UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, ~~2011~~2012

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 0-49639

DIMECO, INC. (Exact name of ~~Registrant~~registrant as specified in its ~~Charter~~charter)

Pennsylvania		23-2250152
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

820 Church Street, Honesdale, Pennsylvania	18431	~~18431~~
(Address of Principal Executive Offices)		(Zip Code)
(Address of principal executive offices)	(Zip Code)

Registrant’s ~~Telephone~~telephone ~~Number~~number, including area code: (570) 253-1970

Securities ~~Registered~~registered ~~Pursuant~~pursuant to Section 12(b) of the Act: None

Securities ~~Registered~~registered ~~Pursuant~~pursuant to Section 12(g) of the Act:

Common Stock, $.50 par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨YES x NO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ YES x NO

Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x YES ¨ NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x YES ¨ NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer ¨		Accelerated filer ¨
	Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ YES x NO

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $4649 million as of June 30, ~~2011~~2012 based on the last sale ($3537.60 per share) reported on the OTC Bulletin Board as of that date. Solely for purposes of this calculation, the term “affiliate” refers to all directors and executive officers of the registrant and all stockholders beneficially owning more than 5% of the registrant’s common stock.

As of March 1, ~~2012~~2013, there were issued and outstanding 1,~~599~~626,~~646~~506 shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, ~~2011~~2012. (Part II)

2. Portions of the Registrant’s definitive Proxy Statement for the ~~2012~~2013 Annual Meeting of Shareholders. (Part III)

DIMECO, INC.

ANNUAL REPORT ON FORM 10-K

for the fiscal year ended December 31, ~~2011~~2012

INDEX

			~~Page~~	Page
PART I	~~PART I~~
Item 1.	~~Business~~	Business	2	2
Item 1A.	~~Risk Factors~~	Risk Factors	23	23
Item 1B.	~~Unresolved Staff Comments~~	Unresolved Staff Comments	23	23
Item 2.	~~Properties~~	Properties	23	23
Item 3.	~~Legal Proceedings~~	Legal Proceedings	24	23
Item 4.	~~Mine Safety Disclosures~~	Mine Safety Disclosures	24	23
PART II
Item 5.	~~Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24	24
Item 6.	~~Selected Financial Data~~	Selected Financial Data	24	24
Item 7.	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24	24
Item 7A.	~~Quantitative and Qualitative Disclosures About Market Risk~~	Quantitative and Qualitative Disclosures About Market Risk	24	24
Item 8.	~~Financial Statements and Supplementary Data~~	Financial Statements and Supplementary Data	25	24
Item 9.	~~Changes In and Disagreements with Accountants on Accounting and Financial Disclosure~~	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	25	24
Item 9A.	~~Controls and Procedures~~	Controls and Procedures	25	24
Item 9B.	~~Other Information~~	Other Information	25	25
PART III
Item 10.	~~Directors, Executive Officers and Corporate Governance~~	Directors, Executive Officers and Corporate Governance	25	25
Item 11.	~~Executive Compensation~~	Executive Compensation	25	25
Item 12.	~~Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters~~	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	25	26
Item 13.	~~Certain Relationships and Related Transactions, and Director Independence~~	Certain Relationships and Related Transactions, and Director Independence	27	27
Item 14.	~~Principal Accounting Fees and Services~~	Principal Accounting Fees and Services	27	27
PART IV
Item 15.	~~Exhibits, Financial Statement Schedules~~	Exhibits, Financial Statement Schedules	27	27
SIGNATURES			29	29

PART I

Forward-Looking Statements

Dimeco, Inc. (the “Company” or “Registrant”) may, from time to time, make written or oral “forward-looking statements,” including statements contained in the Company’s filings with the Securities and Exchange Commission (including this ~~annual~~Annual ~~report~~Report on Form 10-K and the exhibits thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve risks and uncertainties, such as statements of the Company’s plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing these risks.

The Company cautions that this list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

Item 1. Business

General

The Company, a Pennsylvania corporation, is a bank holding company headquartered in Honesdale, Pennsylvania. At December 31, ~~2011~~2012, the Company had total consolidated assets, deposits and stockholders’ equity of approximately $~~582~~604 million, $~~484~~501 million and $5560 million, respectively. The Company’s principal business is to serve as a holding company for its wholly-owned subsidiary, The Dime Bank (the “Bank”).

The Bank is a Pennsylvania-chartered commercial bank, originally organized in 1905. The Bank provides a comprehensive range of lending, depository and financial services to individuals and small to medium-sized businesses. The Bank’s deposit services range from traditional time, demand, and savings deposit accounts to sophisticated cash management products, including electronic banking and commercial sweep accounts. The Bank’s lending services include secured and unsecured commercial, real estate and consumer loans. The Bank also operates a trust department and an investment department which had $~~137~~147 million in client assets under management at December 31, ~~2011~~2012. The Bank conducts business from six branch offices, located in Honesdale, Hawley, Damascus, Greentown and Dingmans Ferry, Pennsylvania, as well as maintaining two off-site ATM machines each located in Honesdale and Hawley, Pennsylvania and an Operations Center in Honesdale, Pennsylvania. The Bank’s Lake Region office in Hawley, Pennsylvania also serves as the office for the Bank’s trust and investments departments. The Bank maintains a website at www.thedimebank.com. Information on our website should not be treated as part of this Annual Report on Form 10-K.

The Bank has a 100% owned subsidiary, TDB Insurance Services, LLC, inwhich ~~order~~offers ~~to offer~~ title insurance services in conjunction with the Bank’s lending function.

Competition

The Bank is one of many financial institutions serving its principal market area, which includes Wayne and Pike Counties, Pennsylvania and Sullivan County, New York. Such market areas are approximately 90 miles west of New York City. ~~Pike County, Pennsylvania is one of the fastest growing counties in Pennsylvania.~~ The competition for deposit products comes primarily from other insured financial institutions such as commercial banks, thrift institutions, credit unions, and multi-state regional banks in the Company’s market area. Based on data compiled by the FDIC as of June 30, ~~2011~~2012 (the latest date for which such information is available), the Bank had the largest share of FDIC-insured deposits in Wayne County with approximately 28% and the second largest share of FDIC-insured deposits in Pike County with approximately 2023%. This data does not reflect deposits held by credit unions with which the Bank also competes. Deposit competition also includes a number of insurance products sold by local agents and investment products, such as mutual funds and other securities sold by local and regional brokers. Loan competition varies depending upon market conditions and comes from other insured financial institutions such as commercial banks, thrift institutions, credit unions, multi-state regional banks, and mortgage brokers.

Lending Activities

General. The principal lending activity of the Bank is the origination of commercial real estate loans, residential mortgage loans, commercial and industrial loans, and to a lesser extent, installment loans, construction and development loans, home equity loans, and agricultural loans. Generally, loans are originated in the Company’s primary market area of Pike and Wayne Counties, Pennsylvania and Sullivan County, New York. The majority of the Bank’s borrowers are located in these counties and would be expected to be affected by economic and other conditions in this area. In addition, at December 31, ~~2011~~2012, the Company had $~~106~~113 million of loans granted to summer camps and recreational facilities in the northeastern United States. This amount of loans constituted approximately 24% of the loan portfolio. The Company does not believe that there are any other concentrations of loans or borrowers exceeding 10% of total loans.

Analysis of Loan Portfolio. Set forth below is selected data relating to the composition of the Bank’s loan portfolio by type of loan on the dates indicated. Prior period information has been reclassified to agree with current year presentation.

	2011					2010					2009					2008					2007
	2012					2011					2010					2009					2008
(dollars in thousands)	$		%			$		%			$		%			$		%			$		%
Loans secured by real estate:
Construction and development	$	1418,~~571~~215		3.38	%	$	1214,~~472~~571		23.93	%	$	1612,~~286~~472		42.09	%	$	1316,~~403~~286		34.50	%	$	813,~~385~~403		23.45	%
Mortgage loans secured by farmland		3,~~585~~185		0.87	%		23,~~590~~585		0.68	%		12,~~684~~590		0.46	%		1,~~804~~684		0.54	%		1,~~869~~804		0.5	%
Commercial loans secured by non-farm, non-residential properties		~~269~~281,~~248~~841		6059.23	%		~~255~~269,~~851~~248		60.2	%		~~243~~255,~~014~~851		5960.32	%		~~217~~243,~~378~~014		5759.23	%		~~198~~217,~~323~~378		57.52	%
Secured by 1-4 family residential properties:
Home equity lines of credit		11,~~215~~754		2.5	%		911,~~935~~215		2.45	%		89,~~657~~935		2.14	%		68,~~342~~657		12.71	%		46,~~718~~342		1.47	%
Mortgage loans		8788,~~088~~930		1918.57	%		8187,~~665~~088		19.25	%		7681,~~193~~665		1819.62	%		7576,~~715~~193		1918.96	%		6975,~~242~~715		2019.19	%
Commercial and industrial loans		4553,~~312~~585		1011.13	%		4445,~~850~~312		10.61	%		4244,~~502~~850		10.46	%		42,~~396~~502		1110.14	%		3942,~~337~~396		11.41	%
Installment loans		98,~~821~~361		21.28	%		109,~~772~~821		2.52	%		1210,~~869~~772		32.15	%		1412,~~750~~869		3.91	%		1514,~~656~~750		43.59	%
Other loans:
Agriculture		~~955~~1,371		0.23	%		~~1,771~~955		0.42	%		1,~~426~~771		0.34	%		~~694~~1,426		0.23	%		~~879~~694		0.32	%
Other		57,~~459~~520		1.26	%		5,~~163~~459		1.2	%		75,~~381~~163		1.82	%		7,~~725~~381		21.08	%		67,~~349~~725		12.90	%
Total loans	$	~~447~~474,~~254~~762		100.0	%	$	~~425~~447,~~069~~254		100.0	%	$	~~410~~425,~~012~~069		100.0	%	$	~~380~~410,~~207~~012		100.0	%	$	~~344~~380,~~758~~207		100.0	%
Less allowance for loan losses		9,152					8,316					7,741					6,253					5,416
Total net loans	$	465,610				$	438,938				$	417,328				$	403,759				$	374,791
Loans held for sale	$	1,132				$	-				$	-				$	-				$	-

Loan Maturities. The following table sets forth the maturities for selected categories of the Bank’s loan portfolio at December 31, ~~2011~~2012. The table does not include prepayments or scheduled principal repayments. All loans are shown as maturing based on contractual maturities. Demand loans and loans having no stated maturity are shown as due within one year.

(in thousands)	Due within 1 yr.		Due after 1 through 5 years		Due after 5 years		Total
			Due after 1
Commercial & agricultural real estate	$	18,434	$	17,038	$	237,361	$	272,833
(in thousands)	Due within 1 yr.		through 5 years		Due after 5 years		Total
Commercial & industrial, and agricultural		11,214		14,848		20,205		46,267
Commercial & agricultural real estate	$	33,283	$	7,593	$	244,150	$	285,026
Construction and development		219		10,239		4,113		14,571
Commercial & industrial, and agricultural		23,185		16,830		14,941		54,956
Total	$	29,867	$	42,125	$	261,679	$	333,671
Construction and development		7,508		2,059		8,648		18,215
Total	$	63,976	$	26,482	$	267,739	$	358,197

The following table sets forth the dollar amount as of December 31, ~~2011~~2012 of selected categories of the Company’s loans due more than one year after December 31, ~~2011~~2012, which are based upon fixed interest rates or floating or adjustable interest rates.

Loans due more than one year after 12/31/12

(in thousands)

Fixed Rate

Variable Rate

Total

Commercial & agricultural real estate

119,~~289~~846

~~243~~241,~~110~~897

~~254~~251,~~399~~743

Commercial & industrial, and agricultural

18,~~745~~937

1612,~~308~~834

3531,~~053~~771

Construction and development

~~5,939~~856

89,~~413~~851

1410,~~352~~707

Total

3529,~~973~~639

~~267~~264,~~831~~582

~~303~~294,~~804~~221

Construction and Development Loans. The Bank’s construction lending has primarily involved lending for commercial construction projects and for single-family residences. All loans for the construction of speculative sale homes have a loan to value ratio of not more than 80%. For both commercial and single-family projects loan proceeds are disbursed during the construction phase according to a draw schedule based on the stage of completion. Construction projects are inspected by approved contracted inspectors. Construction loans are underwritten on the basis of the appraised value of the property as completed. For commercial projects, the Bank typically provides the permanent financing after the construction period, as a commercial mortgage.

The Bank has also originated loans for the development of raw land. These loans have a term of up to three years. Loans granted to developers may have an interest only period during development. Development loans have a loan-to-value ratio not exceeding 75%.

Loans involving construction and development financing have a higher level of risk than loans for the purchase of existing property since collateral values, land values, development costs and construction costs can only be estimated at the time the loan is approved. The Bank has sought to minimize its risk in construction and development lending by offering such financing primarily to builders and developers to whom ~~the~~ Bank ~~has~~officers have loaned funds in the past and to persons who have previous experience in such projects. The Bank also limits ~~construction~~ construction and development lending to its market area, with which management is familiar.

Commercial Real Estate and Farmland Loans. The commercial real estate loan portfolio consists of loans secured primarily by children’s recreational summer camps, retail stores, restaurants, resorts, hotels, investment real estate, stone quarries and manufacturing facilities. The Bank also makes loans secured by farmland. Loans secured by commercial property or farmland may be originated in amounts up to 80% of the lower of the appraised value or purchase price, for a maximum term of 20 years. The Bank has a concentration of commercial real estate loans that are secured by summer camps and recreational facilities for children in the northeastern United States. These loans are generally adjustable-rate loans, with terms of up to 20 years, and the rate tied to the prime interest rate. Interest rate floors were included in most loans originations insince 2009, ~~2010 and 2011~~ but were not before that time. At December 31, ~~2011~~2012, $~~106~~113 million of the loan portfolio consisted of loans to these summer camps and recreational facilities for children.

