SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year ended December 31, 1995
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________________ to
Commission File No. 0-13599
Omega Financial Corporation
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1420888
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
366 Walker Drive
State College, PA 16801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (814) 231-7680
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 6,027,004
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(Title of Class) (Number of shares outstanding
as of March 1, 1996)
Indicate by check mark whether the Registrant (1) 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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X 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]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 1, 1996 was $185,807,449. (1)
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DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain portions of the Company's Annual Report to Shareholders for the
year ended December 31, 1995 are incorporated by reference in Parts II and IV of
this Report.
With the exception of the information incorporated by reference in Parts II
and IV of this Report, the Company's Annual Report to Shareholders for the year
ended December 31, 1995 is not to be deemed "filed" with the Securities and
Exchange Commission for any purpose.
Certain portions of the Company's Proxy Statement to be filed in connection
with its 1996 Annual Meeting of Shareholders are incorporated by reference in
Part III of this Report.
Other documents incorporated by reference are listed in the Exhibit Index.
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(1) The aggregate dollar amount of the voting stock set forth equals the
number of shares of the Company's Common Stock outstanding, reduced by the
amount of Common Stock held by officers, directors, shareholders owning in
excess of 10% of the Company's Common Stock and the Company's employee benefit
plans multiplied by the last reported sale price for the Company's Common Stock
on March 1, 1996. The information provided shall in no way be construed as an
admission that any officer, director or 10% shareholder in the Company may be
deemed an affiliate of the Company or that he is the beneficial owner of the
shares reported as being held by him, and any such inference is hereby
disclaimed. The information provided herein is included solely for record
keeping purposes of the Securities and Exchange Commission.
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PART I
Item 1: Business
GENERAL
Omega Financial Corporation ("Omega" or the "Company") is a Pennsylvania
business corporation which is registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended. Omega was formed, effective
December 31, 1986, as a result of the merger of Heritage Financial Services
Corporation ("Heritage") into Peoples National Bancorp, Inc. ("Peoples") and the
change of Peoples' name to Omega.
Peoples was incorporated on June 24, 1982 and became an active bank holding
company on December 7, 1982 through the acquisition of all of the outstanding
shares of Peoples National Bank of Central Pennsylvania ("Peoples Bank").
Heritage was incorporated on June 21, 1982 and became an active bank holding
company on December 31, 1982 through the acquisition of all of the outstanding
shares of The Russell National Bank ("Russell Bank"). As a result of the merger
of Heritage into Peoples, Omega became the holding company for both Peoples Bank
and Russell Bank. On January 28, 1994, Penn Central Bancorp, Inc. ("Penn
Central"), a bank holding company, merged into Omega. As a result of the merger
of Penn Central into Omega, Omega became the holding company for Penn Central's
five wholly-owned subsidiaries: Penn Central National Bank ("Penn Central
Bank"), Hollidaysburg Trust Company ("Hollidaysburg"), the First National Bank
of Saxton ("Saxton Bank"), Penn Central Bancorp Life Insurance Company and Penn
Central Bancorp Investment Company. On February 18, 1995, Peoples Bank and
Russell Bank merged to form Omega Bank N.A. ("Omega Bank") and on March 18,
1995, Saxton Bank merged into Penn Central Bank. On August 1, 1995, Omega
acquired all of the outstanding shares of Montour Bank ("Montour"). Unless the
context otherwise requires, the "Company" refers to Omega Financial Corporation
and its consolidated subsidiaries and the "Banks" refers to the Company's
banking subsidiaries.
BANKING SERVICES
The Banks currently provide retail and commercial banking services through
41 offices in Central Pennsylvania. Omega Bank operates 24 full service banking
offices in Centre, Clinton, Mifflin, and Juniata counties. Penn Central Bank
operates six full service banking offices in Huntingdon and Bedford counties,
and Hollidaysburg operates nine full service banking offices in Blair County.
Montour has one full service banking office in Montour County.
The Banks provide a full range of banking services including an automatic
teller machine network, checking accounts, NOW accounts, savings accounts, money
market certificates, investment certificates, fixed rate certificates of
deposit, club accounts, secured and unsecured commercial and consumer loans,
construction and mortgage loans, safe deposit facilities, credit loans with
overdraft checking protection and student loans. The Banks also provide a
variety of trust services.
As of December 31, 1995, the Banks operated an aggregate of 37 automated
teller machines (ATMs) at various locations. The Banks are members of the Money
Access Center ("MAC") System and the "Plus System." The MAC System operates
throughout Pennsylvania and the "Plus System" operates nationwide.
The Banks have a relatively stable deposit base with no major seasonal
depositor or group of depositors. Most of their commercial customers are small
and midsized businesses in Central Pennsylvania.
OTHER ACTIVITIES
On January 22, 1986, the Company formed Central Pennsylvania Life Insurance
Co., an Arizona corporation, for the purpose of underwriting credit life
insurance for the Company's bank subsidiaries.
