January 2008

Dear Shareholders:

2007 was planned, budgeted, and directed by a set of extremely lofty goals.  These challenges triggered an overwhelming spirit of determination and purpose that was embraced by everyone within our organization.  The results of our efforts, I am thrilled to report, can only be described as rock solid performance as Dimeco, Inc. posted its best numbers ever!

As reported in our quarterly financial statements, we continued to achieve growth and profitability during 2007.  Deposits grew by more than 7% as all of our five community banking offices expanded existing relationships and initiated new ones.  We regard this uptick in deposits as a great accomplishment this year, given the difficulty that much of the banking industry experienced in gathering this important funding source.  According to the Federal Deposit Insurance Corporation annual report on all banks in the country, our market share of deposits increased more than twice as much as our nearest competitor in the Pike County market.  In Wayne County we moved into the top position. These results pay tribute to the quality of the products and services we provide. 

Our loan portfolio expanded handsomely as well, with an overall increase of almost 13%.  Continuing our trend of the past several years, commercial loans grew the most, as our lenders assisted entrepreneurs to acquire or expand businesses, which is vitally important to the economy of our marketplace. Commercial loan originations were varied and included real estate mortgages, capital improvement term loans, working capital lines of credit, loans for equipment, inventory, and technology.  This increase in loans was accomplished while many other financial institutions struggled just to maintain credits already on their books. 

Our growth did not come at the expense of credit quality.  Loan delinquencies were held at low levels, being consistently below 1% throughout the year.  Proactive loan management resulted in minimal charge-offs and numerous recoveries.  To ensure that we are well positioned for the future, our allowance for loan losses is at a very healthy 1.56% of total loans. 

1. We are particularly pleased to report that the subprime mortgage problems that plague many other institutions are non-existent here, as we never strayed from our prudent underwriting guidelines.  Our loan portfolio, which is both our largest asset class as well as our largest source of income, is diligently managed by practices that have served us well for more than 102 years.

Net income, probably one of our most notable accomplishments for the year, was record-setting at $6.6 million.  This amount was 18% higher than the net income of the previous year, and was achieved primarily by maintaining spread, monitoring cost, and proper, yet competitive, pricing on both sides of the balance sheet. We were able to hold our margins and maintain our spreads while numerous other institutions lost ground. 

1. With net income of this magnitude, we posted a 1.58% return on average assets and a 17.54% return on average equity.  Our efficiency ratio continues to be among the highest of our peers, with the bank ratio at 47.5% compared to a peer average of 61.5%, placing us in the top 12% of our national peer group as published in the Uniform Bank Performance Report for December 31, 2007. When all annual reports are filed, and the comparisons are completed, these ratios should place us near the top of our peer group, both statewide and nationally.

Of particular importance to our shareholders is the manner in which our income was utilized.  A large portion of income is prudently placed in retained earnings.  This net worth category is extremely strong at over $39.9 million, an increase of 13.0% over the previous year.  A significant portion of our income is distributed to you in the form of dividends. For a second year in a row, your Board of Directors increased the dividend by double digits, with this year’s increase being 11.2%. 

1. Also of considerable note is the market’s reaction to the value and strength of Dimeco’s stock.  At the beginning of the year, our market price per share was $41.75, and the year ended with a value of $46.26 per share - a growth rate of more than 10% in the market value of Dimeco stock in 2007.  We view this as a true accomplishment, especially in light of the recent downturn experienced in the overall securities market and the performance of other financial stocks.

Successes like these don’t just happen; they are achieved through the efforts of many.  Certainly our Board of Directors and our staff is to be highly commended.  Every day this group puts forth its best efforts, displaying pride, dedication, and loyalty to our institution.  During the year, eight individuals were recognized as they celebrated employment anniversaries ranging from five to fifteen years.  Of special note were Ruth Daniels and Cindy Theobald who attained twenty and thirty year employment milestones, respectively.  Both individuals have contributed to our success and intend to help guide us for many years to come.  Tenure at all levels provides stability and consistency – the cornerstones of our operating philosophy.  Our dedicated Directors transform our mission statement into a living document by which all actions are dictated.  Director Henry Skier was honored during 2007 for his twenty-five years of guidance, insight, and wisdom.  The entire directorate continually exercises vigilance in doing what is right and best for all concerned. 

We also thank our customers, long-standing and new alike.  This group entrusts its financial well-being to us, a responsibility that we take very seriously.  Whether account service, investment strategies, financial planning, or building a dream, the backbone of our business is addressing the desires of our clientele.  Our staff listens closely and asks appropriate questions in order to gain a full understanding of the needs, wants, and future plans of our customers.  With this knowledge we are able to develop a true relationship and serve the best interests of all. 

To you, our shareholders, we offer sincere gratitude and respect.  It is through your interest and loyalty that we exist.  Please know that the enhancement of your investment is our daily commitment.  Our ultimate goal is to reward your trust and faith.  As we move forward together, we hope that you will continue to refer others to us for both financial services and stock ownership. 

Looking ahead, we are excited by the view.  During the upcoming year we will be introducing new technology geared toward customer convenience and efficiency.  Several new services will be rolled out which will enhance banking activities and expand client relationships.  Additionally, our service area will grow geographically as we construct and open our new Lake Region Office.  Our primary market area of Wayne and Pike Counties, Pennsylvania, and Sullivan County, New York are vibrant and growing.  The overall population is increasing, economic development continues to expand, and the area boasts a workforce with a strong work ethic.  The strategic placement of our community banking offices provides us the opportunity to be a part of, and significantly contribute to, the well-being of our marketplace. 

For the year ahead, we will strive to go even further in achieving outstanding results. The performance of 2007 provides a solid foundation for the future.  As always, we thank you for your continued support.

Sincerely,
 

Gary C. Beilman
President and Chief Executive Officer