Loans secured by commercial properties generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income-producing properties and the greater difficulty of evaluating and monitoring these types of loans. Any significant adverse change in economic conditions could have an adverse impact on the borrowers’ ability to repay loans. A large portion of the Bank’s commercial real estate loan portfolio consists of loans secured by summer camps and recreational facilities located in the northeastern United States. Such loans are dependent upon seasonal business and factors beyond the Bank’s control, such as the general economic condition of the northeastern United States and the impact on discretionary consumer spending. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related business or commercial project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In such cases, the Bank may be compelled to modify the terms of the loan. In addition, the nature of these loans makes them generally less predictable and more difficult to evaluate and monitor. As a result, repayment of these loans may be subject to a greater extent than residential loans to adverse conditions in the real estate market or economy.

Residential Real Estate Loans. The residential real estate portfolio consists primarily of owner-occupied 1-4 family residential mortgage loans. The Bank generally originates 1-4 family residential mortgage loans in amounts of up to 80% of the appraised value of the mortgaged property without requiring mortgage insurance. The Bank will originate residential mortgage loans in amounts up to 95% of the appraised value of a mortgaged property; however, mortgage insurance is required for any loan amount in excess of 80% of appraised value. In addition, the Bank participates in special residential loan programs through various state and federal agencies which provide first-time home buyers the ability to finance up to 100% of the property value; these loans are guaranteed by those various federal and state agencies. The Bank offers residential fixed-rate loans and adjustable-rate loans with a 15 to 30 year amortization period. Interest rates for adjustable-rate loans for residences adjust every 1 to 3 years based upon rates on U.S. Treasury bills and notes. Interest rate adjustments on such loans are generally limited to two percentage points during any adjustment period and six percentage points over the life of the loan. These loans are originated for retention in the portfolio. The Bank does not use introductory “teaser” rates on adjustable-rate mortgages nor has it originated “interest-only” mortgages.

Fixed-rate loans are generally underwritten in accordance with Freddie Mac guidelines. Currently, loans underwritten in accordance with Freddie Mac guidelines are generally sold in the secondary market. However, the number of saleable loans could vary materially as a result of market conditions. Fixed-rate loans which are held in portfolio are underwritten in accordance with Freddie Mac credit guidelines but occasionally may not conform in relation to loan amount or property guidelines. Since we are located in a rural area, many homes are on properties with more acreage than permitted by Freddie Mac underwriting guidelines. At December 31, ~~2011~~2012, $3840 million of the Bank’s residential real estate loan portfolio consisted of long-term, fixed-rate first mortgage loans.

Substantially all of the 1-4 family mortgages include “due on sale” clauses, which are provisions giving the Bank the right to declare a loan immediately payable if the borrower sells or otherwise transfers an interest in the property to a third party.

Property appraisals on real estate securing 1-4 family residential loans are made by appraisers approved by the Loan Committee. Appraisals are performed in accordance with applicable regulations and policies. The Bank obtains title insurance policies on most first mortgage real estate loans originated.

Home equity term loans are written for terms of 1 to 15 years with fixed rates of interest. The Bank also offers revolving home equity lines of credit with variable interest rates tied to the New York prime rate. Interest rate floors were added to these loan originations in 2010. These lines allow for a 10-year draw period followed by a 10-year repayment period. Both types of home equity loans are typically based upon the lower of 80% of the collateral value or $150,000.

Commercial and Industrial Loans. Commercial and industrial loans consist of equipment, accounts receivable, inventory, lines of credit, and other business purpose loans. Such loans are generally originated in amounts up to 75% of the appraised value of the business asset and are secured by either the underlying collateral and/or by the personal guarantees of the principal(s) of the borrower. Commercial and industrial loans are generally originated at rates above the prime interest rate and periodically adjust with changes to prime. Loan interest rate floors were included in the majority of loans originated since 2009. These loans generally mature in 5 to 10 years.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself and the general economic environment.

Installment Loans. The installment loan portfolio includes various types of secured and unsecured consumer loans including automobile, education, and recreational vehicle loans. The Bank also extends overdraft lines of credit through its Ready Credit program. The Bank originates loans directly and indirectly through local automobile and recreational vehicle dealerships. These loans generally have terms of 1 to 5 years, generally at fixed rates of interest. The interest rates range between 2% for loans that are secured by deposits to 14% for loans that are unsecured, with an average interest rate of approximately 9%. The installment loan portfolio includes approximately $5 million of new and used automobile and recreational vehicle loans. These loans are originated in amounts up to 90% of the purchase price of the vehicle.

Consumer installment lending may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets, such as automobiles or recreational vehicles, which depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not be sufficient for repayment of the outstanding loan, and the remaining deficiency may not be collectible. Indirect lending exposes us to additional risk in that we must rely on the dealer to provide accurate information to us and accurate disclosure to the borrowers.

Loans Held For Sale. The Bank holds as available for sale certain residential mortgage loans. These loans conform to Freddie Mac guidelines and are readily saleable in the secondary market. The Bank services such loans and is generally not liable for these loans, since they are sold on a non-recourse basis. At December 31, ~~2011~~2012, we had no$1 million of loans classified as held for sale.

Loan Solicitation and Processing. Loans are derived from a number of sources. Installment loans are primarily solicited through advertising, existing customers and referrals from automobile and recreation vehicle dealers. Residential mortgage loans are generally derived from advertising, walk-in customers and referrals by realtors, depositors, and borrowers. Commercial real estate loans and commercial and industrial loans are generally obtained through existing relationships with borrowers and new relationships developed by our loan officers.

The Bank has established various lending limits for its officers and also maintains a Loan Committee. The Loan Committee is comprised of the President, Senior Lending Officer and other Bank officers. The Loan Committee has the authority to approve all loans up to $500,000. Requests in excess of this limit must be submitted to the Board of Directors’ Loan Committee or the entire Board for approval. Additionally, the President and Senior Lending Officer each has the authority to approve secured loans up to $200,000, and unsecured loans up to $100,000. Loan officers generally have the authority to approve secured loans between $30,000 and $150,000 and unsecured loans between $15,000 and $50,000. Notwithstanding individual lending authority, certain loan policy exceptions must be submitted to the Loan Committee for approval.

Hazard insurance coverage is required on all properties securing loans made by the Bank. Flood insurance is also required, when applicable. Residential and commercial loan applicants are notified of the credit decision by letter. If the loan is approved, the loan commitment specifies the terms and conditions of the proposed loan including the amount, interest rate, and amortization term, a brief description of the required collateral, and the required insurance coverage. The borrower must provide proof of fire, flood (if applicable) and casualty insurance on the property serving as collateral, and these applicable insurances must be maintained during the full term of the loan.

Loan Commitments. The Bank generally grants commitments to fund fixed-rate and adjustable-rate, single-family mortgage loans for periods of 30 days at a specified term and interest rate. The total amount of its commitments to ~~extend~~fund ~~credit~~loans as of December 31, ~~2011~~2012, was $3 6 million.

Nonperforming Assets

The following table identifies nonperforming assets including nonaccrual loans and past due loans which were accruing but contractually past due 90 days or more and restructured loans. Restructured loans are those on which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating position of the borrower. At December 31, ~~2011~~2012, the Bank had $1719 million of impaired loans within the definition of ASC Topic 310.

	At December 31,
(In thousands)	2011			2010			2009			2008			2007
(dollars in thousands)	2012			2011			2010			2009			2008
Loans accounted for on a nonaccrual basis:
Real estate-construction loans	$	~~1,105~~-		$	-1,105		$	-		$	-		$	-
Real estate-mortgage loans		1214,~~324~~396			1512,~~661~~324			515,~~966~~661			~~341~~5,966			~~443~~341
Commercial and industrial loans		381,344			-38			~~1,524~~-			231,524			~~116~~23
Installment loans to individuals		4824			1548			3215			2532			1325
Other loans		-			-			-			-			-
Total	$	1315,~~515~~764		$	1513,~~676~~515		$	715,~~522~~676		$	~~389~~7,522		$	~~572~~389
Accruing loans which are contractually past due 90 days or more:
Real estate-construction loans	$	-		$	-		$	6-		$	6		$	-6
Real estate-mortgage loans		~~386~~-			~~1,464~~386			1,~~988~~464			51,~~823~~988			~~509~~5,823
Commercial and industrial loans		~~163~~300			~~541~~163			67541			1167			5011
Installment loans to individuals		2			442			6144			2061			120
Other loans		-			39-			3039			430			-4
Total	$	~~551~~302		$	~~2,088~~551		$	2,~~152~~088		$	52,~~864~~152		$	~~560~~5,864
Restructured loans		45,~~725~~386			434,725			4643			4846			8348
Total nonperforming loans		1821,~~791~~452			1718,~~807~~791			917,~~720~~807			69,~~301~~720			16,~~215~~301
Other real estate owned		32,~~467~~554			~~960~~3,467			~~389~~960			~~1,955~~389			-1,955
Repossessed assets		253			2725			627			~~164~~6			4164
Total nonperforming assets	$	2224,~~283~~009		$	1822,~~794~~283		$	1018,~~115~~794		$	810,~~420~~115		$	18,~~219~~420
Nonperforming loans as a percent of total loans		4.52	%		4.20	%		4.19	%		2.37	%		1.66	%
Nonperforming assets as a percent of total assets		3.98	%		3.83	%		3.47	%		1.91	%		1.78	%

Interest income of $~~613~~725 thousand would have been recognized on nonaccrual loans during ~~2011~~2012 if they had been performing in accordance with their original terms. WeDuring 2012, we recognized no interest income on ~~such~~any non-accrual loans ~~during~~included ~~2011~~above. No interest was foregone on restructured loans in ~~2011~~2012.

Balances of nonperforming loans increased $13 million during the year ended December 31, ~~2011~~2012 due primarily to an increase of $52 million in ~~restructured~~real estate mortgage loans. Loans past due 90 days or more and still accruing interest declined by $2200 ~~million~~thousand ~~and~~while loans in nonaccrual status ~~declined~~ increased $2 million. Commercial real estate loans accounted for the largest portion of the total nonaccrual loans. These loans are well secured by real estate, with loan to value ratios below our required standards and we are pursuing collection efforts. Management does not believe that we have any one loan that would require a material charge to the allowance for loan losses. The long term national economic downturn has caused our nonperforming loans to increase to current levels. There is a detailed explanation of loans in this category included in “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Allowance for Loan Losses,” incorporated herein by reference from the Annual Report to Shareholders for the year ended December 31, ~~2011~~2012 filed as Exhibit 13 to this Annual Report on Form 10-K.

Other Real Estate Owned. Real estate acquired by foreclosure is classified within other assets 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.

Due to the increase in foreclosure activity in the current economic environment, the average length of time for completing a foreclosure is currently nine to twelve months. For a discussion of our other real estate owned properties, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Statement of Condition” incorporated herein by reference to the Annual Report to Shareholders for the year ended December 31, ~~2011~~2012 filed as Exhibit 13 to this Annual Report on Form 10-K.

Classified Assets. Management, in compliance with regulatory guidelines, has instituted an internal loan review program, whereby weaker credits are classified as special mention, substandard, doubtful or loss. When a loan is classified as substandard or doubtful, management is required to establish a valuation reserve for loan losses in an amount that is deemed prudent. When management classifies a loan as a loss asset, a reserve equal to 100% of the loan balance is required to be established or the loan is to be charged-off. The allowance for loan losses is composed of an allowance for both inherent risk associated with lending activities and particular problem assets.

An asset is considered substandard if it is inadequately protected by the paying capacity and net worth of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a loss reserve is not warranted. Assets which do not currently expose the insured institution to a sufficient degree of risk to warrant classification in one of the aforementioned categories but possess credit deficiencies or potential weaknesses are required to be designated special mention by management.

Management’s evaluation of the classification of assets and the adequacy of the allowance for loan losses is reviewed by the Board on a regular basis and by the regulatory agencies as part of their examination process.

The following table sets forth the Bank’s classified assets in accordance with its classification system:

~~At December 31,~~	At December 31,
(In thousands)	2011		2010		2009		2008		2007
(thousands)	2012		2011		2010		2009		2008
Special mention	$	1113,~~748~~205	$	11,~~698~~748	$	1211,~~029~~698	$	1812,~~281~~029	$	1118,~~990~~281
Substandard		4245,~~822~~072		4142,~~937~~822		2341,~~308~~937		1823,~~359~~308		718,~~889~~359
Doubtful		17		117		1~~,774~~		21,~~032~~774		2,~~561~~032
Loss		—-		—		—		—		—
Total	$	5458,~~587~~294	$	5354,~~636~~587	$	3753,~~111~~636	$	3837,~~672~~111	$	2238,~~440~~672

Potential Problem Loans. As of December 31, 2011, there were no loans other than those disclosed as non-performing or classified assets, where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.

Potential Problem Loans. As of December 31, 2012, there were no loans other than those disclosed as non-performing or classified assets, where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.

Allowance for Loan Losses

For a description of the Company’s methodology for determining the allowance for loan losses, see Note 1 of the Notes to Consolidated Financial Statements. For information on charge-off and recovery activity in the Allowance for Loan Losses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Allowance for Loan Losses” in the Annual Report to Shareholders for the year ended December 31, ~~2011~~2012 which is filed as Exhibit 13 to this Annual Report on Form 10-K and incorporated herein by reference.

The allowance for loan losses increased 710% from December 31, ~~2010~~2011 to December 31, ~~2011~~2012 with several factors contributing to the change. The allowance for loan losses is made up of various components including: historical loss ratios for rated loans (loans subject to individual evaluations) and for homogeneous loans over the past three years, and external environmental factors such as trends in volume, trends in delinquencies, classified loans and charge-offs, local and national economic factors, changes in management and loan policies, loan concentrations, etc. We track the loss ratio in order to determine the percentage of loans in each loan review rating that have resulted in a loss to the Company, and weighting the most recent years heavier than the oldest year in the calculation. Contributing to increases in our allowance for loan losses was growth in the loan portfolio of ~~5.2~~6% and deteriorating external economic factors.

Over the past few years, management has taken a conservative approach to evaluating loans subject to individual reviews in light of current economic conditions within the banking industry. Impaired loans, which are identified independently of the above categories, increased by $2 million ~~from~~to approximately $1619 million. While management has been diligent in its underwriting of loans and generally requires real estate collateral on these risk rated loans, we believe it was appropriate to review these loans on a conservative basis. The ~~increase in the~~ allowance for loan losses relating to impaired loans amounted to $23 million.

