meet the revenue level of 2008.

Noninterest Expense

Salaries and employee benefits
increased $434 or 7.3% in 2008 as compared to 2007. The largest part of this increase was related to wages which increased $441 or 11.2%. Normal wage increases along with hiring additional staff during the year for the Lake Region branch which
opened in December 2008 were the main reasons for the increase. We hired management staff in the first quarter of 2008 in order to assure that they would learn our policies and procedures along with our corporate culture before opening the branch.
As the year progressed we hired the remaining staff, training these employees and utilizing them to fill vacancies on a part-time basis until their permanent jobs became available. Offsetting these increases, payroll incentives declined $106 or
21.0% in 2008 as compared to 2007. These incentives are based on predetermined goals that begin with return on equity. Several of the goals were not met in 2008, thereby lowering incentives paid to employees. Employee benefits increased $84 or 9.6%
due to higher costs of medical insurance along with a greater number of employees who were eligible for benefits. In 2007 the Board of Directors granted a 6% profit sharing contribution due to the high level of performance in that year. Due to the
performance level in 2008 they awarded 4% as had been the norm before 2006. This decrease accounted for $67 or 18.2% lower 401(k) expense in 2008 as compared to 2007. Due to adoption of Emerging Issues Task Force Issue 06-04 (EITF
06-04), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, as of January 1, 2008 we recorded $60 of expense in 2008 that was unmatched in 2007.
Smaller changes on other payroll expenses accounted for the remaining difference in 2008 as compared to 2007.

Occupancy expense increased
$75 or 9.4% in 2008 as compared to 2007 which is attributable to general price increases in all expense categories mainly in building maintenance expenses which increased $46 or 29.1% more than the year before. At the end of 2007 we hired a new
cleaning service for three of our locations and paid more for their services to enhance the services received. This change accounted for $21 of this increase along with experiencing $14 more in relation to additional snow plowing required in 2008.
Increases in the cost of utilities, real estate taxes and higher depreciation on improvements made in 2007 and 2008 accounted for the remaining increase.

Professional fees were $65 or 12.5% greater in 2008 than in 2007 due to use of an outside consultant hired to assist us to review processes and search for efficiencies along with converting to using outside vendors to
process payroll and deliver deposit account monthly statements.



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Other expense increased $463 or 23.3% from 2007 to 2008. This category encompasses all remaining
expenses associated with the operation of a financial services company. FDIC insurance coverage expense increased $186 or 425.4% greater in 2008 than in 2007. The FDIC fees increased because the FDIC reinstated risk-based assessment rates in 2007
for which we were allowed to utilize a one-time credit in 2007 against the assessment. We had no remaining credit available in 2008 and therefore paid the entire assessment. FDIC insurance premiums are scheduled to increase substantially during
2009, in addition to a special assessment equal to 20 basis points of deposits at June 30, 2009 which we estimate will be approximately $800. Donations were $122 or 112.0% greater in 2008 than in 2007 mainly due to donations of $103 in
conjunction with the Pennsylvania Educational Assistance Tax Credit Program for which we were not approved in 2007. The Bank receives a credit of 90% of the amounts donated under this program which is applied against the Pennsylvania tax liability.
Expenses in relation to the operation of our ATM network increased $51 or 24.0% due to conversion to a new processor late in 2007 that offers additional capabilities. Also, we issued additional debit cards to new customers during the year; the fees
associated with those cards are included in our ATM expense. Telephone costs increased $46 or 28.8% in 2008 as compared to 2007 due to conversion to a higher speed transmission service that combines the telephone system with computer communications
to our branches. We also added new lines to the Lake Region branch in the fourth quarter of 2008. The remaining increase was due to smaller changes in various other accounts, none of which are material alone.

Income Taxes

Income taxes decreased $251 or 8.4%
primarily due to the income before income taxes being $462 or 4.8% less in 2008 than in 2007. Investments during 2008 in tax-exempt municipal bonds and loans along with earnings on bank-owned life insurance augmented this decline by changing the
effective tax rate to 30.1% from 31.2% in 2007.

2007 Compared to 2006

Net income for the year ended December 31, 2007 was $6,612, representing an increase of $1,027 or 18.4% over income earned in 2006. The majority of the increase in net income is attributable
to greater net interest income for the year with efficiencies in other cost categories contributing to the growth.

Net Interest Income

Net interest income is the amount that interest earned on assets exceeds interest paid on deposits and borrowings. In 2007, this amount was
$17,350, an increase of $2,182 or 14.4% more than was realized in 2006. 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 on loans
increased $4,506 or 20.9% over the previous year, attributable to greater volume combined with higher interest rates earned during 2007 as compared to 2006. During 2007 the average loan portfolio increased by $32,883 or 11.3% while the average
interest rate received on the portfolio increased .64% from 7.40% to 8.04%. With 73% of the loan portfolio invested in variable or adjustable rate loans, the Company, through its bank subsidiary, recognized greater income when these loans, primarily
commercial real estate loans, repriced even though the prime interest rate declined by 1.0% in the second half of 2007. These commercial real estate loans have been written with the rate of interest fixed for two to three years, generally converting
to an annually adjusted rate that is tied to the prime interest rate for the remainder of the loan term. Many of these loans reached the conversion to adjustable rate during 2007, thereby increasing the rates received because the prime interest rate
has increased since the loans were granted over the past three years.

Interest earned on taxable investment securities increased $758 or
30.4% from 2006 to 2007. The average balance of the portfolio increased by $10,079 or 19.6%, contributing $487 of the earnings increase and the interest rate earned on the portfolio increased by .44% to a yield of 5.27% in 2007. Management has
primarily invested funds from bonds matured and called in short-term commercial paper rather than extend maturities over the past few years. Short-term investments offer the ability to reinvest in longer term securities when the interest rate yield
curve becomes more traditional, while earning a similar or higher rate of interest to those investments during 2007. We believe that our primary source of interest income will continue to be generated from loans and have made investments in
securities that will support this philosophy by maintaining liquidity.



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We extended some maturities by making a net investment of $5,107 in longer term municipal bonds
during 2007, diversifying our holdings, which resulted in an increase of $141 or 63.2% over the previous year in income earned.

Interest
expense increased $3,123 or 32.9% in 2007 as compared to 2006 with the primary increase in interest expense on deposits, amounting to an increase of $3,030 or 35.9%. In addition to acquiring more deposits from new customers, we believe that many
customers have reallocated their deposits into higher interest paying products in order to gain greater interest income as they become better investors. Interest paid on time deposits, primarily certificates of deposit, represented the greatest
increase in interest expense for 2007, with $9,403 paid during the year, an increase of $2,436 or 35.0% more than was paid in 2006. This increase in interest paid was primarily attributable to more time deposits, amounting to $1,430 of the increase
while an increase of .50% paid on average during the year accounted for $1,006 of the larger expense. Local competition for these deposits continued to be very aggressive during all of 2007. In order to maintain and build customer relationships our
staff was given the opportunity to cross sell other products to customers on visits to the branches while opening these higher interest rate certificates of deposit. Interest paid on checking accounts was the next largest interest expense category
with an increase of $613 or 50.5% in 2007 as compared to 2006. Interest paid on money market deposits accounted for the majority of this increase. In the first quarter of 2006 we added an additional, higher interest rate tier to the product in order
to compete with other money market providers. This strategy was successful with an average increase of $11,047 or 37.3% in money market accounts during 2007.

Provision for Loan Losses

The provision for loan losses increased $345 or 43.9% from 2006 to 2007. Management calculates
the appropriate balance for the allowance for loan losses and uses that calculation to determine the annual provision expense. During 2007 the loan portfolio grew by $39,467 or 12.9% while the allowance for loan losses increased $923 or 20.7%. Many
factors are considered in the calculation of the appropriate level for the allowance including information collected from the loan review process, current economic indicators both on a local and national level and the rate of delinquency for our
loan portfolio along with other statistical and subjective information. In addition, the provision expense is affected by the amount of loans charged-off and recoveries of prior loan charge-offs the net amount of which was $207 in 2007. After
careful analysis of all factors, management determined that the appropriate balance for the allowance for loan losses and funded the difference in the allowance account through provision expense.

Noninterest Income

Noninterest income increased $361
or 11.4% in 2007 as compared to 2006. Service charges on deposit accounts increased $112, or 7.5% over the previous year. The main source of service charge income is derived from charges associated with our overdraft protection product which pays
overdrafts on checking accounts up to predetermined amounts when needed. The fee per use of this product has remained constant for the past two years, but more customers used the service in 2007 than in previous years.

Gains on mortgage loans held for sale declined in 2007 with the number of mortgages sold in the secondary market remaining flat however, we recognized
less gain on each sale than in previous years.

Earnings on bank-owned life insurance increased by $125 or 54.3% in 2007 as compared to
2006. This increase resulted from the purchase of $2,000 additional life insurance in 2007 and $442 in 2006 combined with a slight increase in the average interest rate earned on the policies.

Other income encompasses many other smaller sources of revenue that are not related to interest income and accounted for $951 in 2007, an increase of $178 or 23.0% more than in 2006. The largest
of these income sources was an increase of $80 in relation to fees earned on our debit card portfolio which has grown to over six thousand cards issued and outstanding at December 31, 2007. We have no fees for use of the card and have granted
incentives to our staff for cross selling this product. Income relating to merchant card processing grew by $48 or 45.2% with a concerted effort to better manage the program in 2007. No other category of noninterest income showed material changes
from the year before.



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Noninterest Expense

Expenses incurred in relation to salaries and employee benefits increased $690 or 13.1% from 2006 to 2007. There are many components of this expense category; the largest items are discussed here with smaller changes
of other components comprising the remainder. Salaries and wages increased $329 or 8.9% as a result of the net effect of adding six additional full-time equivalent employees and granting annual salary adjustments to existing employees during the
year. In addition, employees are paid an incentive based upon goals that are set at the beginning of each year, contingent on reaching a predetermined goal for return on average equity. These goals were once again attained or surpassed; therefore,
the employees were paid incentives for the year 2007 of $504 which was 28.6% greater than in 2006. Employee benefits increased $63 or 7.7% due mainly to greater payroll taxes which are based on higher payroll expense along with increased cost
associated with health insurance due to more employees becoming eligible and a slight increase in the cost per employee. Contributions to the Banks 401(k) retirement plan were $83 or 29.1% greater mainly due to the Board of Directors granting
an extra 1% toward the discretionary profit sharing segment for 2007 due to the Companys favorable return this year along with having more employees eligible for the benefit in 2007.

Income Taxes

Income tax expense increased $384 or
14.7% from 2006 to 2007. The increase primarily reflects higher earnings in 2007. The Companys effective tax rate for 2007 was 31.2% in 2007 compared to 31.9% in 2006. The Companys effective tax rate differs from statutory rate primarily
due to tax exempt income from its municipal bonds and bank-owned life insurance investments.

MARKET PRICES OF STOCK/DIVIDENDS DECLARED

The Companys stock is quoted on the OTC Bulletin Board under the symbol DIMC. The book value per share at December 31, 2008 was
$28.53, representing an increase of 8.8% over the 2007 book value of $26.23. There were approximately 748 shareholders of record at December 31, 2008. 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 and dividends
declared for the calendar quarters indicated, based upon information obtained from published sources:

MARKET PRICES OF STOCK / DIVIDENDS
DECLARED



|               |  |      |       |      |   |                  |  |      |     |     |   |                  |  |   |       |  |   |    
|-------------- |  | ---- | ----- | ---- | - | ---------------- |  | ---- | --- | --- | - | ---------------- |  | - | ----- |  | - | ---
|               |  | 2008 |       | 2007
|               |  | High |       | Low  |   | DividendDeclared |  | High |     | Low |   | DividendDeclared
|First Quarter  |  | $    | 48.00 |      | $ | 43.00            |  | $    | .32 |     | $ | 43.50            |  | $ | 40.60 |  | $ | .29
|Second Quarter |  | $    | 48.75 |      | $ | 42.21            |  | $    | .32 |     | $ | 49.00            |  | $ | 43.00 |  | $ | .29
|Third Quarter  |  | $    | 46.50 |      | $ | 40.05            |  | $    | .32 |     | $ | 49.50            |  | $ | 47.60 |  | $ | .29
|Fourth Quarter |  | $    | 43.00 |      | $ | 38.00            |  | $    | .36 |     | $ | 48.50            |  | $ | 46.26 |  | $ | .32

The ability of the Company to pay dividends is dependent upon the ability of the Bank to pay
dividends to the Company. The Bank is a depository institution insured by the FDIC and therefore 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



|                                                    |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|--------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                    |  | 2008 |           | 2007 |   | 2006      |  | 2005 |           | 2004
|Summary of operations                               |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|Interest income                                     |  | $    | 28,175    |      | $ | 29,951    |  | $    | 24,646    |      | $ | 19,202    |  | $ | 15,808   
|Interest expense                                    |  | $    | 10,665    |      | $ | 12,601    |  | $    | 9,478     |      | $ | 6,118     |  | $ | 4,412    
|Net interest income                                 |  | $    | 17,510    |      | $ | 17,350    |  | $    | 15,168    |      | $ | 13,084    |  | $ | 11,396   
|Provision for loan losses                           |  | $    | 950       |      | $ | 1,130     |  | $    | 785       |      | $ | 850       |  | $ | 1,126    
|Net interest income after provision for loan losses |  | $    | 16,560    |      | $ | 16,220    |  | $    | 14,383    |      | $ | 12,234    |  | $ | 10,270   
|Other income                                        |  | $    | 3,764     |      | $ | 3,517     |  | $    | 3,156     |      | $ | 2,801     |  | $ | 2,933    
|Other expenses                                      |  | $    | 11,177    |      | $ | 10,128    |  | $    | 9,341     |      | $ | 8,498     |  | $ | 7,525    
|Income before income taxes                          |  | $    | 9,147     |      | $ | 9,609     |  | $    | 8,198     |      | $ | 6,537     |  | $ | 5,678    
|Income taxes                                        |  | $    | 2,746     |      | $ | 2,997     |  | $    | 2,613     |      | $ | 2,082     |  | $ | 1,772    
|                                                    |  |      |           |      |  
|Net income                                          |  | $    | 6,401     |      | $ | 6,612     |  | $    | 5,585     |      | $ | 4,455     |  | $ | 3,906    
|                                                    |  |      |           |      |  
|Per common share                                    |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|Earnings - basic                                    |  | $    | 4.17      |      | $ | 4.34      |  | $    | 3.67      |      | $ | 2.89      |  | $ | 2.54     
|Earnings - diluted                                  |  | $    | 4.05      |      | $ | 4.18      |  | $    | 3.55      |      | $ | 2.80      |  | $ | 2.46     
|Cash dividends                                      |  | $    | 1.32      |      | $ | 1.19      |  | $    | 1.07      |      | $ | 1.01      |  | $ | .94      
|Book value                                          |  | $    | 28.53     |      | $ | 26.23     |  | $    | 23.17     |      | $ | 20.53     |  | $ | 19.17    
|Shares outstanding at year end                      |  |      | 1,558,728 |      |   | 1,522,200 |  |      | 1,525,024 |      |   | 1,522,669 |  |   | 1,548,994
|                                                    |  |      |           |      |  
|Balance sheet data - end of year                    |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|Total assets                                        |  | $    | 472,478   |      | $ | 434,322   |  | $    | 403,577   |      | $ | 358,204   |  | $ | 325,721  
|Loans, net of unearned                              |  | $    | 380,207   |      | $ | 344,758   |  | $    | 305,291   |      | $ | 283,562   |  | $ | 253,141  
|Loans held for sale                                 |  | $    | -         |      | $ | -         |  | $    | -         |      | $ | 211       |  | $ | 112      
|Investment securities:                              |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|Available for sale                                  |  | $    | 65,600    |      | $ | 66,739    |  | $    | 67,266    |      | $ | 54,129    |  | $ | 55,662   
|Held to maturity                                    |  | $    | -         |      | $ | -         |  | $    | -         |      | $ | 199       |  | $ | 198      
|Deposits                                            |  | $    | 381,989   |      | $ | 364,600   |  | $    | 338,117   |      | $ | 294,856   |  | $ | 270,542  
|Stockholders equity                                |  | $    | 44,468    |      | $ | 39,923    |  | $    | 35,337    |      | $ | 31,260    |  | $ | 29,696   
|                                                    |  |      |           |      |  
|Performance                                         |  |      |           |      |   |           |  |      |           |      |   |           |  |   |          
|Return on average assets                            |  |      | 1.43%     |      |   | 1.58%     |  |      | 1.50%     |      |   | 1.30%     |  |   | 1.26%    
|Return on average equity                            |  |      | 15.28%    |      |   | 17.54%    |  |      | 16.80%    |      |   | 14.53%    |  |   | 13.72%   
|Dividend payout ratio                               |  |      | 31.65%    |      |   | 27.42%    |  |      | 29.16%    |      |   | 34.95%    |  |   | 37.01%   
|Average equity to average assets ratio              |  |      | 9.35%     |      |   | 8.99%     |  |      | 8.93%     |      |   | 8.92%     |  |   | 9.15%    



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MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency (as defined in Public Company
Accounting Oversight Board Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.

Management assessed the
effectiveness of the Companys internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of December 31, 2008, the Companys internal control over financial reporting was effective.

This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.

/s/ Gary C. Beilman

By: Gary C. Beilman

President and Chief Executive Officer

(Principal Executive Officer)

Date: March 9, 2009

/s/ Maureen H. Beilman

By: Maureen H. Beilman

Chief
Financial Officer

(Principal Financial & Accounting Officer)

Date: March 9, 2009



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LOGO

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, 2008 and 2007,
and the related consolidated statements of income, changes in stockholders equity, and cash flows for each of the three years in the period ended December 31, 2008. 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 audits.

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, 2008 and 2007, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2008, the Company adopted Emerging Issues Task Force No. 06-4, Accounting for Deferred Compensation and
Post-retirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements. Also, as discussed in Note 15 to the consolidated financial statements, effective January 1, 2008, the Company adopted Statement of Financial
Accounting Standards No. 157, Fair Value Measurements.

We were not engaged to examine managements assertion about the
effectiveness of the Companys internal control over financial reporting as of December 31, 2008, included in the accompanying Managements Report on Internal Control over Financial Reporting and, accordingly, we do not express an
opinion thereon.

/s/ S.R. Snodgrass, A.C.

Wexford, Pennsylvania

March 9, 2009

S.R. Snodgrass, A.C. 2100 Corporate Drive, Suite 400 Wexford, PA 15090-7647 Phone: 724-934-0344 Facsimile: 724-934-0345



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CONSOLIDATED BALANCE SHEET



|                                                                                                 |  |              |         |      |   |        
|------------------------------------------------------------------------------------------------ |  | ------------ | ------- | ---- | - | -------
|                                                                                                 |  | December 31,
|(In thousands)                                                                                   |  | 2008         |         | 2007
|Assets                                                                                           |  |              |         |      |   |        
|Cash and due from banks                                                                          |  | $            | 3,625   |      | $ | 6,878  
|Interest-bearing deposits in other banks                                                         |  |              | 368     |      |   | 39     
|Federal funds sold                                                                               |  |              | -       |      |   | 895    
|                                                                                                 |  |              |         |      |   |        
|Total cash and cash equivalents                                                                  |  |              | 3,993   |      |   | 7,812  
|                                                                                                 |  |             
|Investment securities available for sale                                                         |  |              | 65,600  |      |   | 66,739 
|                                                                                                 |  |             
|Loans (net of unearned income of $272 and $604)                                                  |  |              | 380,207 |      |   | 344,758
|Less allowance for loan losses                                                                   |  |              | 5,416   |      |   | 5,392  
|                                                                                                 |  |              |         |      |   |        
|Net loans                                                                                        |  |              | 374,791 |      |   | 339,366
|                                                                                                 |  |             
|Premises and equipment                                                                           |  |              | 10,880  |      |   | 6,387  
|Accrued interest receivable                                                                      |  |              | 2,050   |      |   | 1,966  
|Bank-owned life insurance                                                                        |  |              | 8,535   |      |   | 8,208  
|Other real estate owned                                                                          |  |              | 1,955   |      |   | -      
|Other assets                                                                                     |  |              | 4,674   |      |   | 3,844  
|                                                                                                 |  |              |         |      |   |        
|                                                                                                 |  |             
|TOTAL ASSETS                                                                                     |  | $            | 472,478 |      | $ | 434,322
|                                                                                                 |  |              |         |      |   |        
|                                                                                                 |  |             
|Liabilities                                                                                      |  |              |         |      |   |        
|Deposits:                                                                                        |  |              |         |      |   |        
|Noninterest-bearing                                                                              |  | $            | 37,626  |      | $ | 34,763 
|Interest-bearing                                                                                 |  |              | 344,363 |      |   | 329,837
|                                                                                                 |  |              |         |      |   |        
|Total deposits                                                                                   |  |              | 381,989 |      |   | 364,600
|                                                                                                 |  |             
|Short-term borrowings                                                                            |  |              | 16,671  |      |   | 8,210  
|Other borrowed funds                                                                             |  |              | 24,298  |      |   | 17,661 
|Accrued interest payable                                                                         |  |              | 1,158   |      |   | 1,691  
|Other liabilities                                                                                |  |              | 3,894   |      |   | 2,237  
|                                                                                                 |  |              |         |      |   |        
|                                                                                                 |  |             
|TOTAL LIABILITIES                                                                                |  |              | 428,010 |      |   | 394,399
|                                                                                                 |  |              |         |      |   |        
|                                                                                                 |  |             
|Stockholders Equity                                                                             |  |              |         |      |   |        
|Common stock, $.50 par value; 5,000,000 shares authorized; 1,611,828 and 1,575,300 shares issued |  |              | 806     |      |   | 788    
|Capital surplus                                                                                  |  |              | 5,516   |      |   | 4,978  
|Retained earnings                                                                                |  |              | 40,160  |      |   | 36,152 
|Accumulated other comprehensive income                                                           |  |              | 18      |      |   | 37     
|Treasury stock, at cost (53,100 shares)                                                          |  |              | (2,032) |      |   | (2,032)
|                                                                                                 |  |              |         |      |   |        
|                                                                                                 |  |             
|TOTAL STOCKHOLDERS EQUITY                                                                       |  |              | 44,468  |      |   | 39,923 
|                                                                                                 |  |              |         |      |   |        
|                                                                                                 |  |             
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                       |  | $            | 472,478 |      | $ | 434,322
|                                                                                                 |  |              |         |      |   |        

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



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CONSOLIDATED STATEMENT OF INCOME



|                                                    |  |                         |        |      |   |        |  |   |       
|--------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                                    |  | Year Ended December 31,
|(In thousands, except per share data)               |  | 2008                    |        | 2007 |   | 2006  
|                                                    |  |                         |       
|Interest Income                                     |  |                         |        |      |   |        |  |   |       
|Interest and fees on loans                          |  | $                       | 25,442 |      | $ | 26,107 |  | $ | 21,601
|Interest-bearing deposits in other banks            |  |                         | 22     |      |   | 30     |  |   | 48    
|Federal funds sold                                  |  |                         | 67     |      |   | 201    |  |   | 283   
|Investment securities:                              |  |                         |        |      |   |        |  |   |       
|Taxable                                             |  |                         | 2,036  |      |   | 3,249  |  |   | 2,491 
|Exempt from federal income tax                      |  |                         | 608    |      |   | 364    |  |   | 223   
|                                                    |  |                         |        |      |   |        |  |   |       
|Total interest income                               |  |                         | 28,175 |      |   | 29,951 |  |   | 24,646
|                                                    |  |                         |        |      |   |        |  |   |       
|                                                    |  |                         |       
|Interest Expense                                    |  |                         |        |      |   |        |  |   |       
|Deposits                                            |  |                         | 9,503  |      |   | 11,477 |  |   | 8,447 
|Short-term borrowings                               |  |                         | 237    |      |   | 349    |  |   | 371   
|Other borrowed funds                                |  |                         | 925    |      |   | 775    |  |   | 660   
|                                                    |  |                         |        |      |   |        |  |   |       
|Total interest expense                              |  |                         | 10,665 |      |   | 12,601 |  |   | 9,478 
|                                                    |  |                         |        |      |   |        |  |   |       
|                                                    |  |                         |       
|Net Interest Income                                 |  |                         | 17,510 |      |   | 17,350 |  |   | 15,168
|                                                    |  |                         |       
|Provision for loan losses                           |  |                         | 950    |      |   | 1,130  |  |   | 785   
|                                                    |  |                         |        |      |   |        |  |   |       
|                                                    |  |                         |       
|Net Interest Income After Provision for Loan Losses |  |                         | 16,560 |      |   | 16,220 |  |   | 14,383
|                                                    |  |                         |        |      |   |        |  |   |       
|                                                    |  |                         |       
|Noninterest Income                                  |  |                         |        |      |   |        |  |   |       
|Service charges on deposit accounts                 |  |                         | 1,662  |      |   | 1,607  |  |   | 1,495 
|Mortgage loans held-for-sale gains, net             |  |                         | 153    |      |   | 154    |  |   | 182   
|Investment securities losses                        |  |                         | (28)   |      |   | -      |  |   | -     
|Brokerage commissions                               |  |                         | 617    |      |   | 450    |  |   | 476   
|Earnings on bank-owned life insurance               |  |                         | 385    |      |   | 355    |  |   | 230   
|Other income                                        |  |                         | 975    |      |   | 951    |  |   | 773   
|                                                    |  |                         |        |      |   |        |  |   |       
|Total noninterest income                            |  |                         | 3,764  |      |   | 3,517  |  |   | 3,156 
|                                                    |  |                         |        |      |   |        |  |   |       
|                                                    |  |                         |       
|Noninterest Expense                                 |  |                         |        |      |   |        |  |   |       
|Salaries and employee benefits                      |  |                         | 6,396  |      |   | 5,962  |  |   | 5,272 
|Occupancy expense, net                              |  |                         | 871    |      |   | 796    |  |   | 786   
|Furniture and equipment expense                     |  |                         | 520    |      |   | 525    |  |   | 512   
|Professional fees                                   |  |                         | 584    |      |   | 519    |  |   | 496   
|Data processing expense                             |  |                         | 359    |      |   | 342    |  |   | 391   
|Other expense                                       |  |                         | 2,447  |      |   | 1,984  |  |   | 1,884 
|                                                    |  |                         |        |      |   |        |  |   |       
|Total noninterest expense                           |  |                         | 11,177 |      |   | 10,128 |  |   | 9,341 
|                                                    |  |                         |        |      |   |        |  |   |       
|                                                    |  |                         |       
|Income before income taxes                          |  |                         | 9,147  |      |   | 9,609  |  |   | 8,198 
|Income taxes                                        |  |                         | 2,746  |      |   | 2,997  |  |   | 2,613 
|                                                    |  |                         |        |      |   |        |  |   |       
|                                                    |  |                         |       
|NET INCOME                                          |  | $                       | 6,401  |      | $ | 6,612  |  | $ | 5,585 
|                                                    |  |                         |        |      |   |        |  |   |       
|                                                    |  |                         |       
|Earnings Per Share:                                 |  |                         |        |      |   |        |  |   |       
|Basic                                               |  | $                       | 4.17   |      | $ | 4.34   |  | $ | 3.67  
|Diluted                                             |  | $                       | 4.05   |      | $ | 4.18   |  | $ | 3.55  