The allowance for loan losses is based on significant estimates and management evaluates the allowance for loan losses based on an appropriate range as opposed to an absolute amount. Management believes the allowance for loan losses is in an acceptable range at December 31, ~~2011~~2012 and will continue to actively monitor current events and trends in their analysis.

The following table presents a breakdown by loan category of the allowance for loan losses:

	At December 31,
	2011					2010					2009					2008					2007
	2012					2011					2010					2009					2008
(dollars in thousands)	Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans			Amount		Percent of Loans to Total Loans
Commercial and industrial, and agricultural	$	~~474~~965		1013.32	%	$	~~634~~474		1210.23	%	$	~~626~~634		12.52	%	$	~~1,263~~626		1312.45	%	$	1,~~916~~263		13.54	%
Construction and development		~~283~~416		3.38	%		~~223~~283		23.93	%		—223		42.09	%		—		34.50	%		—		23.45	%
Mortgage		7,~~401~~641		8381.02	%		67,~~690~~401		8283.40	%		56,~~456~~690		8082.4	%		~~3.980~~5,456		7980.24	%		3~~,270~~.980		79.62	%
Installment		~~158~~130		31.48	%		~~194~~158		23.54	%		~~171~~194		32.15	%		~~173~~171		3.91	%		~~206~~173		43.59	%
Total	$	89,~~316~~152		100.0	%	$	78,~~741~~316		100.0	%	$	67,~~253~~741		100.0	%	$	56,~~416~~253		100.0	%	$	5,~~392~~416		100.0	%

Investment Activities

The Bank is required by federal banking regulators to maintain an adequate level of liquid assets which may be invested in specified short-term securities and certain other investments. The level of liquid assets varies depending upon several factors, including: (i) the yields on investment alternatives, (ii) management’s judgment as to the attractiveness of the yields then available in relation to other opportunities, (iii) expectation of future yield levels, and (iv) management’s projections as to the short-term demand for funds to be used in loan origination and other activities. Investment securities are classified at the time of purchase, based upon management’s intentions and abilities, as securities held to maturity or securities available for sale. Management has for several years maintained all current investment purchases in the available for sale category in order to have the ability to liquidate the investment with no accounting ramifications. It is not our intent to sell these securities, we do expect to hold them until maturity, but have classified them as available for sale in order to have the ability to sell them if the need arises. Securities classified as available for sale are reported for financial reporting purposes at fair value with net changes in the fair value from period to period included as a separate component of stockholders’ equity, net of income taxes. They are booked at cost and adjusted for amortization of premium and accretion of discount to arrive at their amortized cost. Amortization of premium and accretion of discount is computed using the interest method and recognized as adjustments of interest income. Debt securities classified as held to maturity would be those which management purchased with the intent and ability to hold to maturity and would be stated at cost and adjusted for amortization of premium and accretion of discount, computed using the interest method and recognized as adjustments of interest income. Equity securities which consist of investments in stock of various financial services companies are classified as available for sale when purchased.

As of December 31, ~~2011~~2012, the Bank had no securities classified as trading or held to maturity and had securities in the amount of $9691 million classified as available for sale. The Bank’s securities available for sale had an amortized cost of $9388 million and a fair value of $9691 million. Changes in market value in the Bank’s available for sale portfolio reflect normal market conditions and vary, either positively or negatively, based primarily on changes in general levels of market interest rates relative to the yields of the portfolio. Changes in the fair value of securities available for sale do not affect the Company’s income. In addition, changes in the fair value of securities available for sale do not affect the Bank’s regulatory capital requirements or its loan-to-one borrower limit.

At December 31, ~~2011~~2012, the Company’s investment portfolio policy allowed investments in instruments such as: (i) U.S. Treasury obligations; (ii) U.S. federal agency or federally sponsored agency obligations; (iii) obligations of state and political subdivisions; (iv) mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored entities; (v) banker’s acceptances; (vi) certificates of deposit; (vii) equity securities of financial institutions and (viii) investment grade corporate bonds and commercial paper. All bonds purchased must have an investment grade of at least Baa3 by Moody’s or BBB- by Standard & Poor or similar rating by another rating agency. Commercial paper must have a rating of at least A-3 by Standard & Poor or P-3 from Moody’s. The Board of Directors may authorize additional investments. The Company does not have any investments in subprime mortgage-backed securities.

Management evaluates securities in the investment portfolio for other than temporary impairment in accordance with ASC Topic 320, Investments, Debt and Equity Securities. 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.

Investment Portfolio. The following table sets forth the carrying value of the investment securities portfolio at the dates indicated.

	At December 31,
(In thousands)	2011		2010		2009
(in thousands)	2012		2011		2010
Available for Sale:
Available-for-Sale:
U.S. government agency securities	$	11,191	$	12,774	$	22,120
U.S. Government agency securities	$	7,935	$	11,191	$	12,774
Mortgage-backed securities of government - sponsored entities		2825,~~578~~884		2428,~~274~~578		424,~~305~~274
Collateralized mortgage obligations of government - sponsored entities		56,~~175~~066		-5,175		-
Obligations of state and political subdivisions		3437,~~090~~322		2934,~~178~~090		2729,~~088~~178
Corporate securities		45,~~082~~347		4,~~730~~082		64,~~636~~730
Commercial paper		11,998		8,099		13,045
Commercial Paper		7,648		11,998		8,099
Equity securities of financial institutions		~~505~~545		~~600~~505		~~434~~600
Total	$	9590,~~619~~747	$	7995,~~655~~619	$	7379,~~628~~655

Investment Portfolio Maturities. The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of the Registrant’s investment and mortgage-related securities portfolio at December 31, ~~2011~~2012. The following table does not take into consideration the effects of scheduled repayments of mortgage-backed securities and collateralized mortgage obligations or the effects of possible prepayments. Securities held in the available for sale category are carried at their market value.

	One year or less					One to five years					Five to ten years					More than ten years					Total Investment Securities
(dollars in thousands)	Carrying		Average			Carrying		Average			Carrying		Average			Carrying		Average			Carrying		Average			Market
Available for Sale	Value		Yield (1)			Value		Yield (1)			Value		Yield (1)			Value		Yield (1)			Value		Yield (1)			Value
U.S. government agency securities	$	2,348		1.59	%	$	5,950		1.82	%	$	1,927		1.51	%	$	966		1.19	%	$	11,191		1.67	%		11,191
US Gov't Agencies	$	1,385		2.03	%	$	3,872		1.74	%	$	1,585		1.62	%	$	1,093		1.52	%	$	7,935		1.74	%	$	7,935
Mortgage-backed securities of government - sponsored entities		45,~~991~~650		2.6711	%		10,~~180~~217		2.7418	%		43,~~559~~275		32.0445	%		86,~~848~~742		4.03	%		2825,~~578~~884		32.1767	%		2825,~~578~~884
Collateralized mortgage obligations of government - sponsored entities		826		1.52	%		3,842		2.47	%		433		2.08	%		74		2.15	%		5,175		2.28	%		5,175
Collareralized mortgage obligations of government - sponsored entities		2,034		1.40	%		3,130		1.79	%		775		2.11	%		127		2.08	%		6,066		1.70	%		6,066
Obligations of states and political subdivisions		12,~~721~~529		3.8028	%		57,~~206~~021		3.65	%		1520,~~103~~358		3.7332	%		127,~~060~~414		4.4456	%		3437,~~090~~322		3.9763	%		3437,~~090~~322
Corporate securities		-		-			3,001		4.58	%		1,081		8.40	%		-		-			4,082		5.46	%		4,082
Corporate		2,038		4.02	%		2,537		3.01	%		772		7.98	%		-		-			5,347		3.99	%		5,347
Commercial paper		11,998		0.54	%		-		-			-		-			-		-			11,998		0.54	%		11,998
Commercial Paper		7,648		0.33	%		-		-			-		-			-		-			7,648		0.33	%		7,648
Equity securities of financial institutions		-		-			-		-			-		-			505		2.41	%		505		2.41	%		505
Equity Securities of financial institutions		-		-			-		-			-		-			545		3.11	%		545		3.11	%		545
Total	$	21,~~884~~284		1.4371	%	$	2826,~~179~~777		2.8653	%	$	2326,~~103~~765		3.5418	%	$	2215,~~453~~921		4.0806	%	$	9590,~~619~~747		2.9778	%	$	9590,~~619~~747

⁽¹⁾ Weighted average yields on tax-exempt obligations have been computed on a taxable equivalent basis assuming a federal income tax rate of 34%.

Sources of Funds

General. Deposits are the major source of the Bank’s funds for lending and other investment purposes. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They also may be used on a longer-term basis for interest rate risk management and general business purposes. In addition to deposits and borrowings, the Bank derives funds from loan principal repayments, short-term borrowings in the form of securities sold under agreement to repurchase and proceeds from the sale and maturity of investment securities. Loan payments are a relatively stable source of funds, while deposit inflows are significantly influenced by general interest rates and money market conditions.

Deposits. The Bank offers a variety of deposit accounts, although a majority of deposits are in fixed-term, market-rate certificate of deposit accounts. Deposit account terms vary, primarily as to the required minimum balance amount, the amount of time that the funds must remain on deposit and the applicable interest rate. To attract deposits, the Bank offers a variety of customer convenience services, such as telephone, online and mobile banking. The Bank also offers multiple tiered checking accounts pursuant to which higher balance accounts receive higher rates and free services. For information on the average balances and rates paid on the Bank’s various categories of deposits, reference is made to “Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rate and Interest Differential” in the Annual Report to Shareholders for the year ended December 31, ~~2011~~2012 filed as Exhibit 13 hereto and incorporated by reference herein.

In 2004, the Bank joined the Promontory Interfinancial Network, gaining the ability to offer customers certificates of deposit with FDIC insurance coverage up to $50 million through its Certificate of Deposit Account Registry Service (“CDARS”). Our customers’ funds are reciprocated in the network with funds from other banks, with no bank having total customer deposits at the current maximum FDIC coverage limit of $250,000. The Bank is the only point of contact for the customer. In addition, to assist with liquidity, the Bank originated non-reciprocal deposits in ~~2011~~2012 with a balance of $3639 million at December 31, ~~2011~~2012. For their services, CDARS has charged a fee of ~~between 2~~12.255 ~~and 30~~ basis points ~~depending on the size/term of the deposit~~. Any deposits placed through this network are classified as brokered certificates of deposit. The Bank had $4043 million of total deposits in the program at December 31, ~~2011~~2012. InThe ~~the third quarter of 2011, the~~ Bank ~~purchased~~also had $3 million in brokered deposits ~~through a~~on ~~long-standing investment partner. In view of~~ the ~~source~~balance ofsheet ~~this~~at ~~deposit~~December ~~and its favorable interest rate~~31, ~~the~~2012. ~~Bank~~This ~~determined that the acceptance of this~~ deposit was ~~consistent~~purchased ~~with~~through ~~its~~a ~~current asset~~long-~~liability~~standing ~~management~~investment ~~strategies~~partner.

Jumbo Certificates of Deposit. The following table shows the amount (in thousands) of the Bank’s certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, ~~2011~~2012:

Maturity Period	Certificates of Deposit
Three months or less	$	36,~~926~~661
Four through six months		3144,~~888~~118
Seven through twelve months		5152,~~052~~634
Over twelve months		36,~~656~~074
Total	$	~~156~~169,~~522~~487

Borrowings. The Bank may obtain advances from the Federal Home Loan Bank of Pittsburgh (“FHLB”) to supplement its supply of lendable funds. Advances from FHLB are typically secured by a pledge of the Bank’s stock in FHLB and a portion of the Bank’s loans and certain other assets. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The Bank also has established unsecured lines of credit with Atlantic Central Bankers Bank in the amount of $7 million and with M & T Bank in the amount of $3 million. The Bank, if the need arises, may also access the Federal Reserve Bank discount window to supplement its supply of lendable funds and to meet deposit withdrawal requirements. At December 31, ~~2011~~2012, the Bank had no fixed rate short term borrowings ~~of $6 million~~ from the FHLB. ~~These borrowings were at an average rate of 22.5 basis points, which was less than the interest rates on deposits of similar duration.~~ The Bank has offered securities sold with agreements to repurchase to larger commercial customers and had balances of $1518 million at December 31, ~~2011~~2012. These arrangements are not deposits within the definition of the FDIC and therefore do not qualify for FDIC insurance. To collateralize these liabilities, the Bank has pledged securities with amortized cost ~~of $18 million~~ and fair value of $1921 million at December 31, ~~2011~~2012.

The following table sets forth information concerning short-term borrowings, which consist primarily of securities sold under agreements to repurchase during the periods indicated.

	At or For the Years Ended December 31,
(dollars in thousands)	~~2011~~2012			~~2010~~2011			~~2009~~2010
Average outstanding	$	2125,~~800~~652		$	1721,~~423~~800		$	1517,~~488~~423
Maximum amount outstanding at any month-end during the year	$	3354,~~157~~712		$	2333,~~371~~157		$	2123,~~003~~371
Weighted average interest rate during the year		0.5034	%		0.8250	%		0.7982	%
Total short-term borrowings at year end	$	2017,~~686~~813		$	1320,~~006~~686		$	1013,~~974~~006
Weighted average interest rate at year end		0.3528	%		0.6635	%		0.6566	%

Trust and Financial Services Activities

The Bank operates a Trust Department and an Investment Department. These departments provide estate planning, investment management and financial planning to customers. At December 31, ~~2011~~2012, the Bank had $~~137~~147 million of assets under management, of which all but $~~406~~443 thousand is non-discretionary with no investment authority.

Personnel

As of December 31, ~~2011~~2012, the Company had ~~113~~111 full-time employees and 1720 part-time employees. The employees are not represented by a collective bargaining unit. The Company believes its relationship with its employees to be satisfactory.

SUPERVISION AND REGULATION

Set forth below is a brief description of certain laws which relate to the regulation and supervision of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.General

~~Dodd~~The Bank is a Pennsylvania-~~Frank~~chartered commercial ~~Wall~~bank ~~Street~~and ~~Reform~~is the wholly-owned subsidiary of The Company, a Pennsylvania corporation, which is a registered bank holding company. The Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to extensive regulation by the Pennsylvania Department of Banking, as its chartering agency, and ~~Consumer~~by ~~Protection~~the ~~Act~~FDIC, its primary federal regulator and deposit insurer. The Bank is required to file reports with, and is periodically examined by, the FDIC and the Pennsylvania Department of Banking concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. As a registered bank holding company, the Company is regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act is intended to affect a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank Act creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. The Dodd-Frank Act additionally creates a new independent federal regulator to administer federal consumer protection laws. The Dodd-Frank Act is expected to have a significant impact on our business operations as its provisions take effect. Among the provisions that are likely to affect us are the following:

Holding Company Capital Requirements. The Dodd-Frank Act requires the Federal Reserve to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.

~~Deposit~~The ~~Insurance.~~regulatory and ~~The~~supervisory ~~Dodd-Frank~~structure ~~Act~~establishes ~~permanently~~a ~~increases~~comprehensive ~~the~~framework ~~maximum~~of ~~deposit~~activities ~~insurance~~in ~~amount~~which ~~for~~an ~~banks,~~institution ~~savings~~can ~~institutions~~engage and ~~credit~~is ~~unions~~intended primarily tofor ~~$250,000~~the ~~per~~protection ~~depositor,~~of depositors and, ~~extends~~for ~~unlimited~~purposes of the FDIC, the deposit insurance tofund, ~~non-interest~~rather ~~bearing~~than ~~transaction~~for ~~accounts~~the ~~through~~protection ~~December 31,~~of stockholders ~~2012~~and creditors. The ~~Dodd-Frank~~regulatory ~~Act~~structure also ~~broadens~~gives the ~~base~~regulatory ~~for~~authorities ~~FDIC~~extensive ~~insurance~~discretion ~~assessments.~~in ~~Assessments~~connection ~~will~~with ~~now~~their besupervisory and ~~based~~enforcement onactivities ~~the~~and ~~average~~examination ~~consolidated total~~policies, ~~assets~~including ~~less~~policies ~~tangible~~concerning ~~equity~~the ~~capital~~establishment of adeposit ~~financial~~insurance ~~institution.~~assessment fees, ~~The~~classification ~~Dodd-Frank~~of ~~Act~~assets ~~requires~~and ~~the~~establishment ~~FDIC~~of toadequate ~~increase~~loan ~~the~~loss ~~reserve ratio~~reserves offor ~~the~~regulatory ~~Deposit~~purposes. ~~Insurance~~Any ~~Fund~~change ~~from~~in ~~1.15%~~such toregulatory requirements ~~1.35%~~and ofpolicies, ~~insured~~whether ~~deposits~~ by ~~2020~~the ~~and~~Pennsylvania ~~eliminates~~legislature, the ~~requirement~~Pennsylvania ~~that~~Department of Banking, the FDIC, the Federal ~~pay~~Reserve ~~dividends~~Board toor ~~insured~~Congress, ~~depository~~could ~~institutions~~have ~~when~~a ~~the~~material ~~reserve~~adverse ~~ratio~~impact ~~exceeds~~on ~~certain~~the ~~thresholds.~~financial ~~Effective~~condition ~~one~~and ~~year~~results ~~from~~of operations of the Company ~~date~~and ofthe ~~enactment~~Bank. As is further described below, the Dodd-Frank Wall Street Reform and Consumer Protection Act ~~eliminated~~(“Dodd-Frank Act”), has significantly changed the ~~federal~~current ~~statutory~~bank ~~prohibition~~regulatory ~~against~~structure and may affect the ~~payment~~lending, ofinvestment ~~interest~~and ongeneral ~~business~~operating activities ~~checking~~of ~~accounts~~depository institutions and their holding companies.

~~Corporate~~Set ~~Governance. The~~forth ~~Dodd-Frank~~below ~~Act~~is ~~requires publicly traded companies to give stockholders~~ a ~~non-binding~~summary ~~vote~~of ~~on executive compensation at their~~certain ~~first~~material ~~annual~~statutory ~~meeting~~and ~~taking~~regulatory ~~place~~requirements ~~six~~applicable ~~months~~to ~~after~~ the ~~date~~Company ~~of enactment~~ and atthe ~~least every three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders~~Bank. The ~~new~~summary ~~legislation~~is ~~also~~not ~~authorizes~~intended ~~the SEC~~ to ~~promulgate~~be ~~rules that would allow stockholders to nominate their own candidates using~~ a ~~company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to~~complete ~~promulgate~~description ~~rules~~of ~~prohibiting~~such ~~excessive~~statutes ~~compensation~~and ~~paid~~regulations ~~to executives of depository institutions~~ and their ~~holding~~effects ~~companies~~on ~~with assets in excess of $1.0 billion, regardless of whether~~ the ~~company~~Company isand ~~publicly traded or not. The Dodd-Frank Act gives~~ the ~~SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters~~Bank.

~~Prohibition Against Charter Conversions of Troubled Institutions. Effective one year after enactment, the~~ Dodd-Frank ~~Act~~Wall ~~prohibits~~Street aReform ~~depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease~~ and ~~desist~~Consumer ~~order~~Protection orAct other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating hereto.

~~Interstate Branching.~~ The Dodd-Frank Act ~~authorizes~~has ~~national~~significantly ~~and state banks to establish branches in other states to~~ changed the ~~same~~current ~~extent as a~~ bank ~~chartered by~~regulatory ~~that~~structure ~~state~~and ~~would~~will beaffect ~~permitted~~into tothe ~~branch.~~immediate ~~Previously,~~future ~~banks~~the ~~could~~lending ~~only~~and ~~establish~~investment ~~branches~~activities inand ~~other states if the host state expressly~~general ~~permitted~~operations ~~out-~~of~~-state~~ ~~banks~~depository toinstitutions ~~establish~~and ~~branches~~their inholding ~~that state~~companies. ~~Accordingly, banks will be able to enter new markets more freely.~~

~~Limits~~The Dodd-Frank onAct ~~Derivatives.~~requires the Federal Reserve Board to establish minimum consolidated capital requirements for bank holding companies ~~Effective~~that 18are ~~months~~as ~~after~~stringent ~~enactment,~~as ~~the~~those ~~Dodd-Frank~~required ~~Act~~for ~~prohibits~~insured ~~state-chartered~~depository ~~banks~~institutions; ~~from~~the ~~engaging~~components inof ~~derivatives~~Tier ~~transactions~~1 capital would be restricted ~~unless~~to ~~the~~capital ~~loans~~instruments that are currently considered to ~~one~~be ~~borrower~~Tier ~~limits~~1 ofcapital ~~the~~for ~~state~~insured indepository ~~which~~institutions. In addition, the proceeds ~~bank~~of istrust ~~chartered~~preferred ~~takes~~securities ~~into~~are ~~consideration~~excluded ~~credit~~from ~~exposure~~Tier to1 capital unless (i) such securities are issued by bank holding ~~derivatives~~companies ~~transactions.~~with ~~For~~assets ~~this~~of ~~purpose,~~less ~~derivative~~than ~~transaction~~$500 ~~includes~~million ~~any~~or ~~contract,~~(ii) such ~~agreement,~~securities ~~swap,~~were ~~warrant~~issued prior to May 19, ~~note~~2010 by bank or savings ~~option~~and loan holding companies with less than $15 billion of assets. The legislation also establishes a floor for capital of insured depository institutions that iscannot ~~based~~be inlower ~~whole~~than orthe standards in ~~part~~effect ontoday, and directs the ~~value~~federal ~~of,~~banking ~~any~~regulators to ~~interest~~implement ~~in,~~new orleverage ~~any~~and ~~quantitative~~capital ~~measure~~requirements orby ~~the~~December 31, ~~occurrence~~2011. ofThese ~~any~~new ~~event~~leverage ~~relating~~and ~~to,~~risk-based ~~one~~capital orrequirements ~~more~~must ~~commodities~~take ~~securities,~~into ~~currencies,~~account ~~interest~~off-balance orsheet activities and other ~~rates~~risks, ~~indices~~including orrisks ~~other~~relating to ~~assets~~securitized products and derivatives.

~~Transactions~~The ~~with Affiliates and Insiders. Effective one year from the date of enactment, the~~ Dodd-Frank Act also ~~expands~~creates ~~the~~a ~~definition~~new ofConsumer ~~affiliate for~~Financial ~~purposes~~Protection ofBureau ~~quantitative~~with ~~and~~extensive ~~qualitative~~powers ~~limitations~~to ofimplement ~~Section~~and ~~23A~~enforce ofconsumer ~~the~~protection ~~Federal~~laws. The ~~Reserve~~Consumer ~~Act~~Financial toProtection ~~include~~Bureau ~~mutual~~has ~~funds~~broad ~~advised by~~rulemaking aauthority ~~depository~~for ~~institution~~a orwide ~~its~~range ~~affiliates.~~of ~~The~~consumer ~~Dodd-Frank~~protection ~~Act~~laws ~~will~~that apply to ~~Section~~all ~~23A~~banks and ~~Section~~savings ~~22(h)~~associations, ofamong ~~the~~other ~~Federal~~things, ~~Reserve Act~~including ~~(governing~~the ~~transactions~~authority ~~with insiders)~~ to ~~derivative~~prohibit ~~transactions~~“unfair, ~~repurchase~~deceptive ~~agreements~~or abusive” acts and ~~securities~~practices. ~~lending~~The ~~and~~Consumer ~~borrowing transaction~~Financial ~~that~~Protection ~~create~~Bureau ~~credit~~has ~~exposure~~examination toand anenforcement ~~affiliate~~authority orover anall ~~insider.~~banks ~~Any~~and ~~such~~savings associations ~~transactions~~ with ~~affiliates~~more ~~must~~than be$10 ~~fully~~billion ~~secured~~in assets. ~~The~~ ~~current~~Banks ~~exemption~~and ~~from~~savings ~~Section~~associations ~~23A~~with ~~for~~$10 ~~transactions~~billion ~~with~~or ~~financial~~less ~~subsidiaries~~in assets will continue to be ~~eliminated.~~examined ~~The~~for ~~Dodd-Frank~~compliance ~~Act~~with ~~will additionally~~federal ~~prohibit~~consumer anprotection ~~insured~~and ~~depository~~fair ~~institution~~lending ~~from~~laws ~~purchasing~~by antheir ~~asset~~applicable ~~from~~primary orfederal ~~selling~~bank anregulators. The ~~asset~~Dodd-Frank toAct analso ~~insider~~weakens ~~unless~~ the ~~transaction~~federal ispreemption onavailable ~~market~~for ~~terms~~national banks and, iffederal ~~representing~~savings ~~more~~associations ~~than~~and ~~10%~~gives state ofattorneys ~~capital,~~general iscertain ~~approved~~authority into ~~advance~~enforce byapplicable ~~the~~federal ~~disinterested~~consumer ~~directors~~protection laws.

The Dodd-Frank Act made many other changes in banking regulation. Those include authorizing depository institutions, for the first time, to pay interest on business checking accounts, requiring originators of securitized loans to retain a percentage of the risk for transferred loans, establishing regulatory rate-setting for certain debit card interchange fees and establishing a number of reforms for mortgage originations. The Dodd-Frank Act also broadened the base for FDIC insurance assessments. The FDIC was required to promulgate rules revising its assessment system so that it is based on the average consolidated total assets less tangible equity capital of an insured institution instead of deposits. That rule took effect April 1, 2011. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008 and provided for noninterest bearing transaction accounts with unlimited deposit insurance through December 31, 2012.

~~Debit~~The ~~Card Interchange Fees. Effective July 21, 2011, the~~ Dodd-Frank Act increased ~~requires~~stockholder ~~that~~influence ~~the~~over ~~amount~~boards of ~~any~~directors ~~interchange fee charged~~ by arequiring ~~debit~~companies ~~card~~to ~~issuer with~~give ~~respect~~stockholders to a ~~debit~~nonbinding ~~card~~vote ~~transaction~~on ~~must~~executive compensation ~~be reasonable~~ and ~~proportional~~so-called to“golden ~~the~~parachute” ~~cost~~payments, ~~incurred~~and by authorizing the ~~issuer.~~Securities ~~Within~~and ~~nine~~Exchange ~~months~~Commission to ofpromulgate ~~enactment,~~rules ~~the~~that ~~Federal~~would ~~Reserve~~allow ~~Board~~stockholders isto ~~required~~nominate toand ~~establish~~solicit ~~standards~~votes for ~~reasonable~~their ~~and~~own ~~proportional~~candidates ~~fees~~using ~~which~~a ~~may~~company’s ~~take~~proxy ~~into~~materials. ~~account~~The ~~the~~legislation ~~costs~~also ofdirected ~~preventing~~the ~~fraud.~~Federal ~~While~~Reserve ~~the~~Board ~~restrictions~~to onpromulgate ~~interchange~~rules ~~fees~~prohibiting doexcessive ~~not~~incentive ~~apply~~compensation paid to ~~banks~~bank ~~that,~~holding ~~together~~company ~~with their affiliates~~executives, ~~have~~regardless ~~assets~~ of ~~less~~whether ~~than $10 billion,~~ the ~~rule~~company ~~could~~is ~~affect~~publicly ~~the competitiveness of debit cards issued by smaller banks~~traded.