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



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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY



|                                                                                       |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|-------------------------------------------------------------------------------------- |  | ----------- | --- | --------------- | - | ----------------- |  | ------------------------------------------ | ------- | ------------- | - | ------------------------ |  | ------------------- | ------- |  | - | ------- |  | - | -----
|(In thousands, except per share data)                                                  |  | CommonStock |     | Capital Surplus |   | Retained Earnings |  | AccumulatedOtherComprehensiveIncome (Loss) |         | TreasuryStock |   | TotalStockholdersEquity |  | ComprehensiveIncome
|Balance, December 31, 2005                                                             |  | $           | 776 |                 | $ | 4,445             |  | $                                          | 27,400  |               | $ | (299)                    |  | $                   | (1,062) |  | $ | 31,260  |  | $ |      
|                                                                                       |  |             |     |                 |   |                   | 
|Net income                                                                             |  |             |     |                 |   |                   |  |                                            | 5,585   |               |   |                          |  |                     |         |  |   | 5,585   |  | $ | 5,585
|Other comprehensive income:                                                            |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|Unrealized gain on available-for-sale securities, net of tax expense of $135           |  |             |     |                 |   |                   |  |                                            |         |               |   | 264                      |  |                     |         |  |   | 264     |  |   | 264  
|                                                                                       |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|Comprehensive income                                                                   |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  | $ | 5,849
|                                                                                       |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|Purchase of treasury stock (13,000 shares)                                             |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     | (480)   |  |   | (480)   |  |   |      
|Exercise of stock options (15,355 shares)                                              |  |             | 8   |                 |   | 330               |  |                                            |         |               |   |                          |  |                     |         |  |   | 338     |  |   |      
|Cash dividends ($1.07 per share)                                                       |  |             |     |                 |   |                   |  |                                            | (1,630) |               |   |                          |  |                     |         |  |   | (1,630) |  |   |      
|                                                                                       |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|Balance, December 31, 2006                                                             |  |             | 784 |                 |   | 4,775             |  |                                            | 31,355  |               |   | (35)                     |  |                     | (1,542) |  |   | 35,337  |  |   |      
|                                                                                       |  |             |     |                 |   |                   | 
|Net income                                                                             |  |             |     |                 |   |                   |  |                                            | 6,612   |               |   |                          |  |                     |         |  |   | 6,612   |  | $ | 6,612
|Other comprehensive income:                                                            |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|Unrealized gain on available-for-sale securities, net of tax expense of $38            |  |             |     |                 |   |                   |  |                                            |         |               |   | 72                       |  |                     |         |  |   | 72      |  |   | 72   
|                                                                                       |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|Comprehensive income                                                                   |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   | 6,684
|                                                                                       |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|Purchase of treasury stock (10,100 shares)                                             |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     | (490)   |  |   | (490)   |  | $ |      
|Exercise of stock options (7,276 shares)                                               |  |             | 4   |                 |   | 203               |  |                                            |         |               |   |                          |  |                     |         |  |   | 207     |  |   |      
|Cash dividends ($1.19 per share)                                                       |  |             |     |                 |   |                   |  |                                            | (1,815) |               |   |                          |  |                     |         |  |   | (1,815) |  |   |      
|                                                                                       |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|Balance, December 31, 2007                                                             |  |             | 788 |                 |   | 4,978             |  |                                            | 36,152  |               |   | 37                       |  |                     | (2,032) |  |   | 39,923  |  |   |      
|                                                                                       |  |             |     |                 |   |                   | 
|Net income                                                                             |  |             |     |                 |   |                   |  |                                            | 6,401   |               |   |                          |  |                     |         |  |   | 6,401   |  |   | 6,401
|Other comprehensive income:                                                            |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|Unrealized loss on available-for-sale securities, net of tax benefit of $10            |  |             |     |                 |   |                   |  |                                            |         |               |   | (19)                     |  |                     |         |  |   | (19)    |  |   | (19) 
|                                                                                       |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|Comprehensive income                                                                   |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  | $ | 6,382
|                                                                                       |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|Exercise of stock options (36,528 shares)                                              |  |             | 18  |                 |   | 538               |  |                                            |         |               |   |                          |  |                     |         |  |   | 556     |  |   |      
|Cumulative effect of change in accounting for split dollar life insurance arrangements |  |             |     |                 |   |                   |  |                                            | (358)   |               |   |                          |  |                     |         |  |   | (358)   |  |   |      
|Cash dividends ($1.32 per share)                                                       |  |             |     |                 |   |                   |  |                                            | (2,035) |               |   |                          |  |                     |         |  |   | (2,035) |  |   |      
|                                                                                       |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      
|                                                                                       |  |             |     |                 |   |                   | 
|Balance, December 31, 2008                                                             |  | $           | 806 |                 | $ | 5,516             |  | $                                          | 40,160  |               | $ | 18                       |  | $                   | (2,032) |  | $ | 44,468  |  |   |      
|                                                                                       |  |             |     |                 |   |                   |  |                                            |         |               |   |                          |  |                     |         |  |   |         |  |   |      



|                                                                                 |  |      |     |   |      |   |      |  |   |    
|-------------------------------------------------------------------------------- |  | ---- | --- | - | ---- | - | ---- |  | - | ---
|                                                                                 |  |      |    
|                                                                                 |  | 2008 |     |   | 2007 |   | 2006
|Components of other comprehensive income (loss):                                 |  |      |     |   |      |   |      |  |   |    
|Change in net unrealized gain (loss) on investment securities available for sale |  | $    | (37 | ) |      | $ | 72   |  | $ | 264
|Realized loss included in net income, net of tax benefit of $10                  |  |      | 18  |   |      |   | -    |  |   | -  
|                                                                                 |  |      |     |   |      |   |      |  |   |    
|Total                                                                            |  | $    | (19 | ) |      | $ | 72   |  | $ | 264
|                                                                                 |  |      |     |   |      |   |      |  |   |    

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



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CONSOLIDATED STATEMENT OF CASH FLOWS



|                                                                                  |  |                         |           |      |   |           |  |   |          
|--------------------------------------------------------------------------------- |  | ----------------------- | --------- | ---- | - | --------- |  | - | ---------
|                                                                                  |  | Year Ended December 31,
|(In thousands)                                                                    |  | 2008                    |           | 2007 |   | 2006     
|Operating Activities                                                              |  |                         |           |      |   |           |  |   |          
|Net income                                                                        |  | $                       | 6,401     |      | $ | 6,612     |  | $ | 5,585    
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |           |      |   |           |  |   |          
|Provision for loan losses                                                         |  |                         | 950       |      |   | 1130      |  |   | 785      
|Depreciation and amortization                                                     |  |                         | 726       |      |   | 705       |  |   | 743      
|Amortization of premium and discount on investment securities, net                |  |                         | (975)     |      |   | (2,146)   |  |   | (1,235)  
|Amortization of net deferred loan origination fees                                |  |                         | (144)     |      |   | (169)     |  |   | (133)    
|Investment securities loss                                                        |  |                         | 28        |      |   | -         |  |   | -        
|Origination of loans held for sale                                                |  |                         | (8,059)   |      |   | (8,028)   |  |   | (6,917)  
|Proceeds from sale of loans                                                       |  |                         | 8,212     |      |   | 8,182     |  |   | 7,310    
|Mortgage loans sold gains, net                                                    |  |                         | (153)     |      |   | (154)     |  |   | (182)    
|Increase in accrued interest receivable                                           |  |                         | (84)      |      |   | (168)     |  |   | (418)    
|Increase (decrease) in accrued interest payable                                   |  |                         | (533)     |      |   | 263       |  |   | 476      
|Deferred federal income taxes                                                     |  |                         | 4         |      |   | (414)     |  |   | (235)    
|Earnings on bank-owned life insurance                                             |  |                         | (385)     |      |   | (355)     |  |   | (230)    
|Other, net                                                                        |  |                         | 796       |      |   | (274)     |  |   | 295      
|                                                                                  |  |                         |           |      |   |           |  |   |          
|Net cash provided by operating activities                                         |  |                         | 6,784     |      |   | 5,184     |  |   | 5,844    
|                                                                                  |  |                         |           |      |   |           |  |   |          
|                                                                                  |  |                         |          
|Investing Activities                                                              |  |                         |           |      |   |           |  |   |          
|Investment securities available for sale:                                         |  |                         |           |      |   |           |  |   |          
|Proceeds from merger                                                              |  |                         | 2         |      |   | -         |  |   | -        
|Proceeds from maturities or paydown                                               |  |                         | 286,897   |      |   | 295,220   |  |   | 252,970  
|Purchases                                                                         |  |                         | (284,843) |      |   | (292,436) |  |   | (264,474)
|Investment securities held to maturity:                                           |  |                         |           |      |   |           |  |   |          
|Proceeds from maturities or paydown                                               |  |                         | -         |      |   | -         |  |   | 200      
|Redemption of Federal Home Loan Bank stock                                        |  |                         | 1,176     |      |   | 797       |  |   | 671      
|Purchase of Federal Home Loan Bank stock                                          |  |                         | (1,670)   |      |   | (1,063)   |  |   | (641)    
|Net increase in loans                                                             |  |                         | (38,396)  |      |   | (39,505)  |  |   | (21,885) 
|Purchase of bank-owned life insurance                                             |  |                         | -         |      |   | (2,000)   |  |   | (442)    
|Proceeds of sale of other real estate owned                                       |  |                         | 182       |      |   | -         |  |   | -        
|Purchase of premises and equipment                                                |  |                         | (5,033)   |      |   | (1,189)   |  |   | (250)    
|                                                                                  |  |                         |           |      |   |           |  |   |          
|Net cash used for investing activities                                            |  |                         | (41,685)  |      |   | (40,176)  |  |   | (33,851) 
|                                                                                  |  |                         |           |      |   |           |  |   |          
|                                                                                  |  |                         |          
|Financing Activities                                                              |  |                         |           |      |   |           |  |   |          
|Net increase in deposits                                                          |  |                         | 17,389    |      |   | 26,483    |  |   | 43,261   
|Increase (decrease) in short-term borrowings                                      |  |                         | 8,461     |      |   | (4,495)   |  |   | (249)    
|Proceeds from other borrowed funds                                                |  |                         | 7,872     |      |   | 6,900     |  |   | 1,225    
|Repayment of other borrowed funds                                                 |  |                         | (1,235)   |      |   | (3,002)   |  |   | (4,010)  
|Purchase of treasury stock                                                        |  |                         | -         |      |   | (490)     |  |   | (480)    
|Proceeds from exercise of stock options                                           |  |                         | 556       |      |   | 207       |  |   | 338      
|Cash dividends paid                                                               |  |                         | (1,961)   |      |   | (1,770)   |  |   | (1,584)  
|                                                                                  |  |                         |           |      |   |           |  |   |          
|Net cash provided by financing activities                                         |  |                         | 31,082    |      |   | 23,833    |  |   | 38,501   
|                                                                                  |  |                         |           |      |   |           |  |   |          
|                                                                                  |  |                         |          
|Increase (decrease) in cash and cash equivalents                                  |  |                         | (3,819)   |      |   | (11,159)  |  |   | 10,494   
|                                                                                  |  |                         |          
|Cash and cash equivalents at beginning of year                                    |  |                         | 7,812     |      |   | 18,971    |  |   | 8,477    
|                                                                                  |  |                         |           |      |   |           |  |   |          
|                                                                                  |  |                         |          
|Cash and cash equivalents at end of year                                          |  | $                       | 3,993     |      | $ | 7,812     |  | $ | 18,971   
|                                                                                  |  |                         |           |      |   |           |  |   |          

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



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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 six 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 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.

Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to, the length of time and extent to which the market value has
been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the securitys ability to recover any decline in its market value, and managements intent
and ability to hold the security for a period of time sufficient to allow for a recovery in market value. Among the factors that are considered in determining managements intent and ability is a review of the Companys capital adequacy,
interest rate risk position, and liquidity. The assessment of a securitys ability to recover any decline in market value, the ability of the issuer to meet contractual obligations, and managements intent and ability requires considerable
judgment. A decline in value that is considered to be other than temporary is recorded as a loss within noninterest income in the Consolidated Statement of Income.



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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Mortgage Loans Held for Sale

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

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 collectability,
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.



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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



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.

Bank-Owned Life Insurance (BOLI)

The Company owns insurance on the lives of a certain group of key employees. The policies were purchased to help offset the increase in the costs of various fringe benefit plans including healthcare. The cash
surrender value of these policies is included as an asset on the consolidated statements of financial condition, and any increases in cash surrender value are recorded as noninterest income on the consolidated statement of income. In the event of
the death of an insured individual under these policies, the Company would receive a death benefit which would be recorded as noninterest income.

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

FAS 123R requires the grant-date fair value of all share-based payment awards that are expected to vest, including employee share
options, to be recognized as employee compensation expense over the requisite service period. The Company adopted FAS 123R on January 1, 2006, and applied the modified prospective transition method. Under this transition method, the Company
(1) did not restate any prior periods and (2) is recognizing compensation expense for all share-based payment awards that were outstanding, but not yet vested, as of January 1, 2006, based upon the same estimated grant-date fair values and
service periods used to prepare the FAS 123 pro forma disclosures.

For 2008, 2007 and 2006, the Company did not recognize
any compensation expense as all outstanding options were vested at January 1, 2006.



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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



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.

Endorsement Split-Dollar Life Insurance Arrangements

On January 1, 2008, the Company changed its accounting policy and recognized a cumulative-effect adjustment
to retained earnings totaling $358,000 related to accounting for certain endorsement split-dollar life insurance arrangements in connection with the adoption of Emerging Issues Task Force Issue No. 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements.

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):



|                        |  |                  |        |                         |   |      
|----------------------- |  | ---------------- | ------ | ----------------------- | - | -----
|                        |  | Interest    Paid |        | FederalIncome TaxesPaid
|Year Ended December 31, |  |                  |        |                         |   |      
|2008                    |  | $                | 11,198 |                         | $ | 2,745
|2007                    |  | $                | 12,338 |                         | $ | 3,539
|2006                    |  | $                | 9,002  |                         | $ | 2,759



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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Recent Accounting Pronouncements

In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations(FAS 141(R)), which establishes
principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement
of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect
on the Companys results of operations or financial position.

In September 2006, the FASB issued FAS No. 157,
Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard
does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008,
the FASB issued Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13, which removed leasing transactions accounted for under FAS No. 13 and related guidance from the scope of FAS No. 157. Also in February 2008, the FASB issued Staff Position No.157-2, Partial Deferral of the
Effective Date of Statement 157, which deferred the effective date of FAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. The adoption of this standard is not expected
to have a material effect on the Companys results of operations or financial position.

In December 2007, the FASB
issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51. FAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling
interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. FAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Companys results of operations or financial position.

In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, to require
enhanced disclosures about derivative instruments and hedging activities. The new standard has revised financial reporting for derivative instruments and hedging activities by requiring more transparency about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted for under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities; and how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows. FAS No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires entities to provide more
information about their liquidity by requiring disclosure of derivative features that are credit risk-related. Further, it requires cross-referencing within footnotes to enable financial statement users to locate important information about
derivative instruments. FAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The adoption of this standard is not expected to
have a material effect on the Companys results of operations or financial position.



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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)



In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, to clarify that instruments granted in share-based payment transactions can be participating securities prior to the requisite service
having been rendered. A basic principle of the FSP is that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in
the computation of EPS pursuant to the two-class method. The provisions of this FSP are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS
data presented (including interim financial statements, summaries of earnings, and selected financial data) are required to be adjusted retrospectively to conform with the provisions of the FSP. The adoption of this FSP is not expected to have a
material effect on the Companys results of operations or financial position.

In October 2008, the FASB issued FSP
No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. This FSP clarifies the application of FAS Statement No. 157, Fair Value Measurements, in a market that is not active and
provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP shall be effective upon issuance, including prior periods for which financial
statements have not been issued. Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate (FAS Statement No. 154, Accounting Changes and Error Corrections).
The disclosure provisions of Statement 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The adoption of this FSP is not expected to have a material effect on
the Companys results of operations or financial position.

In December 2008, the FASB issued FASB Staff Position
(FSP) No. FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets. This FSP amends FASB Statement No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits, to
improve an employers disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by the FSP are to be provided for fiscal years ending after December 15, 2009. The
adoption of this FSP is not expected to have a material effect on the Companys results of operations or financial position.

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.



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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.



|                                                                                                         |  |           |  |           |  |          
|-------------------------------------------------------------------------------------------------------- |  | --------- |  | --------- |  | ---------
|                                                                                                         |  | 2008      |  | 2007      |  | 2006     
|Weighted-average common shares outstanding                                                               |  | 1,589,258 |  | 1,572,604 |  | 1,558,553
|                                                                                                         |  |           | 
|Average treasury stock shares                                                                            |  | (53,100)  |  | (48,068)  |  | (34,770) 
|                                                                                                         |  |           |  |           |  |          
|                                                                                                         |  |           | 
|Weighted-average common shares and common stock equivalents used to calculate basic earnings per share   |  | 1,536,158 |  | 1,524,536 |  | 1,523,783
|                                                                                                         |  |           | 
|Additional common stock equivalents (stock options) used to calculate diluted earnings per share         |  | 44,112    |  | 56,598    |  | 49,992   
|                                                                                                         |  |           |  |           |  |          
|                                                                                                         |  |           | 
|Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share |  | 1,580,270 |  | 1,581,134 |  | 1,573,775
|                                                                                                         |  |           |  |           |  |          



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NOTE 3 - INVESTMENT SECURITIES

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



|                                                  |  |                   |        |                              |   |                           |  |                   |       |  |   |       
|------------------------------------------------- |  | ----------------- | ------ | ---------------------------- | - | ------------------------- |  | ----------------- | ----- |  | - | ------
|                                                  |  | 2008             
|                                                  |  | Amortized    Cost |        | Gross    Unrealized    Gains |   | GrossUnrealized    Losses |  | Fair        Value
|AVAILABLE FOR SALE                                |  |                   |        |                              |   |                           |  |                   |       |  |   |       
|U.S. government agencies                          |  | $                 | 10,478 |                              | $ | 84                        |  | $                 | (10)  |  | $ | 10,552
|Mortgage-backed securities                        |  |                   | 3,652  |                              |   | 92                        |  |                   | (1)   |  |   | 3,743 
|Obligations of states and political subdivisions: |  |                   |        |                              |   |                           |  |                   |       |  |   |       
|Taxable                                           |  |                   | 1,275  |                              |   | -                         |  |                   | -     |  |   | 1,275 
|Tax-exempt                                        |  |                   | 21,156 |                              |   | 147                       |  |                   | (186) |  |   | 21,117
|Corporate securities                              |  |                   | 8,056  |                              |   | 154                       |  |                   | (176) |  |   | 8,034 
|Commercial paper                                  |  |                   | 20,463 |                              |   | -                         |  |                   | -     |  |   | 20,463
|                                                  |  |                   |        |                              |   |                           |  |                   |       |  |   |       
|Total debt securities                             |  |                   | 65,080 |                              |   | 477                       |  |                   | (373) |  |   | 65,184
|                                                  |  |                   |        |                             
|Equity securities                                 |  |                   | 493    |                              |   | 32                        |  |                   | (109) |  |   | 416   
|                                                  |  |                   |        |                              |   |                           |  |                   |       |  |   |       
|                                                  |  |                   |        |                             
|Total                                             |  | $                 | 65,573 |                              | $ | 509                       |  | $                 | (482) |  | $ | 65,600
|                                                  |  |                   |        |                              |   |                           |  |                   |       |  |   |       
|                                                  | 
|                                                  |  | 2007             
|                                                  |  | AmortizedCost     |        | GrossUnrealizedGains         |   | GrossUnrealizedLosses     |  | FairValue        
|AVAILABLE FOR SALE                                |  |                   |        |                              |   |                           |  |                   |       |  |   |       
|U.S. government agencies                          |  | $                 | 7,993  |                              | $ | 19                        |  | $                 | (6)   |  | $ | 8,006 
|Mortgage-backed securities                        |  |                   | 4,101  |                              |   | 30                        |  |                   | (39)  |  |   | 4,092 
|Obligations of states and political subdivisions: |  |                   |        |                              |   |                           |  |                   |       |  |   |       
|Taxable                                           |  |                   | 1,340  |                              |   | -                         |  |                   | -     |  |   | 1,340 
|Tax-exempt                                        |  |                   | 12,409 |                              |   | 74                        |  |                   | (41)  |  |   | 12,442
|Corporate securities                              |  |                   | 3,674  |                              |   | 13                        |  |                   | (36)  |  |   | 3,651 
|Commercial paper                                  |  |                   | 36,845 |                              |   | -                         |  |                   | -     |  |   | 36,845
|                                                  |  |                   |        |                              |   |                           |  |                   |       |  |   |       
|Total debt securities                             |  |                   | 66,362 |                              |   | 136                       |  |                   | (122) |  |   | 66,376
|                                                  |  |                   |        |                             
|Equity securities                                 |  |                   | 320    |                              |   | 70                        |  |                   | (27)  |  |   | 363   
|                                                  |  |                   |        |                              |   |                           |  |                   |       |  |   |       
|                                                  |  |                   |        |                             
|Total                                             |  | $                 | 66,682 |                              | $ | 206                       |  | $                 | (149) |  | $ | 66,739
|                                                  |  |                   |        |                              |   |                           |  |                   |       |  |   |       



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NOTE 3 - INVESTMENT SECURITIES (Continued)



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 (in thousands):



|                                                 |  |                         |        |                          |   |               |  |                         |       |               |   |                         |  |   |        |  |   |    
|------------------------------------------------ |  | ----------------------- | ------ | ------------------------ | - | ------------- |  | ----------------------- | ----- | ------------- | - | ----------------------- |  | - | ------ |  | - | ---
|                                                 |  | 2008                   
|                                                 |  | Less than Twelve Months |        | Twelve Months or Greater |   | Total        
|                                                 |  | Fair    Value           |        | Gross Unrealized Losses  |   | Fair    Value |  | Gross Unrealized Losses |       | Fair    Value |   | Gross Unrealized Losses
|                                                 |  |                         |        |                          |   |              
|U.S. government agencies                         |  | $                       | 989    |                          | $ | 10            |  | $                       | -     |               | $ | -                       |  | $ | 989    |  | $ | 10 
|Mortgage-backed securities                       |  |                         | 37     |                          |   | 1             |  |                         | -     |               |   | -                       |  |   | 37     |  |   | 1  
|Obligations of states and political subdivisions |  |                         | 5,693  |                          |   | 186           |  |                         | -     |               |   | -                       |  |   | 5,693  |  |   | 186
|Corporate securities                             |  |                         | 3,361  |                          |   | 121           |  |                         | 183   |               |   | 55                      |  |   | 3,544  |  |   | 176
|                                                 |  |                         |        |                          |   |               |  |                         |       |               |   |                         |  |   |        |  |   |    
|Total debt securities                            |  |                         | 10,080 |                          |   | 318           |  |                         | 183   |               |   | 55                      |  |   | 10,263 |  |   | 373
|                                                 |  |                         |        |                          |   |              
|Equity securities                                |  |                         | 161    |                          |   | 75            |  |                         | 39    |               |   | 34                      |  |   | 200    |  |   | 109
|                                                 |  |                         |        |                          |   |               |  |                         |       |               |   |                         |  |   |        |  |   |    
|                                                 |  |                         |        |                          |   |              
|Total                                            |  | $                       | 10,241 |                          | $ | 393           |  | $                       | 222   |               | $ | 89                      |  | $ | 10,463 |  | $ | 482
|                                                 |  |                         |        |                          |   |               |  |                         |       |               |   |                         |  |   |        |  |   |    
|                                                 | 
|                                                 |  | 2007                   
|                                                 |  | Less than Twelve Months |        | Twelve Months or Greater |   | Total        
|                                                 |  | FairValue               |        | GrossUnrealizedLosses    |   | FairValue     |  | GrossUnrealizedLosses   |       | FairValue     |   | GrossUnrealizedLosses  
|                                                 |  |                         |        |                          |   |              
|U.S. government agencies                         |  | $                       | 3,992  |                          | $ | 6             |  | $                       | -     |               | $ | -                       |  | $ | 3,992  |  | $ | 6  
|Mortgage-backed securities                       |  |                         | 802    |                          |   | 6             |  |                         | 1,486 |               |   | 33                      |  |   | 2,288  |  |   | 39 
|Obligations of states and political subdivisions |  |                         | 4,649  |                          |   | 40            |  |                         | 232   |               |   | 1                       |  |   | 4,881  |  |   | 41 
|Corporate securities                             |  |                         | 1,210  |                          |   | 36            |  |                         | -     |               |   | -                       |  |   | 1,210  |  |   | 36 
|                                                 |  |                         |        |                          |   |               |  |                         |       |               |   |                         |  |   |        |  |   |    
|Total debt securities                            |  |                         | 10,653 |                          |   | 88            |  |                         | 1,718 |               |   | 34                      |  |   | 12,371 |  |   | 122
|                                                 |  |                         |        |                          |   |              
|Equity securities                                |  |                         | 102    |                          |   | 13            |  |                         | 20    |               |   | 14                      |  |   | 122    |  |   | 27 
|                                                 |  |                         |        |                          |   |               |  |                         |       |               |   |                         |  |   |        |  |   |    
|                                                 |  |                         |        |                          |   |              
|Total                                            |  | $                       | 10,755 |                          | $ | 101           |  | $                       | 1,738 |               | $ | 48                      |  | $ | 12,493 |  | $ | 149
|                                                 |  |                         |        |                          |   |               |  |                         |       |               |   |                         |  |   |        |  |   |    



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NOTE 3 - INVESTMENT SECURITIES (Continued)



There are 42 positions that are temporarily impaired at December 31, 2008. The
aggregate carrying amount of those investments at December 31, 2008, was $10,463. The Company reviews its position quarterly and has asserted that at December 31, 2008, the declines outlined in the preceeding 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 unrealized loss disclosed is not other than temporary but is the result of
interest rate changes that are not expected to result in the noncollection of principal and interest during the period.

The amortized cost and estimated market values of debt securities at December 31, 2008, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):



|                                       |  |                    |        |                 |   |       
|-------------------------------------- |  | ------------------ | ------ | --------------- | - | ------
|                                       |  | Available for Sale
|                                       |  |                   
|                                       |  | Amortized  Cost    |        | Fair      Value
|                                       |  |                   
|Due in one year or less                |  | $                  | 24,326 |                 | $ | 24,273
|Due after one year through five years  |  |                    | 9,557  |                 |   | 9,615 
|Due after five years through ten years |  |                    | 7,834  |                 |   | 7,906 
|Due after ten years                    |  |                    | 23,363 |                 |   | 23,390
|                                       |  |                    |        |                 |   |       
|                                       |  |                   
|Total debt securities                  |  | $                  | 65,080 |                 | $ | 65,184
|                                       |  |                    |        |                 |   |       

There were no sales of investment securities during 2008, 2007 and 2006. In 2008,
the Company recorded an investment security loss of $3 resulting from a business combination where by the Company received a combination of the common stock of the acquirer in a non-monetary exchange and cash proceeds of $2. In 2008, the Company
recognized an other than temporary impairment of $25. There were no such impairments in 2007 or 2006.

Investment
securities with amortized costs of $51,179 and $61,392 and estimated market value of $57,379 and $61,400 at December 31, 2008 and 2007, respectively, were pledged to secure deposits, short-term borrowings, and for other purposes as required by
law.



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NOTE 4 - LOANS

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



|                                                                             |  |      |         |      |   |        
|---------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                             |  | 2008 |         | 2007
|                                                                             |  |     
|Loans secured by real estate:                                                |  |      |         |      |   |        
|Construction and development                                                 |  | $    | 13,403  |      | $ | 8,385  
|Secured by farmland                                                          |  |      | 1,804   |      |   | 1,869  
|Secured by 1 - 4 family residential properties:                              |  |      |         |      |   |        
|Revolving, open-end loans secured by 1 - 4 family residential properties     |  |      | 6,342   |      |   | 4,718  
|All other loans secured by 1 - 4 family residential properties               |  |      | 75,715  |      |   | 69,242 
|Secured by nonfarm, nonresidential properties                                |  |      | 217,378 |      |   | 198,323
|Commercial and industrial loans                                              |  |      | 42,396  |      |   | 39,337 
|Loans to individuals for household, family, and other personal expenditures: |  |      |         |      |   |        
|Ready credit loans                                                           |  |      | 1,111   |      |   | 1,045  
|Other installment loans                                                      |  |      | 13,639  |      |   | 14,611 
|Other loans:                                                                 |  |      |         |      |   |        
|Agricultural loans                                                           |  |      | 694     |      |   | 879    
|All other loans                                                              |  |      | 7,725   |      |   | 6,349  
|                                                                             |  |      |         |      |   |        
|                                                                             |  |     
|Loans, net of unearned income                                                |  | $    | 380,207 |      | $ | 344,758
|                                                                             |  |      |         |      |   |        

Real estate loans serviced for others which are not included in the Consolidated
Balance Sheet totaled $84,878 and $84,114 at December 31, 2008 and 2007, respectively.

Information with respect to
impaired loans as of and for the year ended December 31 is as follows (in thousands):



|                                                         |  |      |     |      |   |       |  |   |  
|-------------------------------------------------------- |  | ---- | --- | ---- | - | ----- |  | - | -
|                                                         |  | 2008 |     | 2007 |   | 2006 
|                                                         |  |      |    
|Impaired loans without related allowance for loan losses |  | $    | 267 |      | $ | 298   |  | $ | -
|Impaired loans with related allowance for loan losses    |  | $    | -   |      | $ | 725   |  | $ | -
|Related allowance for loan losses                        |  | $    | -   |      | $ | 410   |  | $ | -
|Average recorded balance for of impaired loans           |  | $    | 621 |      | $ | 1,051 |  | $ | -
|Interest income recognized on impaired loans             |  | $    | -   |      | $ | 61    |  | $ | -



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NOTE 4 - LOANS (continued)



The following is a summary of past due and nonaccrual loans as of December 31,
2008 and 2007 (in thousands):



|                                 |  |                         |       |            |   |    
|-------------------------------- |  | ----------------------- | ----- | ---------- | - | ---
|                                 |  | December 31, 2008      
|                                 |  |                        
|                                 |  | Past Due90 days or more |       | Nonaccrual
|Loans secured by real estate:    |  |                         |       |            |   |    
|Construction and development     |  | $                       | 6     |            | $ | -  
|Other                            |  |                         | 5,823 |            |   | 341
|Commercial and industrial        |  |                         | 11    |            |   | 23 
|Installment loans to individuals |  |                         | 20    |            |   | 25 
|Other                            |  |                         | 4     |            |   | -  
|                                 |  |                         |       |            |   |    
|                                 |  |                        
|Total                            |  | $                       | 5,864 |            | $ | 389
|                                 |  |                         |       |            |   |    



|                                 |  |                         |     |            |   |    
|-------------------------------- |  | ----------------------- | --- | ---------- | - | ---
|                                 |  | December 31, 2007      
|                                 |  |                        
|                                 |  | Past Due90 days or more |     | Nonaccrual
|Loans secured by real estate:    |  |                         |     |            |   |    
|Construction and development     |  | $                       | -   |            | $ | -  
|Other                            |  |                         | 509 |            |   | 443
|Commercial and industrial        |  |                         | 50  |            |   | 116
|Installment loans to individuals |  |                         | 1   |            |   | 13 
|Other                            |  |                         | -   |            |   | -  
|                                 |  |                         |     |            |   |    
|                                 |  |                        
|Total                            |  | $                       | 560 |            | $ | 572
|                                 |  |                         |     |            |   |    

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



|                                 |  |      |         |      |   |       |  |   |      
|-------------------------------- |  | ---- | ------- | ---- | - | ----- |  | - | -----
|                                 |  | 2008 |         | 2007 |   | 2006 
|                                 |  |      |        
|Balance, beginning of year       |  | $    | 5,392   |      | $ | 4,469 |  | $ | 3,973
|Provision charged to operations  |  |      | 950     |      |   | 1,130 |  |   | 785  
|Recoveries credited to allowance |  |      | 82      |      |   | 153   |  |   | 82   
|Losses charged to allowance      |  |      | (1,008) |      |   | (360) |  |   | (371)
|                                 |  |      |         |      |   |       |  |   |      
|                                 |  |      |        
|Balance, end of year             |  | $    | 5,416   |      | $ | 5,392 |  | $ | 4,469
|                                 |  |      |         |      |   |       |  |   |      



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NOTE 4 - LOANS (continued)



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, 2008,
is as follows (in thousands):



|     |        |           |   |                  |  |      |       |  |   |       
|---- | ------ | --------- | - | ---------------- |  | ---- | ----- |  | - | ------
|2007 |        | Additions |   | AmountsCollected |  | 2008
|     |        |           |  
|$    | 10,801 |           | $ | 2,089            |  | $    | 2,142 |  | $ | 10,748

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, 2008 and 2007, the Company had approximately $97 million and $80 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, 2008 and 2007, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

NOTE 5 - PREMISES AND EQUIPMENT

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



|                              |  |      |        |      |   |       
|----------------------------- |  | ---- | ------ | ---- | - | ------
|                              |  | 2008 |        | 2007
|                              |  |     
|Land                          |  | $    | 1,465  |      | $ | 1,377 
|Premises and improvements     |  |      | 9,998  |      |   | 5,619 
|Furniture and equipment       |  |      | 3,876  |      |   | 3,463 
|Leasehold improvements        |  |      | 1,636  |      |   | 1,625 
|                              |  |      |        |      |   |       
|Total, at cost                |  |      | 16,975 |      |   | 12,084
|Less accumulated depreciation |  |      | 6,095  |      |   | 5,697 
|                              |  |      |        |      |   |       
|Net premises and equipment    |  | $    | 10,880 |      | $ | 6,387 
|                              |  |      |        |      |   |       

Depreciation and amortization expense was $533, $526, and $541, in 2008, 2007, and
2006, respectively.

NOTE 6 - DEPOSITS

Deposits are summarized as follows (in thousands):



|                                  |  |      |         |      |   |        
|--------------------------------- |  | ---- | ------- | ---- | - | -------
|                                  |  | 2008 |         | 2007
|                                  |  |     
|Demand - noninterest-bearing      |  | $    | 37,626  |      | $ | 34,763 
|Demand - interest-bearing         |  |      | 40,715  |      |   | 39,741 
|Money market                      |  |      | 41,925  |      |   | 46,175 
|Savings                           |  |      | 35,556  |      |   | 31,418 
|Time deposits of $100,000 or more |  |      | 91,473  |      |   | 80,851 
|Other time deposits               |  |      | 134,694 |      |   | 131,652
|                                  |  |      |         |      |   |        
|Total                             |  | $    | 381,989 |      | $ | 364,600
|                                  |  |      |         |      |   |        



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NOTE 6 - DEPOSITS (Continued)



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



|      |  |   |        
|----- |  | - | -------
|2009  |  | $ | 172,891
|2010  |  |   | 15,263 
|2011  |  |   | 23,310 
|2012  |  |   | 10,172 
|2013  |  |   | 4,531  
|      |  |   |        
|      | 
|Total |  | $ | 226,167
|      |  |   |        

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



|                            |  |      |       
|--------------------------- |  | ---- | ------
|                            |  | 2008
|                            | 
|Three months or less        |  | $    | 26,290
|Four through six months     |  |      | 20,860
|Seven through twelve months |  |      | 26,488
|Over twelve months          |  |      | 17,835
|                            |  |      |       
|                            | 
|Total                       |  | $    | 91,473
|                            |  |      |       

Interest expense on certificates of deposit of $100,000 or amounted to $3,073,
$3,449 and $2,476, for the years ended December 31, 2008, 2007 and 2006, respectively.



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NOTE 7 - 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.