~~Consumer~~Many ~~Financial Protection~~of ~~Bureau.~~the ~~The~~provisions of the Dodd-Frank Act ~~creates~~are anot ~~new,~~yet ~~independent federal agency called the Consumer Financial Protection Bureau (“CFPB”)~~effective, ~~which is granted broad rulemaking, supervisory~~ and ~~enforcement powers under various federal consumer financial protection laws, including~~ the ~~Equal~~Dodd-Frank ~~Credit Opportunity~~ Act, ~~Truth~~requires invarious ~~Lending~~federal ~~Act,~~agencies ~~Real~~to ~~Estate~~promulgate ~~Settlement Procedures~~numerous ~~Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act~~ and ~~certain other statutes. The CFPB will have examination and primary enforcement authority with respect to depository institutions~~ ~~with~~extensive ~~$10~~implementing ~~billion~~regulations orover ~~more in assets. Smaller institutions will be subject to rules promulgated by~~ the ~~CFPB~~next ~~but~~several ~~will continue to be examined and supervised by federal banking regulators for consumer compliance purposes~~years. ~~The~~It ~~CFPB~~is ~~will~~therefore ~~have~~difficult ~~authority~~ to ~~prevent unfair,~~predict ~~deceptive~~at orthis ~~abusive~~time ~~practices~~what inimpact ~~connection with~~ the ~~offering of consumer financial products. The~~ Dodd-Frank Act ~~authorizes the~~and ~~CFPB~~implementing toregulations ~~establish~~will ~~certain~~have ~~minimum~~on ~~standards~~community ~~for~~banks ~~the~~such ~~origination~~as ~~of residential mortgages including a determination of~~ the ~~borrower’s ability to repay~~Bank. InAlthough ~~addition,~~ the ~~Dodd-Frank~~substance ~~Act~~and ~~will~~scope ~~allow borrowers to raise certain defenses to foreclosure if they receive~~of ~~any~~many ~~loan~~of ~~other~~these ~~than~~regulations acannot ~~“qualified~~be ~~mortgage”~~determined asat ~~defined~~this bytime, ~~the~~it ~~CFPB.~~is ~~The~~expected ~~Dodd-Frank Act permits states to adopt consumer protection laws and standards~~ that ~~are more stringent than those adopted at~~ the ~~federal~~legislation ~~level~~ and, inimplementing ~~certain circumstances~~regulations, ~~permits~~ ~~state~~particularly ~~attorneys~~those ~~general~~provisions relating to ~~enforce~~the ~~compliance~~new ~~with~~Consumer ~~both~~Financial ~~the~~Protection ~~state~~Bureau, ~~and~~may ~~federal~~increase ~~laws~~our operating and ~~regulations~~compliance costs.

~~Regulation~~Holding ~~of the~~ Company Regulation

~~General.~~The As Company, as a bank holding company, is subject to examination, supervision, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the ~~Company~~Federal isReserve ~~subject~~Board. toThe ~~regulation,~~Company ~~supervision and~~is ~~examination~~required byto obtain the ~~Board~~prior ofapproval ~~Governors~~ of the Federal Reserve ~~System~~Board ~~(the~~to ~~“Federal~~acquire ~~Reserve”)~~all, ~~and~~or bysubstantially all, of the ~~Pennsylvania Department~~assets of ~~Banking.~~any ~~The~~bank ~~Company~~or isbank ~~required~~holding tocompany. ~~file~~Prior ~~annually~~Federal aReserve Board ~~report~~approval ofwould ~~its~~be ~~operations~~required ~~with~~for the ~~Federal~~Company ~~Reserve~~to ~~and~~acquire ~~the~~direct ~~Pennsylvania Department~~or ofindirect ~~Banking.~~ownership ~~This~~or ~~regulation~~control ~~and~~of ~~oversight~~any isvoting ~~generally~~securities ~~intended~~of any tobank ~~ensure~~or ~~that~~bank ~~the~~holding ~~Company~~company ~~limits~~if ~~its~~it ~~activities~~would, ~~to those~~directly ~~allowed~~or byindirectly, ~~law~~own ~~and~~or ~~that~~control itmore ~~operates~~than in5% aof ~~safe~~any ~~and~~class ~~sound~~of ~~manner~~voting ~~without~~shares of ~~endangering~~ the ~~financial~~bank ~~health~~or ofbank ~~the~~holding ~~Bank~~company.

~~Under~~A ~~the~~bank ~~Bank~~holding ~~Holding~~company ~~Company~~is ~~Act~~generally prohibited from engaging in, ~~the~~or ~~Company~~acquiring, ~~must~~direct ~~obtain~~or ~~the~~indirect ~~prior~~control ~~approval~~of more than 5% of the ~~Federal~~voting ~~Reserve~~securities ~~before~~of any itcompany ~~may~~engaged ~~acquire~~in ~~control~~nonbanking activities. One of ~~another~~the ~~bank~~principal orexceptions to this prohibition is for activities found by the ~~bank~~Federal ~~holding~~Reserve ~~company,~~Board ~~merge~~to be so closely related to banking or ~~consolidate~~managing ~~with~~or ~~another~~controlling ~~bank~~banks ~~holding~~as ~~company,~~to ~~acquire~~be ~~all~~a orproper ~~substantially~~incident ~~all~~thereto. Some of the ~~assets~~principal ~~of another~~activities ~~bank~~that orthe ~~bank~~Federal ~~holding~~Reserve ~~company,~~Board orhas ~~acquire~~determined ~~direct~~by orregulation ~~indirect~~to ~~ownership~~be closely related to banking are: (i) making or ~~control~~servicing ofloans; ~~any~~(ii) performing ~~voting~~certain ~~shares~~data ofprocessing ~~any~~services; ~~bank~~(iii) providing orsecurities ~~bank~~brokerage ~~holding~~services; ~~company~~(iv) acting ifas fiduciary, ~~after~~investment ~~such~~or ~~acquisition,~~financial ~~the~~advisor; ~~Company~~(v) leasing ~~would~~personal ~~directly~~ or ~~indirectly~~real ~~own~~property under certain conditions; (vi) making investments in corporations or ~~control~~projects ~~more~~designed ~~than~~primarily 5%to ofpromote ~~such~~community ~~shares~~welfare; and (vii) acquiring a savings association.

~~Federal~~A ~~statutes impose restrictions on the ability of a~~ bank holding company that ~~and~~meets ~~its~~specified ~~nonbank~~conditions, ~~subsidiaries~~including tothat ~~obtain extensions of credit from~~ its ~~subsidiary bank,~~depository oninstitutions ~~the~~subsidiaries ~~subsidiary~~are ~~bank’s~~“well ~~investments~~capitalized” inand “well ~~the~~managed,” ~~stock~~can oropt ~~securities~~to ofbecome ~~the~~a “financial holding company,.” ~~and~~A on“financial ~~the subsidiary bank’s taking of the~~ holding company’s” may ~~stock~~engage orin ~~securities~~a asbroader ~~collateral~~array ~~for~~of ~~loans~~financial toactivities ~~any~~than ~~borrower.~~permitted Aa typical bank holding company. ~~and~~Such ~~its subsidiaries~~activities ~~are~~can ~~also~~include insurance ~~prevented~~underwriting ~~from~~and ~~engaging~~investment inbanking. ~~certain~~The ~~tie-in~~Company ~~arrangements~~does innot ~~connection~~anticipate ~~with~~opting ~~any~~for ~~extension~~“financial ofholding ~~credit, lease~~company” orstatus ~~sale~~at ofthis ~~property, or furnishing of services by the subsidiary bank~~time.

AThe ~~bank~~Company ~~holding~~is ~~company~~subject isto ~~required~~the toFederal ~~serve~~Reserve asBoard’s aconsolidated ~~source~~capital ofadequacy ~~financial~~guidelines ~~and~~for ~~managerial~~bank ~~strength~~holding tocompanies. ~~its~~Traditionally, ~~subsidiary~~those guidelines ~~banks~~have ~~and~~been ~~may~~structured ~~not~~similarly ~~conduct~~to ~~its~~the ~~operations in~~regulatory ancapital ~~unsafe~~requirements orfor ~~unsound~~the ~~manner.~~subsidiary Indepository ~~addition~~institutions, itbut were issomewhat ~~the~~more ~~Federal~~lenient. ~~Reserve~~For ~~policy~~example, ~~that~~the ~~a bank~~ holding company ~~should stand ready to use available resources to provide adequate~~ capital torequirements ~~its~~allowed ~~subsidiary~~inclusion ~~banks during periods~~ of ~~financial~~certain ~~stress~~instruments orin ~~adversity and~~Tier ~~should~~1 ~~maintain the financial flexibility and~~ capital~~-raising~~ ~~capacity~~that toare ~~obtain~~not ~~additional~~includable ~~resources~~at ~~for~~the ~~assisting~~institution ~~its subsidiary banks~~level. AAs ~~bank~~previously ~~holding~~noted, ~~company’s~~the ~~failure~~Dodd-Frank toAct ~~meet~~requires ~~its~~that ~~obligations~~the ~~to serve as a source of strength to its subsidiary banks~~guidelines ~~will generally~~ be ~~considered~~amended byso ~~the~~that ~~Federal~~they ~~Reserve~~are toat beleast anas ~~unsafe~~stringent ~~and~~as ~~unsound~~those ~~banking~~required ~~practice~~for ~~or a violation of~~ the ~~Federal Reserve~~subsidiary ~~regulations,~~depository ~~or both~~institutions.

A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve Board has adopted an exception to that approval requirement for well-capitalized bank holding companies that meet certain other conditions.

~~Non-Banking~~The ~~Activities.~~Federal Reserve ~~The~~Board ~~business~~has ~~activities~~issued ofa policy statement regarding the ~~Company,~~payment asof adividends by bank holding ~~company~~companies. In general, ~~are~~the ~~restricted~~Federal byReserve Board’s ~~the~~policies ~~Bank~~provide ~~Holding~~that ~~Company~~dividends ~~Act.~~should ~~Under~~be ~~the~~paid ~~Bank Holding~~only ~~Company~~out ~~Act~~of current earnings and only if the ~~Federal~~prospective ~~Reserve’s~~rate of earnings retention by the bank holding company ~~regulations,~~appears ~~the~~consistent ~~Company~~with ~~may~~the ~~only~~organization’s ~~engage~~capital inneeds, orasset ~~acquire~~quality and overall orfinancial ~~control~~condition. ~~voting~~The ~~securities~~Federal orReserve ~~assets~~Board’s ofpolicies also require that a bank holding company ~~engaged~~serve inas ~~(i) banking~~a orsource ~~managing~~of orfinancial strength ~~controlling~~to its subsidiary banks ~~and~~by ~~other~~using ~~subsidiaries authorized~~available ~~under~~resources ~~the~~to ~~Bank~~provide ~~Holding~~capital ~~Company~~funds ~~Act;~~during periods of financial stress or ~~(ii) any~~adversity and ~~non-banking~~by ~~activity~~maintaining the ~~Federal~~financial ~~Reserve~~flexibility ~~has~~and ~~determined~~capital-raising capacity to beobtain ~~so closely~~additional ~~related~~resources tofor ~~banking~~assisting orits ~~managing~~subsidiary banks orwhere ~~controlling~~necessary. ~~banks~~The toDodd-Frank beAct acodified ~~proper~~the ~~incident~~source ~~thereto.~~of ~~These~~strength ~~include~~policy ~~any~~and ~~incidental~~requires ~~activities necessary~~the topromulgation ~~carry~~of onimplementing regulations. ~~those~~Under ~~activities,~~the asprompt ~~well~~corrective asaction alaws, ~~lengthy~~the ~~list~~ability of ~~activities~~a ~~that~~bank ~~the~~holding ~~Federal~~company ~~Reserve~~to ~~has~~pay ~~determined~~dividends tomay be sorestricted ~~closely~~if ~~related~~a tosubsidiary bank becomes undercapitalized. These regulatory policies could affect the ~~business~~ability of ~~banking~~The asCompany to bepay adividends or ~~proper~~otherwise ~~incident~~engage ~~thereto~~in capital distributions.

~~Financial~~The ~~Activities.~~Federal Deposit ~~Provisions~~Insurance ~~of the Gramm-Leach-Bliley~~ Act ~~permit~~makes ~~greater~~depository ~~affiliation~~institutions ~~among~~liable ~~banks,~~to ~~securities~~the ~~firms,~~FDIC ~~insurance~~for ~~companies,~~losses ~~and~~suffered ~~other companies~~or ~~under~~anticipated aby ~~new~~the ~~type~~insurance offund ~~financial~~in ~~services~~connection with ~~company~~the ~~known~~default asof a ~~“financial~~commonly ~~holding~~controlled ~~company.”~~depository Ainstitution ~~financial~~or ~~holding company~~any ~~essentially~~assistance isprovided aby ~~bank~~the ~~holding~~FDIC ~~company~~to ~~with~~such ~~significantly~~an ~~expanded powers. Financial holding companies are authorized by~~institution ~~statute to engage~~ in adanger ~~number~~ of financial activities previously impermissible for bank holding companies, including: (i) securities underwriting, dealing and market making; (ii) sponsoring mutual funds and investment companies; (iii) insurance underwriting and agency; and (iv) merchant banking activitiesdefault. ~~The~~That ~~Gramm-Leach-Bliley~~law ~~Act~~would ~~also~~have ~~permits~~potential ~~the~~applicability ~~Federal~~if ~~Reserve and~~ the ~~Treasury Department~~Company toever ~~authorize~~held ~~additional~~as ~~activities for financial holding companies if they are “financial in nature” or “incidental” to financial activities. A bank holding company may become~~ a ~~financial~~separate ~~holding company if each of its~~ subsidiary ~~banks is well capitalized, well managed, and has at least~~ a ~~“satisfactory” CRA rating. A financial holding~~depository ~~company~~institution ~~must~~in ~~provide~~addition ~~notice~~ to the ~~Federal Reserve within 30 days after commencing activities previously determined by statute or by the Federal Reserve and Department of the Treasury to be permissible~~Bank. ~~The Company has not submitted notice to the Federal Reserve to become a financial holding company.~~

~~Regulatory Capital Requirements.~~ The ~~Federal~~status ~~Reserve~~of ~~has adopted capital adequacy guidelines under which it assesses~~ the ~~adequacy~~Company ofas ~~capital in examining and supervising~~ a registered bank holding company ~~and in analyzing applications to it~~ under the Bank Holding Company Act. ~~The~~will ~~Federal Reserve’s~~not ~~capital~~exempt ~~adequacy~~it ~~guidelines~~from ~~are~~certain ~~similar~~federal toand ~~those~~state ~~imposed~~laws onand ~~the~~regulations applicable ~~Bank~~to bycorporations ~~the~~generally, ~~Federal~~including, ~~Deposit~~without ~~Insurance~~limitation, ~~Corporation (“FDIC”).~~certain ~~See~~provisions ~~“Regulation~~ of the ~~Bank—Regulatory~~federal ~~Capital~~securities ~~Requirements~~laws.”

Restrictions on Dividends. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal prompt corrective action regulations, the Federal Reserve may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.” The Federal Reserve requires advance notice of any dividend that exceeds earnings for the period for which the dividend is being paid.