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



|                                            |  |        |        |      |      |   |        |   |        |  |      |  
|------------------------------------------- |  | ------ | ------ | ---- | ---- | - | ------ | - | ------ |  | ---- | -
|                                            |  | 2008   |        |      | 2007 |  
|                                            |  | Amount |        | Rate |      |   | Amount |   | Rate   | 
|                                            |  |        |        |     
|Balance at year-end                         |  | $      | 16,671 |      | 0.83 | % |        | $ | 8,210  |  | 2.22 | %
|Average balance outstanding during the year |  | $      | 15,626 |      | 1.51 | % |        | $ | 13,537 |  | 2.58 | %
|Maximum amount outstanding at any month-end |  | $      | 19,454 |      |      |   |        | $ | 19,165 |  |      |  

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 $12,638 and $14,454 and market values of $12,712 and $14,426, respectively, at December 31, 2008 and 2007, 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, 2008, the Banks remaining borrowing capacity with the FHLB was approximately $46 million.

NOTE 8 -
OTHER BORROWED FUNDS

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



|                                  |      |                |    |           |      |      |                            |      |      |                 |    |      |   |      |   |        |  |   |       
|--------------------------------- | ---- | -------------- | -- | --------- | ---- | ---- | -------------------------- | ---- | ---- | --------------- | -- | ---- | - | ---- | - | ------ |  | - | ------
|Description                       |      | Maturity Range |    | Weighted- |      |      | Stated Interest Rate Range |      |      | At December 31,
|                                  |      | Average        |    |           |     
|                                  | From |                | To |           | Rate |      |                            | From |      |                 | To |      |   | 2008 |   | 2007  
|                                  |      |                |    |           |      |      |                           
|Fixed Rate                        |      | 09/17/10       |    | 09/17/12  |      | 3.63 | %                          |      | 3.13 | %               |    | 3.87 | % |      | $ | 5,000  |  | $ | -     
|Fixed Rate Amortizing             |      | 11/06/13       |    | 01/26/26  |      | 4.70 | %                          |      | 3.47 | %               |    | 5.55 | % |      |   | 18,298 |  |   | 16,661
|Convertible select-fixed to float |      | 02/18/10       |    | 02/18/10  |      | 5.91 | %                          |      | 5.91 | %               |    | 5.91 | % |      |   | 1,000  |  |   | 1,000 
|                                  |      |                |    |           |      |      |                            |      |      |                 |    |      |   |      |   |        |  |   |       
|                                  |      |                |    |           |      |      |                           
|Total                             |      |                |    |           |      |      |                            |      |      |                 |    |      |   |      | $ | 24,298 |  | $ | 17,661
|                                  |      |                |    |           |      |      |                            |      |      |                 |    |      |   |      |   |        |  |   |       

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.



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NOTE 8 - OTHER BORROWED FUNDS (continued)





|                         |  |                       |        |                       |      |  
|------------------------ |  | --------------------- | ------ | --------------------- | ---- | -
|Year Ending December 31, |  | Maturities/repayments |        | Weighted-Average Rate |     
|                         |  |                      
|2009                     |  | $                     | 1,697  |                       | 4.78 | %
|2010                     |  |                       | 3,775  |                       | 4.78 | %
|2011                     |  |                       | 4,356  |                       | 4.68 | %
|2012                     |  |                       | 3,442  |                       | 4.80 | %
|2013                     |  |                       | 1,989  |                       | 5.00 | %
|2014 and beyond          |  |                       | 9,039  |                       | 5.07 | %
|                         |  |                       |        |                       |      |  
|                         |  |                      
|Total                    |  | $                     | 24,298 |                       |      |  
|                         |  |                       |        |                       |      |  

NOTE 9 - 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 14,789 shares in 2008, 12,786 shares in 2007 and 15,546 shares in 2006 through the Plan.

NOTE 10 - 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 2008, 2007 and 2006, the Board of Directors authorized an additional 4 percent, 6 percent, and 5 percent, respectively, of each eligible employees compensation. Employee contributions are vested at all
times, and Bank contributions are fully vested after five years. Contributions for 2008, 2007, and 2006 to this plan amounted to $300, $373 and $285, respectively.

Supplemental Retirement Plan

The Bank maintains a Salary Continuation Plan
for the certain officers of the Bank to provide guaranteed consecutive postretirement payments totaling a predetermined amount over a ten or fifteen year period. Expenses for the years ended December 31, 2008, 2007 and 2006 amounted to $150,
$144, and $59, respectively, and are included as a component of salaries and employee benefits.



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NOTE 10 - EMPLOYEE BENEFITS (continued)



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



|                               |  |         |   |  |                               |       |      |         |   |                               |   |      
|------------------------------ |  | ------- | - |  | ----------------------------- | ----- | ---- | ------- | - | ----------------------------- | - | -----
|                               |  | 2008    |   |  | Weighted-AverageExercisePrice |       | 2007 |         |   | Weighted-AverageExercisePrice
|                               |  |         |   | 
|Outstanding, beginning of year |  | 105,360 |   |  | $                             | 20.33 |      | 112,636 |   |                               | $ | 20.48
|Granted                        |  | -       |   |  |                               | -     |      | -       |   |                               |   | -    
|Exercised                      |  | (36,528 | ) |  |                               | 13.86 |      | (7,276  | ) |                               |   | 22.54
|Forfeited                      |  | -       |   |  |                               | -     |      | -       |   |                               |   | -    
|                               |  |         |   |  |                               |       |      |         |   |                               |   |      
|                               |  |         |   | 
|Outstanding, end of year       |  | 68,832  |   |  | $                             | 23.77 |      | 105,360 |   |                               | $ | 20.33
|                               |  |         |   |  |                               |       |      |         |   |                               |   |      
|                               |  |         |   | 
|Exercisable at year-end        |  | 68,832  |   |  | $                             | 23.77 |      | 105,360 |   |                               | $ | 20.33
|                               |  |         |   |  |                               |       |      |         |   |                               |   |      

The following table summarizes characteristics of stock options outstanding at
December 31, 2008:



|               |  |             |  |                      |  |                      |  |        |  |                     
|-------------- |  | ----------- |  | -------------------- |  | -------------------- |  | ------ |  | --------------------
|               |  | Outstanding |  | Exercisable         
|Exercise Price |  | Shares      |  | AverageRemainingLife |  | AverageExercisePrice |  | Shares |  | AverageExercisePrice
|$        13.00 |  | 7,500       |  | 1.20                 |  | $        13.00       |  | 7,500  |  | $        13.00      
|$        13.25 |  | 20,740      |  | 1.20                 |  | $        13.25       |  | 20,740 |  | $        13.25      
|$        16.50 |  | 4,550       |  | 1.20                 |  | $        16.50       |  | 4,550  |  | $        16.50      
|$        21.30 |  | 4,000       |  | 1.20                 |  | $        21.30       |  | 4,000  |  | $        21.30      
|$        23.00 |  | 1,250       |  | 1.20                 |  | $        23.00       |  | 1,250  |  | $        23.00      
|$        26.50 |  | 1,000       |  | 1.20                 |  | $        26.50       |  | 1,000  |  | $        26.50      
|$        32.55 |  | 2,000       |  | 4.85                 |  | $        32.55       |  | 2,000  |  | $        32.55      
|$        34.00 |  | 7,712       |  | 6.96                 |  | $        34.00       |  | 7,712  |  | $        34.00      
|$        35.00 |  | 1,000       |  | 5.85                 |  | $        35.00       |  | 1,000  |  | $        35.00      
|$        35.95 |  | 19,080      |  | 6.73                 |  | $        35.95       |  | 19,080 |  | $        35.95      
|               |  |             |  |                      |  |                      |  |        |  |                     
|               |  |             |  |                      | 
|Total          |  | 68,832      |  |                      |  | Total                |  | 68,832 |  |                     
|               |  |             |  |                      |  |                      |  |        |  |                     



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NOTE 11 - INCOME TAXES

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



|                  |  |      |       |      |   |       |  |   |      
|----------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                  |  | 2008 |       | 2007 |   | 2006 
|                  |  |      |      
|Currently payable |  | $    | 2,742 |      | $ | 3,411 |  | $ | 2,848
|Deferred taxes    |  |      | 4     |      |   | (414) |  |   | (235)
|                  |  |      |       |      |   |       |  |   |      
|                  |  |      |      
|Total provision   |  | $    | 2,746 |      | $ | 2,997 |  | $ | 2,613
|                  |  |      |       |      |   |       |  |   |      

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



|                                         |  |      |       |      |   |      
|---------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                         |  | 2008 |       | 2007
|                                         |  |     
|Deferred tax assets:                     |  |      |       |      |   |      
|Allowance for loan losses                |  | $    | 1,613 |      | $ | 1,650
|Salary continuation plan                 |  |      | 237   |      |   | 204  
|Mortgage servicing rights                |  |      | 24    |      |   | 7    
|                                         |  |      |       |      |   |      
|Total                                    |  |      | 1,874 |      |   | 1,861
|                                         |  |      |       |      |   |      
|                                         |  |     
|Deferred tax liabilities:                |  |      |       |      |   |      
|Premises and equipment                   |  |      | 575   |      |   | 529  
|Deferred loan origination fees, net      |  |      | 126   |      |   | 146  
|Unrealized gain on nonmonetary exchange  |  |      | -     |      |   | 9    
|Unrealized gain on investment securities |  |      | 9     |      |   | 19   
|                                         |  |      |       |      |   |      
|Total                                    |  |      | 710   |      |   | 703  
|                                         |  |      |       |      |   |      
|                                         |  |     
|Net deferred tax assets                  |  | $    | 1,164 |      | $ | 1,158
|                                         |  |      |       |      |   |      

No valuation allowance was established at December 31, 2008 and 2007, 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.

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



|                              |  |        |       |                  |       |   |        |      |                  |  |       |        |  |                  |       |  |       |  
|----------------------------- |  | ------ | ----- | ---------------- | ----- | - | ------ | ---- | ---------------- |  | ----- | ------ |  | ---------------- | ----- |  | ----- | -
|                              |  | 2008   |       |                  | 2007  |   |        | 2006 |                 
|                              |  | Amount |       | % ofPretaxIncome |       |   | Amount |      | % ofPretaxIncome |  |       | Amount |  | % ofPretaxIncome |      
|                              |  |        |       |                  |       |  
|Provision at statutory rate   |  | $      | 3,110 |                  | 34.0  | % |        | $    | 3,267            |  | 34.0  | %      |  | $                | 2,787 |  | 34.0  | %
|Tax-exempt income             |  |        | (306) |                  | (3.4) |   |        |      | (194)            |  | (2.0) |        |  |                  | (127) |  | (1.6) |  
|BOLI earnings                 |  |        | (131) |                  | (1.4) |   |        |      | (121)            |  | (1.3) |        |  |                  | (78)  |  | (0.9) |  
|Nondeductible interest        |  |        | 42    |                  | 0.5   |   |        |      | 29               |  | 0.3   |        |  |                  | 16    |  | 0.2   |  
|Other, net                    |  |        | 31    |                  | 0.4   |   |        |      | 16               |  | 0.2   |        |  |                  | 15    |  | 0.2   |  
|                              |  |        |       |                  |       |   |        |      |                  |  |       |        |  |                  |       |  |       |  
|                              |  |        |       |                  |       |  
|Effective income tax and rate |  | $      | 2,746 |                  | 30.1  | % |        | $    | 2,997            |  | 31.2  | %      |  | $                | 2,613 |  | 31.9  | %
|                              |  |        |       |                  |       |   |        |      |                  |  |       |        |  |                  |       |  |       |  



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NOTE 11 - INCOME TAXES (Continued)



The Company adopted the provisions of FIN No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement 109, effective January 1, 2007. FIN No. 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing
authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. FIN No. 48 also provides guidance on the accounting
for and disclosure of unrecognized tax benefits, interest and penalties. The adoption of FIN No. 48 did not have a significant impact on the Companys financial statements.

NOTE 12 - 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):



|                             |  |      |        |      |   |       
|---------------------------- |  | ---- | ------ | ---- | - | ------
|                             |  | 2008 |        | 2007
|                             |  |     
|Commitments to extend credit |  | $    | 49,671 |      | $ | 49,985
|Standby letters of credit    |  | $    | 3,683  |      | $ | 3,296 

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.

At December 18, 2008, the Company entered into an Agreement of Limited Partnership which would generate low income housing credits
for use in future periods. The agreement states the Bank will acquire a 33.33% interest in the partnership at a cost of $3,109,000. The first installment of this investment in the amount of $2,729,000 was made on January 16, 2009 with the
remainder due at a later date in 2009.



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NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES

Commitments (Continued)

At December 31, 2008, the minimum rental commitments for all noncancelable leases are as follows (in thousands):



|                    |  |   |    
|------------------- |  | - | ---
|2009                |  | $ | 197
|2010                |  |   | 186
|2011                |  |   | 167
|2012                |  |   | 161
|2013                |  |   | 83 
|2014 and thereafter |  |   | 68 
|                    |  |   |    
|                    | 
|Total               |  | $ | 862
|                    |  |   |    

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 13 - REGULATORY
RESTRICTIONS

Cash and Due From Banks

The district Federal Reserve Bank requires the Bank to maintain certain average reserve balances. As of each of the years ended December 31, 2008 and 2007, the Bank had required reserves of
$225, 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, 2008, the balance in the capital surplus account totaling approximately $1,756 is unavailable for dividends.



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NOTE 14 - 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, 2008 and 2007, 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):



|                              |  |        |        |       |       |   |        |   |        |  |       |  
|----------------------------- |  | ------ | ------ | ----- | ----- | - | ------ | - | ------ |  | ----- | -
|                              |  | 2008   |        |       | 2007  |  
|                              |  | Amount |        | Ratio |       |   | Amount |   | Ratio  | 
|                              |  |        |        |      
|Total Capital                 |  |        |        |       |       |   |        |   |        |  |       |  
|(to Risk-Weighted Assets)     |  |        |        |       |       |   |        |   |        |  |       |  
|                              |  |        |        |      
|Actual                        |  | $      | 49,636 |       | 11.91 | % |        | $ | 44,651 |  | 11.61 | %
|For Capital Adequacy Purposes |  | $      | 33,339 |       | 8.00  | % |        | $ | 30,770 |  | 8.00  | %
|To Be Well Capitalized        |  | $      | 41,673 |       | 10.00 | % |        | $ | 38,462 |  | 10.00 | %
|                              |  |        |        |      
|Tier I Capital                |  |        |        |       |       |   |        |   |        |  |       |  
|(to Risk-Weighted Assets)     |  |        |        |       |       |   |        |   |        |  |       |  
|                              |  |        |        |      
|Actual                        |  | $      | 44,390 |       | 10.65 | % |        | $ | 39,817 |  | 10.35 | %
|For Capital Adequacy Purposes |  | $      | 16,669 |       | 4.00  | % |        | $ | 15,385 |  | 4.00  | %
|To Be Well Capitalized        |  | $      | 25,004 |       | 6.00  | % |        | $ | 23,077 |  | 6.00  | %
|                              |  |        |        |      
|Tier I Capital                |  |        |        |       |       |   |        |   |        |  |       |  
|(to Average Assets)           |  |        |        |       |       |   |        |   |        |  |       |  
|                              |  |        |        |      
|Actual                        |  | $      | 44,390 |       | 9.90  | % |        | $ | 39,817 |  | 9.50  | %
|For Capital Adequacy Purposes |  | $      | 17,927 |       | 4.00  | % |        | $ | 16,762 |  | 4.00  | %
|To Be Well Capitalized        |  | $      | 22,408 |       | 5.00  | % |        | $ | 20,953 |  | 5.00  | %



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NOTE 15 - FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted the provisions of FAS No. 157, Fair Value Measurements, for financial assets and financial liabilities. FAS No. 157 provides
enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any
new circumstances. The FASB issued Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13, which removed leasing transactions accounted for under FAS No. 13 and related guidance from the scope of FAS No. 157. The FASB also issued Staff Position No.157-2, Partial Deferral
of the Effective Date of Statement 157, which deferred the effective date of FAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.

FAS No. 157 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring
assets and liabilities at fair value. The three broad levels defined by FAS No. 157 hierarchy are as follows:



|           |  |                                                                                                                                                                                                                                                                                                                                                                                          
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level I:   |  | Quoted prices are available in active markets for identical assets or liabilities as of the reported date.                                                                                                                                                                                                                                                                               
|           | 
|Level II:  |  | Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and
liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
|           | 
|Level III: |  | Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using
managements best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.                                                                       

The following table presents the assets reported on the consolidated statements of
financial condition at their fair value as of December 31, 2008 by level within the fair value hierarchy. As required by SFAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.



|                              |  |         |        |          |   |           |  |       |   |  |   |       
|----------------------------- |  | ------- | ------ | -------- | - | --------- |  | ----- | - |  | - | ------
|Assets:                       |  | Level 1 |        | Level II |   | Level III |  | Total
|                              |  |         |        |         
|Securities available for sale |  | $       | 22,154 |          | $ | 43,446    |  | $     | - |  | $ | 65,600

The following table presents the assets measured on a nonrecurring basis on the
consolidated statements of financial condition at their fair value as of December 31, 2008, by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of
specific reserves. Techniques used to value the collateral that secure the impaired loan include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets
classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset
valuation is classified as Level III inputs.



|                                         |  |         |   |          |   |           |  |       |   |  |   |    
|---------------------------------------- |  | ------- | - | -------- | - | --------- |  | ----- | - |  | - | ---
|Assets measured on a nonrecurring basis: |  | Level 1 |   | Level II |   | Level III |  | Total
|                                         |  |         |   |         
|Impaired Loans                           |  | $       | - |          | $ | 267       |  | $     | - |  | $ | 267



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NOTE 16 - FAIR VALUE DISCLOSURE

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



|                            |  |               |         |           |   |               |  |           |         |  |   |        
|--------------------------- |  | ------------- | ------- | --------- | - | ------------- |  | --------- | ------- |  | - | -------
|                            |  | 2008          |         | 2007     
|                            |  | CarryingValue |         | FairValue |   | CarryingValue |  | FairValue
|Financial assets:           |  |               |         |           |   |               |  |           |         |  |   |        
|Cash and cash equivalents   |  | $             | 3,993   |           | $ | 3,993         |  | $         | 7,812   |  | $ | 7,812  
|Investment securities       |  |               | 65,600  |           |   | 65,600        |  |           | 66,739  |  |   | 66,739 
|Net loans                   |  |               | 374,791 |           |   | 395,672       |  |           | 339,366 |  |   | 352,811
|Accrued interest receivable |  |               | 2,050   |           |   | 2,050         |  |           | 1,966   |  |   | 1,966  
|Regulatory stock            |  |               | 1,675   |           |   | 1,675         |  |           | 1,181   |  |   | 1,181  
|Bank-owned life insurance   |  |               | 8,535   |           |   | 8,535         |  |           | 8,208   |  |   | 8,208  
|Mortgage servicing rights   |  |               | 602     |           |   | 602           |  |           | 689     |  |   | 689    
|                            |  |               |         |          
|Financial liabilities:      |  |               |         |           |   |               |  |           |         |  |   |        
|Deposits                    |  | $             | 381,989 |           | $ | 388,164       |  | $         | 364,600 |  | $ | 367,851
|Short-term borrowings       |  |               | 16,671  |           |   | 16,696        |  |           | 8,210   |  |   | 8,208  
|Other borrowed funds        |  |               | 24,298  |           |   | 26,858        |  |           | 17,661  |  |   | 18,422 
|Accrued interest payable    |  |               | 1,158   |           |   | 1,158         |  |           | 1,691   |  |   | 1,691  

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.



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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, and Accrued Interest Payable

The fair value is equal
to the current carrying value.

Investment Securities

The fair value of investment securities available for sale 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 and Mortgage
Servicing Rights

The fair value is estimated by discounting future cash flows using current market inputs at which
loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.

Deposits, Short Term Borrowings and Other Borrowed Funds

The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows. The
discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year-end.

Bank-Owned Life Insurance

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

Commitments to
Extend Credit and Standby Letters of Credit

These financial instruments are generally not subject to sale, and
estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over
the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are presented in
Note 12.



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NOTE 17 - PARENT COMPANY

Following are condensed financial statements for the parent company:

CONDENSED
BALANCE SHEET



|                                           |  |              |        |      |   |       
|------------------------------------------ |  | ------------ | ------ | ---- | - | ------
|                                           |  | December 31,
|(In thousands)                             |  | 2008         |        | 2007
|Assets                                     |  |              |        |      |   |       
|Cash and due from banks                    |  | $            | 2,752  |      | $ | 1,604 
|Investment securities available for sale   |  |              | 416    |      |   | 363   
|Investment in bank subsidiary              |  |              | 41,185 |      |   | 37,598
|Other assets                               |  |              | 685    |      |   | 878   
|                                           |  |              |        |      |   |       
|                                           |  |             
|Total Assets                               |  | $            | 45,038 |      | $ | 40,443
|                                           |  |              |        |      |   |       
|                                           |  |             
|Liabilities                                |  |              |        |      |   |       
|Dividends payable                          |  | $            | 561    |      | $ | 487   
|Other liabilities                          |  |              | 9      |      |   | 33    
|                                           |  |              |        |      |   |       
|                                           |  |             
|Total Liabilities                          |  |              | 570    |      |   | 520   
|                                           |  |             
|Stockholders Equity                       |  |              | 44,468 |      |   | 39,923
|                                           |  |              |        |      |   |       
|                                           |  |             
|Total Liabilities and Stockholders Equity |  | $            | 45,038 |      | $ | 40,443
|                                           |  |              |        |      |   |       

CONDENSED STATEMENT OF INCOME



|                                                                             |  |                         |       |      |   |       |  |   |      
|---------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | -----
|                                                                             |  | Year Ended December 31,
|                                                                             |  | 2008                    |       | 2007 |   | 2006 
|(In thousands)                                                               |  |                         |       |      |   |       |  |   |      
|Dividends from bank subsidiary                                               |  | $                       | 2,575 |      | $ | 2,450 |  | $ | 2,100
|Dividends on investment securities                                           |  |                         | 19    |      |   | 10    |  |   | 9    
|Investment securities losses                                                 |  |                         | (28)  |      |   | -     |  |   | -    
|                                                                             |  |                         |       |      |   |       |  |   |      
|Total income                                                                 |  |                         | 2,566 |      |   | 2,460 |  |   | 2,109
|                                                                             |  |                         |      
|Noninterest expense                                                          |  |                         | 89    |      |   | 101   |  |   | 101  
|                                                                             |  |                         |       |      |   |       |  |   |      
|                                                                             |  |                         |      
|Net income before undistributed earnings of bank subsidiary and income taxes |  |                         | 2,477 |      |   | 2,359 |  |   | 2,008
|                                                                             |  |                         |      
|Undistributed earnings of bank subsidiary                                    |  |                         | 3,886 |      |   | 4,220 |  |   | 3,544
|Income tax benefit                                                           |  |                         | (38)  |      |   | (33)  |  |   | (33) 
|                                                                             |  |                         |       |      |   |       |  |   |      
|                                                                             |  |                         |      
|Net Income                                                                   |  | $                       | 6,401 |      | $ | 6,612 |  | $ | 5,585
|                                                                             |  |                         |       |      |   |       |  |   |      



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NOTE 17 - PARENT COMPANY (Continued)



CONDENSED STATEMENT OF CASH FLOWS



|                                                                                  |  |                         |         |      |   |         |  |   |        
|--------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|                                                                                  |  | Year Ended December 31,
|(In thousands)                                                                    |  | 2008                    |         | 2007 |   | 2006   
|Operating Activities                                                              |  |                         |         |      |   |         |  |   |        
|Net income                                                                        |  | $                       | 6,401   |      | $ | 6,612   |  | $ | 5,585  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |         |      |   |         |  |   |        
|Undistributed earnings of bank subsidiary                                         |  |                         | (3,886) |      |   | (4,220) |  |   | (3,544)
|Investment securities losses                                                      |  |                         | 28      |      |   | -       |  |   | -      
|Other, net                                                                        |  |                         | 212     |      |   | (346)   |  |   | 32     
|                                                                                  |  |                         |         |      |   |         |  |   |        
|Net cash provided by operating activities                                         |  |                         | 2,755   |      |   | 2,046   |  |   | 2,073  
|                                                                                  |  |                         |         |      |   |         |  |   |        
|                                                                                  |  |                         |        
|Investing Activities                                                              |  |                         |         |      |   |         |  |   |        
|Purchases of investment securities                                                |  |                         | (204)   |      |   | (53)    |  |   | (57)   
|Proceeds from merger of investment securities                                     |  |                         | 2       |      |   | -       |  |   | -      
|                                                                                  |  |                         |         |      |   |         |  |   |        
|Net cash used for investing activities                                            |  |                         | (202)   |      |   | (53)    |  |   | (57)   
|                                                                                  |  |                         |         |      |   |         |  |   |        
|                                                                                  |  |                         |        
|Financing Activities                                                              |  |                         |         |      |   |         |  |   |        
|Purchase of treasury stock                                                        |  |                         | -       |      |   | (490)   |  |   | (480)  
|Proceeds from exercise of stock options                                           |  |                         | 556     |      |   | 207     |  |   | 338    
|Cash dividends paid                                                               |  |                         | (1,961) |      |   | (1,770) |  |   | (1,584)
|                                                                                  |  |                         |         |      |   |         |  |   |        
|Net cash used for financing activities                                            |  |                         | (1,405) |      |   | (2,053) |  |   | (1,726)
|                                                                                  |  |                         |         |      |   |         |  |   |        
|                                                                                  |  |                         |        
|Increase (decrease) in cash and cash equivalents                                  |  |                         | 1,148   |      |   | (60)    |  |   | 290    
|                                                                                  |  |                         |        
|Cash at beginning of year                                                         |  |                         | 1,604   |      |   | 1,664   |  |   | 1,374  
|                                                                                  |  |                         |         |      |   |         |  |   |        
|                                                                                  |  |                         |        
|Cash at end of year                                                               |  | $                       | 2,752   |      | $ | 1,604   |  | $ | 1,664  
|                                                                                  |  |                         |         |      |   |         |  |   |        