Regulation of the Bank

~~General.~~Pennsylvania AsBanking aLaw. The Pennsylvania ~~chartered~~Banking ~~commercial~~Code ~~bank~~(“Code”) ~~with~~contains ~~deposits~~detailed ~~insured~~provisions bygoverning the ~~FDIC which is not a Federal Reserve System member~~organization, ~~the~~location ~~Bank~~of isoffices, ~~subject~~rights ~~to extensive regulation~~ and ~~examination~~responsibilities ~~by the Pennsylvania Department~~ of ~~Banking~~trustees, ~~and by the FDIC~~officers, ~~which insures its deposits to the maximum extent permitted by law. The federal~~ and ~~state laws and regulations applicable to banks regulate~~employees, ~~among other~~as ~~things,~~well ~~the~~as ~~scope~~corporate ~~of their business~~powers, ~~their~~savings ~~investments,~~and ~~the reserves required to be kept against deposits, the timing of~~investment ~~the~~operations ~~availability of deposited funds~~ and ~~the~~other ~~nature~~aspects ~~and amount~~ of ~~and collateral for certain loans. The laws and regulations governing~~ the Bank ~~generally have been promulgated to protect depositors~~ and ~~not~~its ~~for the purpose of protecting stockholders~~affairs. ~~This~~The ~~regulatory structure~~Code ~~also~~delegates ~~gives~~extensive ~~the~~rule-making ~~federal~~power and ~~state~~administrative ~~banking agencies extensive~~ discretion ~~in connection with their supervisory and enforcement~~ ~~activities and examination policies, including policies with respect~~ to the ~~classification~~Pennsylvania ofDepartment ~~assets and the establishment~~ of ~~adequate loan~~Banking ~~loss~~so ~~reserves~~that ~~for~~the ~~regulatory~~supervision ~~purposes.~~and ~~Any change in such~~ regulation, ~~whether~~of bystate ~~the~~chartered ~~Pennsylvania~~commercial ~~Department~~banks ofmay ~~Banking,~~be ~~the~~flexible ~~FDIC~~and orreadily ~~the~~responsive ~~United~~to ~~States~~changes ~~Congress,~~in ~~could~~economic ~~have~~conditions aand ~~material~~in ~~impact~~savings ~~on the Bank~~ and ~~its~~lending ~~operations~~practices.

19The Code also provides state-chartered commercial banks with all of the powers enjoyed by national banks and federal savings associations, subject to regulation by the Pennsylvania Department of Banking. The Federal Deposit Insurance Corporation Act, however, prohibits a state-chartered bank from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless (i) the FDIC determines the activity or investment does not pose a significant risk of loss to the relevant insurance fund and (ii) the bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to the Bank by the code is restricted by the Federal Deposit Insurance Act.

Federal law provides the federal banking regulators, including the FDIC and the Federal Reserve, with substantial enforcement powers. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders, and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Pennsylvania Banking Law. The Pennsylvania Banking Code contains detailed provisions governing the organization, location of offices, rights and responsibilities of trustees, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Code delegates extensive rule-making power and administrative discretion to the Pennsylvania Department of Banking so that the supervision and regulation of state chartered commercial banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.

The Code also provides state-chartered commercial banks with all of the powers enjoyed by national banks and federal savings associations, subject to regulation by the Pennsylvania Department of Banking. The Federal Deposit Insurance Corporation Act, however, prohibits a state-chartered bank from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless (i) the FDIC determines the activity or investment does not pose a significant risk of loss to the relevant insurance fund and (ii) the bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to the Bank by the code is significantly restricted by the Federal Deposit Insurance Act.

The Pennsylvania Banking Code states, in part, that dividends may be declared and paid only out of accumulated net earnings and may not be declared or paid unless surplus (retained earnings) is at least equal to contributed capital. The Bank has not declared or paid any dividends that have caused its retained earnings to be reduced below the amount required. Finally, dividends may not be declared or paid if the Bank is in default in payment of any assessment due the FDIC.

Federal ~~Deposit~~ Insurance of Deposit Accounts. Deposit ~~The~~accounts ~~Bank’s~~in ~~deposits~~the Bank are insured ~~to applicable limits~~ by the FDIC.’s ~~Under~~Deposit ~~the~~Insurance ~~Dodd-Frank~~Fund, ~~Wall Street~~generally ~~Reform~~up ~~and~~to ~~Consumer~~a ~~Protection Act, the~~ maximum ~~deposit~~of ~~insurance amount has been permanently increased from~~ $~~100,000 to $~~250,000 ~~and~~ ~~unlimited~~per ~~deposit~~separately ~~insurance~~insured ~~has~~depositor, ~~been~~pursuant ~~extended~~ to ~~non-interest-bearing~~changes ~~transaction~~made ~~accounts~~permanent ~~until~~by ~~December 31, 2012. Prior to~~ the Dodd-Frank Act,. ~~the~~The ~~FDIC had established a Temporary Liquidity Guarantee Program under which, for the payment of an additional~~Dodd-Frank ~~assessment~~Act byalso ~~insured~~extended ~~banks~~unlimited ~~that~~deposit ~~did~~insurance ~~not~~on ~~opt~~noninterest ~~out, the FDIC fully guaranteed all non-interest-~~bearing transaction accounts ~~until December~~through December 31, ~~2010~~2012. ~~(the~~The ~~“Transaction~~FDIC assesses ~~Account Guarantee Program”) and all senior unsecured debt of~~ insured depository institutions orto ~~their~~maintain ~~qualified holding companies issued between October 14, 2008 and October 31, 2009, with~~ the ~~FDIC’s~~Deposit ~~guarantee expiring~~Insurance ~~by December 31, 2012 (the “Debt Guarantee Program”)~~Fund. ~~The~~No ~~Company~~institution ~~and~~may ~~the~~pay ~~Bank~~a ~~opted~~dividend ~~out~~if ofin ~~the Debt Guarantee~~default ~~Program. The Bank did not opt out~~ of ~~the~~its ~~Transaction~~deposit ~~Account~~insurance ~~Guarantee Program~~assessment.

~~The~~Under ~~FDIC~~the ~~has adopted~~FDIC’s a risk-based ~~premium~~assessment system, ~~that provides for quarterly assessments based on an~~ insured ~~institution’s~~institutions ~~ranking~~are inassigned ~~one~~to ofa ~~four~~ risk ~~categories~~category based on ~~their~~supervisory ~~examination~~evaluations, ~~ratings and~~ regulatory capital ~~ratios.~~levels ~~Well-capitalized institutions with the CAMELS ratings of 1 or 2 are grouped in Risk Category I~~ and, ~~until~~other ~~2009,~~factors. ~~were~~An ~~assessed~~institution’s ~~for~~assessment ~~deposit insurance at an annual~~ rate ofdepends ~~between~~upon ~~five and seven basis points with~~ the ~~assessment~~category ~~rate for an individual institution determined according~~ to awhich ~~formula~~it ~~based~~is onassigned ~~a weighted~~and ~~average~~certain ofadjustments ~~the~~specified ~~institution’s~~by ~~individual~~the ~~CAMELS~~FDIC, ~~component~~with ~~ratings~~less ~~plus~~risky ~~either~~institutions ~~five~~paying ~~financial~~lower ~~ratios or the average ratings of its long-term debt~~assessments. ~~Institutions~~Until ~~in Risk Categories II~~recently, ~~III~~assessment ~~and~~rates ranged IVfrom ~~were~~7 ~~assessed~~to at77.5 ~~annual~~basis ~~rates~~points of ~~10,~~assessable ~~28, and 43 basis points, respectively~~deposits.

Starting in 2009, the FDIC significantly raised the assessment rate in order to restore the reserve ratio of the Deposit Insurance Fund to the statutory minimum of 1.15%. For the quarter beginning January 1, 2009, the FDIC raised the base annual assessment rate for institutions in Risk Category I to between 12 and 14 basis points while the base annual assessment rates for institutions in Risk Categories II, III and IV were increased to 17, 35 and 50 basis points, respectively. For the quarter beginning April 1, 2009 the FDIC set the base annual assessment rate for institutions in Risk Category I to between 12 and 16 basis points and the base annual assessment rates for institutions in Risk Categories II, III and IV at 22, 32 and 45 basis points, respectively. An institution’s assessment rate could be lowered by as much as five basis points based on the ratio of its long-term unsecured debt to deposits or, for smaller institutions based on the ratio of certain amounts of Tier 1 capital to adjusted assets. The assessment rate may be adjusted for Risk Category I institutions that have a high level of brokered deposits and have experienced higher levels of asset growth (other than through acquisitions) and could be increased by as much as ten basis points for institutions in Risk Categories II, III and IV whose ratio of brokered deposits to deposits exceeds 10%. Reciprocal deposit arrangements like CDARS were treated as brokered deposits for Risk Category II, III and IV institutions but not for institutions in Risk Category I. An institution’s base assessment rate would also be increased if an institution’s ratio of secured liabilities (including FHLB advances and repurchase agreements) to deposits exceeds 25%. The maximum adjustment for secured liabilities for institutions in Risk Categories I, II, III and IV would be 8, 11, 16 and 22.5 basis points, respectively, provided that the adjustment may not increase an institution’s base assessment rate by more than 50%.19

On February 7, 2011, as required by the Dodd-Frank Act, the FDIC published a final rule to revise the deposit insurance assessment system. The rule, which took effect April 1, 2011, changes the assessment base used for calculating deposit insurance assessments from deposits to total assets less tangible (Tier 1) capital. Since the new base is larger than the previous base, the FDIC also lowered assessment rates so that the rule would not significantly alter the total amount of revenue collected from the industry. The range of adjusted assessment rates is now 2.5 to 45 basis points of the new assessment base. The rule is expected to benefit smaller financial institutions, which typically rely more on deposits for funding, and shift more of the burden for supporting the insurance fund to larger institutions, which are thought to have greater access to nondeposit funding.

As part of its plan to restore the Deposit Insurance Fund in the wake of a large number of bank failures, the FDIC imposed a special assessment of five basis points for the second quarter of 2009. In addition, the FDIC required all insured institutions to prepay their quarterly assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. In calculating the required prepayment, the FDIC assumed a 5% annual growth in the assessment base and applied a three basis point increase in assessment rates effective January 1, 2011. Subsequently, in 2011 the FDIC revised its assessment formula, which had the effect of reducing our annual assessment, and eliminated the scheduled amortization of the prepaid balance. Currently, annual assessments as determined by the FDIC will reduce the remaining prepaid balance until it is fully eliminated and assessments begin to be paid on a current year basis.

In addition to FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, through the FDIC, assessments for costs related to bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. In setting the assessments necessary to achieve the 1.35% ratio, the FDIC is supposed to offset the effect of the increased ratio on insured institutions with assets of less than $10 billion. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC. The FDIC has recently exercised that discretion by establishing a long range fund ratio of 2%.

A material increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.

Capital Requirements. Under the FDIC’s regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state nonmember banks”), such as the Bank, are required to comply with minimum leverage capital requirements. For an institution not anticipating or experiencing significant growth and deemed by the FDIC to be, in general, a strong banking organization rated composite 1 under Uniform Financial Institutions Ranking System, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3.0%. For all other institutions, the minimum leverage capital ratio is not less than 4.0%. Tier 1 capital is the sum of common stockholder’s equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships), unrealized appreciation or depreciation in the value of available for sale securities, net of tax effects, and certain other specified items.

~~The~~ FDIC regulations ~~imposed~~also ~~a special~~require ~~assessment~~state ~~equal~~nonmember banks to ~~five~~maintain ~~basis~~certain ~~points~~ratios of ~~assets~~regulatory ~~less Tier 1~~ capital asto ofregulatory ~~June~~risk-weighted 30assets, or ~~2009~~“risk-based ~~payable~~capital onratios.” ~~September~~Risk-based ~~30,~~capital ~~2009~~ratios ~~and reserved~~are ~~the~~determined ~~right~~by toallocating ~~impose~~assets ~~additional~~and ~~special~~specified ~~assessments.~~off-balance sheet Initems ~~lieu~~to offour ~~further~~risk-weighted ~~special~~categories ~~assessments,~~ranging onfrom ~~November~~0.0% ~~12,~~to ~~2009~~100.0%. ~~the~~State ~~FDIC required~~nonmember ~~all~~banks ~~insured~~must ~~depository~~maintain ~~institutions~~a tominimum ~~prepay~~ratio ~~their~~of total ~~estimated~~capital to risk-~~based~~weighted ~~assessments~~assets ~~for~~of ~~the~~at ~~fourth~~least ~~quarter~~8.0%, of ~~2009,~~which ~~and for~~at ~~all~~least ofone-half ~~2010,~~must ~~2011,~~be ~~and~~Tier ~~2012~~1 oncapital. ~~December~~Total ~~30,~~capital ~~2009.~~consists of ~~For~~Tier ~~purposes~~1 ofcapital ~~estimating~~plus ~~future~~Tier ~~assessments,~~2 anor ~~institution~~supplementary ~~would~~capital ~~assume 5%~~items, ~~annual~~which ~~growth~~include inallowances ~~the~~for ~~assessment~~loan ~~base~~losses ~~and~~in aan ~~three~~amount ~~basis~~of ~~point~~up ~~increase~~to in1.25% of ~~the~~risk-weighted ~~current~~assets, ~~assessment~~cumulative ~~rate~~preferred ~~for~~stock, ~~2011~~subordinated debentures and ~~2012.~~certain ~~The prepaid~~other ~~assessment~~capital ~~would~~instruments, beand a ~~applied~~portion ~~against~~of the ~~actual~~net ~~assessment~~unrealized ~~until~~gain ~~exhausted~~on equity securities. ~~Any~~The ~~funds~~includable ~~remaining~~amount ~~after~~of ~~June~~Tier ~~30,~~2 ~~2013~~capital ~~would~~cannot beexceed ~~returned~~the toamount of the institution’s Tier 1 capital.

The ~~Dodd-Frank~~Bank ~~Act requires~~is ~~the~~also ~~FDIC~~ subject to ~~take~~minimum ~~such~~capital ~~steps~~requirements asimposed ~~necessary~~by ~~to increase~~ the ~~reserve~~Pennsylvania ~~ratio~~Department of ~~the~~Banking ~~Deposit~~on ~~Insurance~~Pennsylvania-chartered ~~Fund~~depository ~~from 1~~institutions.~~15% to 1.35%~~ ofUnder ~~insured~~the ~~deposits~~Pennsylvania byDepartment ~~2020.~~of InBanking’s ~~setting~~capital ~~the assessments~~regulations, ~~the~~a ~~FDIC~~Pennsylvania isbank ~~required~~or tosavings ~~offset~~bank ~~the~~must ~~effect~~maintain ofa ~~the~~minimum leverage ~~higher reserve~~ ratio ~~against~~ ~~insured depository institutions with total consolidated assets~~ of ~~less~~Tier ~~than~~1 ~~$10~~capital ~~billion.~~(as ~~The~~defined ~~Dodd-Frank~~under ~~Act also broadens~~ the ~~base for~~ FDIC’s ~~insurance~~capital ~~assessments~~regulations) soto ~~that~~total ~~assessments~~assets ~~will~~of be4%. ~~based~~In onaddition, the ~~average consolidated total assets less average~~ ~~tangible~~Pennsylvania ~~equity~~Department ~~capital~~ of aBanking ~~financial~~has ~~institution~~the ~~rather~~supervisory ~~than~~discretion onto ~~its~~require ~~insured~~a ~~deposits.~~higher ~~The~~leverage ~~FDIC~~ratio ~~has~~for ~~adopted~~any ainstitutions ~~new restoration~~based ~~plan~~on ~~to increase~~ the ~~reserve~~institution’s ~~ratio~~substandard toperformance ~~1.15%~~in byany ~~September~~of ~~30,~~a ~~2020~~number ~~with~~of ~~additional~~areas. ~~rulemaking~~The ~~scheduled~~Bank ~~regarding~~was ~~the~~in ~~method~~compliance ~~to be~~with ~~used~~both tothe ~~achieve~~FDIC ~~a 1.35% reserve ratio by that date~~ and ~~offset~~ the ~~effect~~Pennsylvania onDepartment ~~institutions~~of ~~with~~Banking ~~assets~~capital ~~less~~requirements ~~than~~as ~~$10~~of ~~billion~~December 31, ~~in assets~~2012.

~~The~~Prompt ~~FDIC has adopted~~Corrective ~~new~~Regulatory ~~assessment regulations that redefine the assessment base as average consolidated assets less average tangible equity~~Action. Federal ~~Insured banks~~law ~~with~~requires, ~~more~~among ~~than~~other ~~$1.0 billion in assets must calculate quarterly average assets based on daily balances while smaller banks and newly chartered banks may use weekly averages. In the case of a merger~~things, ~~the~~that ~~average~~federal ~~assets of the surviving~~ bank ~~for~~regulatory ~~the~~authorities ~~quarter~~take “prompt ~~must~~corrective ~~include~~action” ~~the~~with ~~average~~respect ~~assets of the merged institution for the period in the quarter prior~~ to ~~the~~banks ~~merger.~~that ~~Average~~do ~~assets~~not ~~would be~~meet ~~reduced~~minimum bycapital ~~goodwill and other intangibles~~requirements. ~~Average tangible equity will equal Tier 1 capital.~~ For ~~institutions~~these ~~with more than $1.0 billion in assets average tangible equity will be calculated on a weekly basis while smaller institutions may use the quarter-end balance. Beginning April 1~~purposes, ~~2011,~~ the ~~base~~law ~~assessment rate for insured institutions in Risk Category I will range between 5 to~~establishes 9five ~~basis~~capital ~~points~~categories: ~~and~~well ~~for~~capitalized, ~~institutions~~adequately ~~in Risk Categories II~~capitalized, ~~III~~undercapitalized, ~~and~~significantly IVundercapitalized ~~will be 14, 23~~ and ~~35 basis points. An institution’s~~critically ~~assessment rate will be reduced based on the amount of its outstanding unsecured long-term debt and for institutions in Risk Categories II, III and IV may be increased based on their brokered deposits~~undercapitalized. ~~Risk Categories are eliminated for institutions with more than $10 billion in assets which will be assessed at a rate between 5 and 35 basis points.~~

InThe ~~addition,~~FDIC ~~all~~has ~~FDIC-insured~~adopted ~~institutions~~regulations ~~are~~to ~~required~~implement tothe ~~pay~~prompt ~~assessments~~corrective toaction ~~the~~legislation. ~~FDIC~~An institution is deemed to ~~fund~~be ~~interest~~“well ~~payments~~capitalized” if onit ~~bonds~~has ~~issued~~a bytotal ~~the~~risk-based ~~Financing~~capital ~~Corporation~~ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage (ratio of 5.0% or greater. An institution is “~~FICO~~adequately capitalized”), anif ~~agency~~it has a total risk-based capital ratio of 8.0% ~~the~~or ~~Federal~~greater, ~~government~~a ~~established~~Tier to1 ~~recapitalize~~risk-based ~~the~~capital ~~Federal~~ratio ~~Savings~~of 4.0% or greater, and ~~Loan~~generally ~~Insurance~~a ~~Corporation~~leverage ratio of 4.0% or greater. An institution ~~The~~is ~~FICO~~“undercapitalized” ~~assessment~~if ~~rates~~it has a total risk-based capital ratio of less than 8.0%, ~~which~~a ~~are~~Tier ~~determined~~1 ~~quarterly~~risk-based capital ratio of less than 4.0%, ~~averaged~~or generally a leverage ratio of less than 4.~~0084~~0%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of ~~insured~~less ~~deposits~~than on6.0%, ana ~~annualized~~Tier ~~basis~~1 inrisk-based ~~fiscal~~capital ratio of less than 3.0%, or a leverage ~~year~~ratio ~~2011~~of less than 3.0%. ~~These~~An ~~assessments~~institution ~~will~~is ~~continue~~considered ~~until~~to ~~the~~be ~~FICO~~“critically ~~bonds~~undercapitalized” ~~mature~~if it has a ratio of tangible equity (as defined in ~~2017~~the regulations) to total assets that is equal to or less than 2.0%.

~~Regulatory~~“Undercapitalized” banks ~~Capital~~must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital ~~Requirements~~restoration plan. ~~The~~A ~~FDIC~~bank’s ~~has~~compliance ~~promulgated~~with ~~capital~~such ~~adequacy~~a ~~requirements~~plan ~~for~~must ~~state-chartered~~be ~~banks~~guaranteed by any company that, ~~like~~controls the ~~Bank~~undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, ~~are~~it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient ~~members~~voting stock to become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the ~~Federal~~dismissal ~~Reserve~~of ~~System~~directors or officers and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. At“Critically ~~December 31~~undercapitalized” institutions are subject to additional measures including, ~~2011~~subject to a narrow exception, the ~~Bank~~appointment ~~exceeded~~of ~~all~~a ~~regulatory~~receiver ~~capital~~or ~~requirements~~conservator ~~and~~within ~~was~~270 days after ~~classified~~it asobtains ~~“well~~such ~~capitalized~~status.”

Basel III Proposal. In the summer of 2012, our primary federal regulators, published two notices of proposed rulemaking (the “2012 Capital Proposals”) that would substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank, compared to the current U.S. risk-based capital rules, which are based on the international capital accords of the Basel Committee on Banking Supervision (the “Basel Committee”) which are generally referred to as “Basel I.”

~~The~~One ~~FDIC’s~~of ~~capital regulations~~the ~~establish~~2012 aCapital Proposals ~~minimum~~(the 3%“Basel ~~Tier~~III 1Proposal”) ~~leverage~~addresses ~~capital requirement for~~ the ~~most~~components ~~highly~~of ~~rated~~capital ~~state-chartered,~~and ~~non-member~~other ~~banks, with~~issues anaffecting ~~additional~~the ~~cushion~~numerator ofin banking atinstitutions’ ~~least~~regulatory ~~100~~capital toratios ~~200~~and ~~basis~~would ~~points~~implement ~~for~~the ~~all~~Basel ~~other~~Committee’s ~~state-chartered,~~December ~~non-member~~2010 ~~banks~~framework, ~~which effectively~~ ~~increases~~known ~~the~~as ~~minimum~~“Basel ~~Tier~~III,” ~~1 leverage ratio~~ for ~~such~~strengthening ~~other~~international ~~banks~~capital tostandards. 4%The toother 5%proposal or(the ~~more.~~“Standardized Approach ~~Under~~Proposal”) ~~the~~addresses ~~FDIC’s~~risk ~~regulation,~~weights ~~the~~and ~~highest-rated banks~~other ~~are~~issues ~~those~~affecting ~~that~~ the ~~FDIC~~denominator ~~determines~~in ~~are~~banking ~~not~~institutions’ ~~anticipating~~regulatory capital orratios ~~experiencing~~and ~~significant~~would ~~growth~~replace ~~and~~the ~~have~~existing ~~well~~Basel ~~diversified~~I-derived risk~~, including~~ noweighting ~~undue~~approach ~~interest~~with ~~rate~~a more risk-sensitive ~~exposure,~~approach ~~excellent asset quality~~based, in ~~high liquidity~~part, ~~good~~on ~~earnings~~the ~~and,~~standardized approach in ~~general,~~the ~~which~~Basel ~~are considered~~Committee’s a2004 ~~strong~~“Basel ~~banking~~II” ~~organization,~~capital ~~rated~~accords. ~~composite~~Although ~~1 under~~ the Basel ~~Uniform~~III ~~Financial~~Proposal ~~Institutions~~was ~~Rating~~proposed ~~System.~~to ~~Tier~~come 1into oreffect ~~core capital~~on isJanuary ~~defined~~1, as2013, the ~~sum~~federal ofbanking ~~common~~agencies ~~stockholders’~~jointly ~~equity~~announced ~~(including~~on ~~retained earnings)~~November 9, ~~noncumulative~~2012 ~~perpetual~~that ~~preferred stock~~they ~~and~~do ~~related~~not ~~surplus,~~expect ~~and~~any ~~minority~~of ~~interests~~the inproposed ~~consolidated~~rules ~~subsidiaries,~~to ~~minus~~become ~~all~~effective ~~intangible~~on ~~assets~~that ~~other~~date. ~~than~~As ~~certain mortgage~~proposed, ~~and~~the ~~non-mortgage~~Standardized ~~servicing~~Approach Proposal ~~assets~~would ~~and~~come ~~purchased~~into ~~credit~~effect ~~card~~on ~~relationships~~January 1, 2015.

The ~~FDIC’s~~federal ~~regulations~~banking ~~also~~agencies ~~require~~have ~~that~~not ~~state-chartered,~~proposed ~~non-member~~rules ~~banks~~implementing ~~meet~~the afinal ~~risk-based~~liquidity ~~capital~~framework ~~standard. The risk-based capital standard requires the maintenance~~ of ~~total~~Basel ~~capital~~III ~~(which is defined as Tier 1 capital~~ and ~~supplementary~~have ~~(Tier~~not 2)determined ~~capital)~~ to ~~risk~~what ~~weighted assets~~extent ofthey ~~8%.~~will Inapply ~~determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0%~~ to ~~100%, based on the risks the FDIC believes are inherent in the type of asset or item~~U.S. ~~The~~banks ~~components~~that ~~of Tier 1 capital for the risk-based standards~~ are ~~the~~not ~~same as those for the leverage capital requirement. The components of supplementary (Tier 2) capital include cumulative perpetual preferred stock~~large, ~~mandatory~~internationally ~~subordinated~~active ~~debt, perpetual subordinated debt, intermediate-term preferred stock, up to 45% of unrealized gains on equity securities and a bank’s allowance for loan and lease losses~~banks. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital that may be included in total capital is limited to 100% of Tier 1 capital.

AIt ~~bank~~is management’s belief that, ~~has~~as ~~less than~~of ~~the~~December ~~minimum~~31, ~~leverage~~2012, ~~capital~~the ~~requirement~~Company isand ~~subject~~the toBank ~~various~~would ~~capital~~meet ~~plan~~all ~~and~~capital ~~activities~~adequacy ~~restriction~~ requirements. ~~The~~under ~~FDIC’s regulations~~the ~~also~~Basel ~~provide~~III and ~~that~~Standardized ~~any~~Approach ~~insured~~Proposals ~~depository~~on ~~institution with~~ a ~~ratio~~fully ofphased-in ~~Tier~~basis 1if ~~capital~~such torequirements ~~total~~were ~~assets~~currently ~~that~~effective. isThe ~~less~~regulations ~~than~~ultimately ~~2.0%~~applicable isto ~~deemed~~financial toinstitutions may be ~~operating~~substantially indifferent anfrom ~~unsafe~~the orBasel ~~unsound~~III ~~condition~~final ~~pursuant~~framework toas ~~Section 8(a)~~published ofin December 2010 and the ~~Federal~~proposed ~~Deposit~~rules ~~Insurance Act~~issued ~~and~~in ~~could~~June be2012. ~~subject~~Management will continue to ~~termination~~monitor ofthese ~~deposit~~and ~~insurance~~any future proposals submitted by our regulators.

The Bank is also subject to minimum capital requirements imposed by the Pennsylvania Department of Banking on Pennsylvania-chartered depository institutions. Under the Pennsylvania Department of Banking’s capital regulations, a Pennsylvania bank or savings bank must maintain a minimum leverage ratio of Tier 1 capital (as defined under the FDIC’s capital regulations) to total assets of 4%. In addition, the Pennsylvania Department of Banking has the supervisory discretion to require a higher leverage ratio for any institutions based on the institution’s substandard performance in any of a number of areas. The Bank was in compliance with both the FDIC and the Pennsylvania Department of Banking capital requirements as of December 31, 2011.

Affiliate Transaction Restrictions. Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. Such transactions between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of a bank subsidiary’s capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that all transactions between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.

Federal Home Loan Bank System. The Bank is a member of FHLB of Pittsburgh, which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank system. It makes loans to members (i.e. advances) in accordance with policies and procedures established by the board of trustees of the Federal Home Loan Bank.

As a member, it is required to purchase and maintain stock in FHLB in an amount equal to 4% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year and 4.75% of its outstanding advances from the Federal Home Loan Bank. At December 31, ~~2011~~2012, the Bank was in compliance with this requirement.

Federal Reserve System. The Federal Reserve requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking and NOW accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy the liquidity requirements. At December 31, 2012, the Bank met its reserve requirements.