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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
|                                                    |  | March2008          |           | June2008 |   | September2008 |  | December2008
|                                                    |  |                    |           |         
|Total interest income                               |  | $                  | 7,371     |          | $ | 7,012         |  | $            | 6,913     |  | $ | 6,879    
|Total interest expense                              |  |                    | 3,029     |          |   | 2,670         |  |              | 2,455     |  |   | 2,511    
|                                                    |  |                    |           |          |   |               |  |              |           |  |   |          
|Net interest income                                 |  |                    | 4,342     |          |   | 4,342         |  |              | 4,458     |  |   | 4,368    
|Provision for loan losses                           |  |                    | 150       |          |   | 200           |  |              | 230       |  |   | 370      
|                                                    |  |                    |           |          |   |               |  |              |           |  |   |          
|Net interest income after provision for loan losses |  |                    | 4,192     |          |   | 4,142         |  |              | 4,228     |  |   | 3,998    
|Total noninterest income                            |  |                    | 937       |          |   | 858           |  |              | 1,025     |  |   | 944      
|Total noninterest expense                           |  |                    | 2,750     |          |   | 2,752         |  |              | 2,775     |  |   | 2,900    
|                                                    |  |                    |           |          |   |               |  |              |           |  |   |          
|Income before income taxes                          |  |                    | 2,379     |          |   | 2,248         |  |              | 2,478     |  |   | 2,042    
|Income taxes                                        |  |                    | 714       |          |   | 679           |  |              | 752       |  |   | 601      
|                                                    |  |                    |           |          |   |               |  |              |           |  |   |          
|                                                    |  |                    |           |         
|Net income                                          |  | $                  | 1,665     |          | $ | 1,569         |  | $            | 1,726     |  | $ | 1,441    
|                                                    |  |                    |           |          |   |               |  |              |           |  |   |          
|                                                    |  |                    |           |         
|Per share data:                                     |  |                    |           |          |   |               |  |              |           |  |   |          
|Net income                                          |  |                    |           |          |   |               |  |              |           |  |   |          
|Basic                                               |  | $                  | 1.09      |          | $ | 1.03          |  | $            | 1.12      |  | $ | .93      
|Diluted                                             |  | $                  | 1.06      |          | $ | .99           |  | $            | 1.09      |  | $ | .91      
|                                                    |  |                    |           |         
|Weighted-average shares outstanding:                |  |                    |           |          |   |               |  |              |           |  |   |          
|Basic                                               |  |                    | 1,522,708 |          |   | 1,523,131     |  |              | 1,540,116 |  |   | 1,558,393
|Diluted                                             |  |                    | 1,577,099 |          |   | 1,577,863     |  |              | 1,580,243 |  |   | 1,585,589



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NOTE 18 - QUARTERLY DATA (Unaudited) (Continued)





|                                                    |  |                    |           |          |   |               |  |              |           |  |   |          
|--------------------------------------------------- |  | ------------------ | --------- | -------- | - | ------------- |  | ------------ | --------- |  | - | ---------
|                                                    |  | Three Months Ended
|                                                    |  | March2007          |           | June2007 |   | September2007 |  | December2007
|                                                    |  |                    |           |         
|Total interest income                               |  | $                  | 6,987     |          | $ | 7,388         |  | $            | 7,705     |  | $ | 7,871    
|Total interest expense                              |  |                    | 2,976     |          |   | 3,116         |  |              | 3,153     |  |   | 3,356    
|                                                    |  |                    |           |          |   |               |  |              |           |  |   |          
|Net interest income                                 |  |                    | 4,011     |          |   | 4,272         |  |              | 4,552     |  |   | 4,515    
|Provision for loan losses                           |  |                    | 225       |          |   | 225           |  |              | 300       |  |   | 380      
|                                                    |  |                    |           |          |   |               |  |              |           |  |   |          
|Net interest income after provision for loan losses |  |                    | 3,786     |          |   | 4,047         |  |              | 4,252     |  |   | 4,135    
|Total noninterest income                            |  |                    | 810       |          |   | 840           |  |              | 921       |  |   | 946      
|Total noninterest expense                           |  |                    | 2,420     |          |   | 2,562         |  |              | 2,465     |  |   | 2,681    
|                                                    |  |                    |           |          |   |               |  |              |           |  |   |          
|Income before income taxes                          |  |                    | 2,176     |          |   | 2,325         |  |              | 2,708     |  |   | 2,400    
|Income taxes                                        |  |                    | 679       |          |   | 726           |  |              | 851       |  |   | 741      
|                                                    |  |                    |           |          |   |               |  |              |           |  |   |          
|                                                    |  |                    |           |         
|Net income                                          |  | $                  | 1,497     |          | $ | 1,599         |  | $            | 1,857     |  | $ | 1,659    
|                                                    |  |                    |           |          |   |               |  |              |           |  |   |          
|                                                    |  |                    |           |         
|Per share data:                                     |  |                    |           |          |   |               |  |              |           |  |   |          
|Net income                                          |  |                    |           |          |   |               |  |              |           |  |   |          
|Basic                                               |  | $                  | .98       |          | $ | 1.05          |  | $            | 1.22      |  | $ | 1.09     
|Diluted                                             |  | $                  | .95       |          | $ | 1.01          |  | $            | 1.18      |  | $ | 1.05     
|                                                    |  |                    |           |         
|Weighted-average shares outstanding:                |  |                    |           |          |   |               |  |              |           |  |   |          
|Basic                                               |  |                    | 1,527,418 |          |   | 1,529,139     |  |              | 1,520,024 |  |   | 1,521,670
|Diluted                                             |  |                    | 1,580,945 |          |   | 1,587,416     |  |              | 1,578,255 |  |   | 1,578,026



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INVESTOR INFORMATION CORPORATE HEADQUARTERS P.O. Box 509 820 Church Street Honesdale, PA 18431 570-253-1970 email: dimeco@thedimebank.com www.thedimebank.com INDEPENDENT AUDITORS S.R. Snodgrass, A.C. 2100 Corporate Drive, Suite 400 Wexford, PA 15090-7647 724-934-0344 www.srsnodgrass.com LEGAL COUNSEL Malizia Spidi & Fisch, P.C. 901 New York Avenue, N.W. Suite 210 East Washington, DC 20001 202-434-4660 www.malizialaw.com TRANSFER AGENT Registrar and Transfer Company 10
Commerce Drive Cranford, NJ 07016 800-368-5948 email: info@rtco.com www.rtco.com Contact the transfer agent for changes of name, address, or to replace lost certificates. DIVIDEND REINVESTMENT PLAN The Company offers a plan for stockholders to automatically reinvest their dividends in shares of common stock. There are no brokerage commissions or fees imposed.
For more information contact the transfer agent. ANNUAL MEETING Shareholders are cordially invited to attend the Annual Meeting of Shareholders, which will be held at The Community Room of the Wayne County Chamber of Commerce Building, 303 Commercial Street, Honesdale, PA on Thursday, April 23,
2009 at 2:00 pm. FIRMS KNOWN TO HANDLE DIMECO, INC. STOCK TRANSACTIONS Boenning & Scattergood, Inc.* Four Tower Bridge 200 Barr Harbor Drive, Suite 300 West Conshohocken, PA 19428-2979 610-862-5360 or 800-842-8928 Howe Barnes Hoefer & Arnett, Inc.* 21B South Main Street Cohasset, MA 02025 781-383-3350 888-239-4463 www.howebarnes.com RBC Wealth Management 2101 Oregon Pike Lancaster, PA 17601-9669 717-519-5940 or 866-604-1471 Stifel Nicolaus* 7111 Fairway Drive, Suite 301 Palm Beach Gardens, FL 33418 800-793-7226 * Denotes Market Maker


THE DIME BANK OFFICERS WILLIAM E. SCHWARZ Chairman of the Board JOHN S. KIESENDAHL Vice Chairman of the Board JOHN F. SPALL Assistant Secretary GARY C. BEILMAN President and Chief Executive Officer MAUREEN H. BEILMAN Chief Financial Officer and Treasurer PETER BOCHNOVICH Senior Vice President and Assistant Secretary L. JILL GEORGE Vice President JOSEPH W. ADAMS Vice President RUTH E. DANIELS Vice President JANETTE M. DAVIS Vice President THOMAS M. DIDATO Vice President FRANK R. REDINGTON Vice President CHERYL A. SMITH Vice President JEROME D. THEOBALD Vice President DEBORAH L. UNFLAT Assistant Vice President AMY L. BURKE Community Office Manager MARY CAROL CICCO Community Banking Officer JAN M. HOADLEY Community Office Manager NANCY M. LAVENDUSKI Loan Officer THOMAS A. ONIONS Community Office Manager MELANIE F. SEAGRAVES Community Office Manager LINDA S. TALLMAN Secretary CYNTHIA D. THEOBALD Bank Security Officer TDB
INSURANCE SERVICES, LLC OFFICERS GARY C. BEILMAN President PETER BOCHNOVICH Secretary MAUREEN H. BEILMAN Treasurer JOSEPH PIZZO Vice President


DIMECO, INC. OFFICERS WILLIAM E. SCHWARZ Chairman of the Board JOHN S. KIESENDAHL Vice Chairman of the Board GARY C. BEILMAN President and Chief Executive Officer MAUREEN H. BEILMAN Chief Financial Officer, Treasurer and Assistant Secretary PETER BOCHNOVICH Senior Vice President and Assistant Secretary JOHN F. SPALL Secretary THE DIME BANK LOCATIONS HONESDALE OFFICE P.O. Box 509 820 Church Street Honesdale, PA 18431 570-253-1902 honesdale@thedimebank.com GREENTOWN OFFICE P.O. Box 946 1586 Route 507 Greentown, PA 18426 570-676-8390 greentown@thedimebank.com HAWLEY OFFICE P.O. Box 290 309 Main Avenue Hawley, PA 18428 570-226-3506 hawley@thedimebank.com DAMASCUS OFFICE P.O. Box 190 1679 Cochecton Turnpike Damascus, PA 18415 570-224-6300 damascus@thedimebank.com DINGMANS FERRY OFFICE 1824
Route 739 Dingmans Ferry, PA 18328 570-828-1200 dingmansferry@thedimebank.com LAKE REGION OFFICE P.O. Box 499 99 Welwood Avenue Hawley, PA 18428 570-226-3600 lakeregion@thedimebank.com OPERATIONS CENTER P.O. Box 509 120 Sunrise Avenue Honesdale, PA 18431 570-253-1970 operations@thedimebank.com




|  
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THE DIME BANK AND DIMECO, INC.

BOARD OF
DIRECTORS

WILLIAM E. SCHWARZ

President, Edw. J. Schwarz, Inc.

GARY C. BEILMAN

President and Chief Executive Officer,

Dimeco, Inc. and The Dime Bank

ROBERT E. GENIRS

Retired Chief Administrative Officer,

Lehman Brothers

BARBARA J. GENZLINGER

Secretary and Treasurer, The Settlers Inn, Ltd.

President, Sayre Mansion, LLC

JOHN S. KIESENDAHL

President and Chief Executive Officer,

Woodloch Pines, Inc.

THOMAS A. PEIFER

Retired Superintendent,

Wallenpaupack Area School District

HENRY M. SKIER

President, A.M. Skier Agency, Inc.

JOHN F. SPALL

Attorney-at-Law

GERALD J. WENIGER,

Director Emeritus

THE DIME BANK

SENIOR OFFICERS

Peter Bochnovich, Jill George, Gary Beilman, Maureen Beilman, Joseph Adams

THE DIME BANK

OFFICERS

Cynthia Theobald, Janette Davis, Ruth Daniels, Frank Redington, Nancy Lavenduski, Melanie Seagraves, Thomas Didato, Amy Burke, Thomas Onions, Mary Carol Cicco, Jerome Theobald, Cheryl Smith, Jan Hoadley, Deborah Unflat, Linda
Tallman



63