Loans to One Borrower. Under Pennsylvania law, commercial banks have, subject to certain exemptions, lending limits to one borrower in an amount equal to 15% of the institution’s capital accounts. Pursuant to the national bank parity provisions of the Pennsylvania Banking Code, the Bank may also lend up to the maximum amounts permissible for national banks, which are allowed to make loans to one borrower of up to 25% of capital and surplus in certain circumstances. An institution’s capital account includes the aggregate of all capital, surplus, undivided profits, capital securities and general reserves for loan losses. As of December 31, 2012, the Bank’s loans to one borrower limitation were $9.7 million and the Bank was in compliance with such limitation.

Federal Reserve System. The Federal Reserve requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking and NOW accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy the liquidity requirements. At December 31, 2011, the Bank met its reserve requirements.

Loans to One Borrower. Under Pennsylvania law, commercial banks have, subject to certain exemptions, lending limits to one borrower in an amount equal to 15% of the institution’s capital accounts. Pursuant to the national bank parity provisions of the Pennsylvania Banking Code, the Bank may also lend up to the maximum amounts permissible for national banks, which are allowed to make loans to one borrower of up to 25% of capital and surplus in certain circumstances. An institution’s capital account includes the aggregate of all capital, surplus, undivided profits, capital securities and general reserves for loan losses. As of December 31, 2011, the Bank’s loans to one borrower limitation were $9 million and the Bank was in compliance with such limitation.

Item 1A. Risk Factors

Not applicable.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

The Company operates from its main office, an operations center, and six branch offices, as described in “Item 1. Business”. All offices are owned except for two branch offices and the operations center. The leases have initial terms of between 5-20 years, with renewal options for additional years. The following table sets forth certain information regarding our offices:

Year Opened

Owned or Leased

~~Owned~~Book orValue ~~Leased~~at 12/31/12 (in thousands)

~~Book Value at 12/31/11 (in thousands)~~

Main Office

820 Church Street Honesdale, PA

1985

~~1985~~

Owned

~~Owned~~2,047

~~2,174~~

Branch Offices

309 Main Avenue Hawley, PA

1988

~~1988~~

Owned

~~Owned~~736

~~761~~

Route 371 Damascus, PA

1995

~~1995~~

Leased(1)

~~Leased~~81

~~(1)~~

Route 507 Greentown, PA

1997

~~1997~~

Leased(2)

~~Leased~~352

~~(2)~~

~~354~~

Route 739 Dingmans Ferry, PA

2004

~~2004~~

Owned

~~Owned~~1,139

~~1,143~~

99 Welwood Avenue (Route 6) Hawley, PA

2008

~~2008~~

Owned

~~Owned~~4,901

~~5,005~~

Operations Center

120 Sunrise Avenue Honesdale, PA

1998

~~1998~~

Leased(3)

~~Leased~~419

~~(3)~~

~~484~~

⁽¹⁾

Lease expires 2015 with 15 year renewal option.

(2) Lease expires ~~2012~~2017 with 105 year renewal option.

⁽³⁾

Lease expires 2013 with a 5 year renewal option.

Item 3. Legal Proceedings

There are various claims and lawsuits in which Registrant is periodically involved, such as claims to enforce liens, condemnation proceedings on properties in which Registrant holds security interests, claims involving the making and servicing of real property loans, and other issues incident to Registrant’s business. In the opinion of management, no material loss is expected from any of the pending claims or lawsuits.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

(a) Market for Common Equity. The Information relating to the market for Registrant’s common equity and related stockholder matters appears under “Market Prices of Stock/Dividends Declared” in the Registrant’s Annual Report to Shareholders for the fiscal year ended December 31, ~~2011~~2012 (“Annual Report”) which is filed as Exhibit 13 hereto and is incorporated herein by reference. During the period covered by this report, the Company did not sell any equity securities that were not registered under the Securities Act of 1933.

(b) Use of Proceeds.

Not applicable.

Item 6. Selected Financial Data

The information contained in the table captioned “Summary of Selected Financial Data” in the Annual Report is incorporated herein by reference.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in the Annual Report is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

~~The~~Not ~~information contained in the section captioned “Quantitative and Qualitative Disclosures About Market Risk” in the Annual Report is incorporated herein by reference~~applicable. The consolidated financial statements and notes thereto presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which generally require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, nearly all of the Registrant’s assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on the Registrant’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Item 8. Financial Statements and Supplementary Data

The Registrant’s financial statements listed in Item 15 are incorporated herein by reference from the Annual Report.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

(a) Disclosure Controls and Procedures. Dimeco, Inc.’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, ~~2011~~2012, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Registrant’s disclosure controls and procedures were effective as of that date in ensuring material information required to be disclosed in this Annual Report on 10-K was recorded, processed, summarized, and reported on a timely basis.

(b) Internal Control Over Financial Reporting. Management’s Report on Internal Control Over Financial Reporting is furnished herein by reference from the Annual Report. Such report is not deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section. There were no changes in the Registrant’s internal control over financial reporting that occurred during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.24

(b) Internal Control Over Financial Reporting. Management’s Report on Internal Control Over Financial Reporting is furnished herein by reference from the Annual Report. Such report is not deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section.

(c) Changes to Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting during the three months ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

Not applicable.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

~~Other~~Board ~~information required under this item is incorporated herein by reference to the Proxy Statement for the 2012 Annual Meeting~~ of ~~Shareholders (the “Proxy Statement”) contained under the sections captioned “Section 16(a) Beneficial Ownership Reporting Compliance,” “Proposal I – Election of~~ Directors~~,” and “Corporate Governance.”~~

~~The~~For ~~Registrant~~information ~~has adopted~~concerning athe ~~Code~~Company’s board of ~~Ethics that applies to its principal executive officers~~directors, ~~principal~~the ~~financial~~information ~~officer,~~contained ~~principal~~under ~~accounting~~the ~~officer or~~section ~~controller~~captioned or“Proposal ~~persons~~1—Election ~~performing similar functions. A copy~~ of Directors” in the ~~Registrant~~Company’s ~~Code~~Proxy ofStatement ~~Ethics~~for ~~will~~the be2013 ~~provided~~Annual toMeeting ~~any person~~of ~~without~~Stockholders ~~charge~~(the ~~upon~~“Proxy ~~written~~Statement”) ~~request~~is toincorporated herein ~~Secretary,~~by ~~Dimeco, Inc~~reference.~~, PO Box 509, Honesdale, PA 18431.~~

Executive Officers

For information relating to officers of the Company, the information contained under the section captioned “Proposal 1—Election of Directors” in the Company’s Proxy Statement is incorporated herein by reference.

Audit Committee and Audit Committee Financial Expert

For information regarding the audit committee and audit committee financial expert of the Company, the section captioned “Corporate Governance” in the Proxy Statement is incorporated herein by reference.

Section 16(a) Beneficial Ownership Reporting Compliance

For information regarding compliance with Section 16(a) of the Exchange Act, the information contained under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement is incorporated herein by reference.

Code of Ethics

The Registrant has adopted a Code of Ethics that applies to its principal executive officers, principal financial officer, principal accounting officer or controller or persons performing similar functions. See Exhibit 14 to this Annual Report on Form 10-K.

Item 11. Executive Compensation

The information required by this item is incorporated by reference to the Proxy Statement contained under the sections captioned “Executive Compensation” and “Director Compensation.”

Item 12. Security Ownership of Certain Beneficial Owners and Management

(a) Security Ownership of Certain Beneficial Owners

Information required by this item is incorporated herein by reference to the section captioned “Principal Holders of Our Common Stock” of the Proxy Statement.

(b) Security Ownership of Management

Information required by this item is incorporated herein by reference to the section captioned “Proposal I1. — Election of Directors” of the Proxy Statement.

Management of the Registrant knows of no arrangements, including any pledge by any person of securities of the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant.

(d) Securities Authorized for Issuance Under Equity Compensation Plans

Set forth below is information as of December 31, ~~2011~~2012, with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.

Equity Compensation Plan Information

	(A)		(B)		(C)
					Number of Securities
					Remaining Available for
	Number of Securities				Future Issuance Under
	to be Issued Upon		Weighted-average		Equity Compensation
	Exercise of		Exercise Price of		Plans (Excluding
	Outstanding Options,		Outstanding Options,		Securities Reflected in
	Warrants and Rights		Warrants and Rights		Column (A)

Equity compensation plans approved by shareholders:
2000 Independent Directors Stock Option Plan		4,284	$	34.00		-
2000 Stock Incentive Plan		22,630		35.48		-
2010 Equity Incentive Plan		70,950		35.00		26,040
Equity compensation plans not approved by shareholders		-		-		-
Total		97,864	$	35.06		26,040

	(A)		(B)		(C)
	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		Weighted-average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (A))
Equity compensation plans approved by shareholders:
2000 Independent Directors Stock Option Plan		4,284	$	34.00		-
2000 Stock Incentive Plan		22,630		35.48		-
2010 Equity Incentive Plan		74,500		35.00		26,040
Equity compensation plans not approved by shareholders:		-		-		-
Total		101,414	$	35.06		26,040

The information required by this item is incorporated herein by reference to the section captioned “Related Party Transactions” and “Corporate Governance” in the Proxy Statement.

Item 14. Principal Accounting Fees and Services

The information called for by this item is incorporated herein by reference to the section entitled “Proposal 2. - Ratification of Independent Auditors” in the Proxy Statement.

Part IV

Item 15. Exhibits, Financial Statement Schedules

(a) The following documents are filed as a part of this report:

(1) The consolidated balance sheet of Dimeco, Inc. as of December 31, ~~2011~~2012 and ~~2010~~2011 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, ~~2011~~2012, together with the related notes and the independent auditors’ report of S.R. Snodgrass, A.C., independent registered public accountants for the three years ended December 31, ~~2011~~2012.

(2) Schedules omitted as they are not applicable.

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

	3(i)	Articles of Incorporation of Dimeco, Inc., as amended (1)
	3(ii)	Amended Bylaws of Dimeco, Inc. (2)
	10.1†	2000 Independent Directors Stock Option Plan (3)
	10.2†	2000 Stock Incentive Plan (4)
	10.3†	Form of Salary Continuation Plan for Executive Officers, as amended and restated (5)
	10.4†	Amended and Restated Change in Control Severance Agreement with Gary C. Beilman (6)
	10.5†	Amended and Restated Change in Control Severance Agreement with Maureen H. Beilman (6)
	10.6†	Amended and Restated Change in Control Severance Agreement with Peter Bochnovich (6)
	10.7†	2010 Equity Incentive Plan (67)
	13	Annual Report to Shareholders for the fiscal year ended December 31, ~~2011~~2012
	14	Code of Ethics for Principal Executive Officers and Senior Financial Officers (78)
	21	Subsidiaries of the Registrant
	23	Consent of S.R. Snodgrass, A.C.
	31.1	Rule 13a-14(a)/15d-14(a) Certification
	31.2	Rule 13a-14(a)/15d-14(a) Certification
	32	Section 1350 Certification
	101.INS	XBRL Instance Document *
	101.1	The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statement of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements, (detail tagged).*
	101.SCH	XBRL Schema Document *
	101.CAL	XBRL Calculation Linkbase Document *
	101.LAB	XBRL Labels Linkbase Document *
	101.PRE	XBRL Presentation Linkbase Document *
	101.DEF	XBRL Definition Linkbase Document *

†	Management contract or compensatory plan or arrangement.
*	~~Submitted as Exhibits 101 to this Annual Report on Form 10-K are documents formatted in XBRL (Extensible Business Reporting Language). Pursuant to Rule 406T of Regulation S-T~~Furnished, ~~these interactive data files are deemed~~ not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liabilityfile.
(1)	Incorporated by reference to the identically numbered exhibit to the Registrant’s Form 10-K for the fiscal year ended December 31, 2004.
(2)	Incorporated by reference to the identically numbered exhibit to the Registrant’s Form 10-K for the fiscal year ended December 31, 2009.
(3)	Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 (File No. 333-69420) filed with the Commission on September 14, 2001.

(3)	Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 (File No. 333-69416) filed with the Commission on September 14, 2002.
(4)	Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 (File No. 333-69416) filed with the Commission on September 14, 2001.
(4)	Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 (File No. 333-69420) filed with the Commission on September 14, 2002.
(5)	Incorporated by reference to identically numbered exhibit to the Registrant’s Form 8-K filed July 2, 2007.
(6)	Incorporated by reference to ~~Exhibit~~identically ~~10.1~~numbered exhibit to the ~~Registration~~Registrant’s ~~Statement on~~ Form S10-8K ~~(File~~for ~~No. 333-169454) filed with~~ the ~~Commission~~fiscal onyear ~~September~~ended 17December 31, ~~2010~~2011.
(7)	Incorporated by reference to ~~the~~Exhibit ~~identically~~10.1 ~~numbered exhibit~~ to the ~~Registrant’s~~Registration Statement on Form 10S-~~KSB~~8 ~~for~~(File ~~the~~No. ~~fiscal~~333-169454) ~~year~~filed ~~ended~~with ~~December~~the 31Commission on September 17, ~~2003~~2010.
(8)	Incorporated by reference to the identically numbered exhibit to the Registrant’s Form 10-KSB for the fiscal year ended December 31, 2003.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	DIMECO, INC.
Dated: March 23, 2012		/s/ Gary C. Beilman
Dated: March 27, 2013		/s/ Gary C. Beilman
	By:	Gary C. Beilman
		President and Chief Executive Officer
		(Duly Authorized Representative)

Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on March 2327, ~~2012~~2013 on behalf of the Registrant and in the capacities indicated.

/s/ William E. Schwarz		/s/ Gary C. Beilman
William E. Schwarz		Gary C. Beilman
Chairman of the Board and Director		President, Chief Executive Officer and Director
		(Principal Executive Officer)

/s/ Maureen H. Beilman		/s/ Robert E. Genirs
Maureen H. Beilman		Robert E. Genirs
Chief Financial Officer and Treasurer		Director
(Principal Financial and Accounting Officer)

/s/ Barbara Jean Genzlinger		/s/ John S. Kiesendahl
Barbara Jean Genzlinger		John S. Kiesendahl
Director		Vice Chairman of the Board of Directors

/s/ Thomas A. Peifer		/s/ Henry M. Skier
Thomas A. Peifer		Henry M. Skier
Director		Director

/s/ John F. Spall		/s/ Todd J. Stephens
John F. Spall		Todd J. Stephens
Director		Director

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