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On December 26, 1985, the Company formed Central Pennsylvania Investment
Co., a Delaware corporation, for the purpose of holding and managing certain
investments of the Company.
On January 14, 1988, the Company formed Central Pennsylvania Leasing, Inc.,
a Pennsylvania corporation, for the purpose of leasing activities. As of
December 31, 1995, no activity had transpired.
On January 14, 1988, the Company formed Central Pennsylvania Real Estate,
Inc. for the purpose of engaging in real estate transactions for the Company. As
of December 31, 1995, no activity had transpired.
As a result of the merger of Penn Central into Omega on January 28, 1994,
the Company also acquired Penn Central Bancorp Life Insurance Company and Penn
Central Bancorp Investment Company.
Penn Central Bancorp Life Insurance Company was incorporated on December
13, 1985 under the laws of the State of Arizona and was authorized to underwrite
credit life and disability insurance on credit obligations granted by the Banks.
On December 31, 1994, Penn Central Bancorp Life Insurance Company was
liquidated, with all existing business being transferred to Central Pennsylvania
Life Insurance Company.
Penn Central Bancorp Investment Company was incorporated on July 24, 1986
under the laws of the State of Delaware for the purpose of acquiring high
quality debt and equity investments. On August 4, 1994, Penn Central Bancorp
Investment Company was merged into Central Pennsylvania Investment Company.
COMPETITION
The Banks service areas are characterized by intense competition for
banking business among commercial banks, savings and loan associations, mutual
savings banks and other financial institutions. The Banks actively compete with
such banks and institutions for local retail and commercial accounts. The Banks
also are subject to competition from other banks and financial institutions in
Central Pennsylvania, as well as other financial institutions outside their
service areas, for certain types of banking business. Many competitors have
substantially greater financial resources and larger branch systems than those
of the Banks.
In commercial transactions, the Banks' respective legal lending limits to a
single borrower (approximately $7,770,000 for Omega Bank, $3,066,000 for Penn
Central Bank, $3,399,000 for Hollidaysburg Trust Company and $678,000 for
Montour Bank, as of December 31, 1995) enable them to compete effectively for
the business of small and midsized businesses. However, this legal lending limit
is considerably lower than that of various competing institutions and thus may
act as a constraint on each Bank's effectiveness in competing for financings in
excess of the limit.
In consumer transactions, the Banks believe that they are able to compete
on a substantially equal basis with larger financial institutions because they
offer competitive interest rates on savings and time accounts and loans.
In competing with other banks, savings and loan associations and other
financial institutions, the Banks seek to provide personalized services through
management's knowledge and awareness of their service areas, customers and
borrowers. In management's opinion, larger institutions often do not provide
sufficient attention to the retail depositors and the relatively small
commercial borrowers that comprise the Banks' customer base.
Other competitors, including credit unions, consumer finance companies,
factors, insurance companies, and money market mutual funds, compete with
certain lending and deposit gathering services offered by the Banks. The Banks
also compete with insurance companies, investment counseling firms,
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mutual funds and other business firms and individuals in corporate and trust
investment management services.
SUPERVISION AND REGULATION
The Company. The Company is registered as a "bank holding company" under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is
therefore subject to regulation by the Board of Governors of the Federal Reserve
System (the "FRB").
Under the BHC Act, the Company is required to secure the prior approval of
the FRB before it can merge or consolidate with any other bank holding company
or acquire all or substantially all of the assets of any bank that is not
already majority owned by it or acquire direct or indirect ownership, or control
of, any voting shares of any bank that is not already majority owned by it, if
after such acquisition it would directly or indirectly own or control more than
5% of the voting shares of such bank.
The Company is generally prohibited under the BHC Act from engaging in, or
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company engaged in, nonbanking activities unless the FRB, by order
or regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making such
determination, the FRB considers whether the performance of these activities by
a bank holding company can reasonably be expected to produce benefits to the
public which outweigh the possible adverse effects. The FRB has by regulation
determined that certain activities are closely related to banking within the
meaning of the BHC Act. These activities include, among others, operating a
mortgage, finance, credit card or factoring company; performing certain data
processing operations; providing investment and financial advice; acting as an
insurance agent for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; and certain stock brokerage and
investment advisory services.
Under the policy of the FRB with respect to bank holding company
operations, a bank holding company is deemed to serve as a source of financial
strength to its subsidiary depository institutions and to commit resources to
support such institutions in circumstances where it might not do so absent such
policy. Under the Federal Deposit Insurance Corporation Improvement Act of 1991
(the "1991 Act"), a bank holding company is required to guarantee that any
"undercapitalized" (as such term is defined in the statute) insured depository
institution subsidiary will comply with the terms of any capital restoration
plan filed by such subsidiary with its appropriate federal banking agency to the
lesser of (I) an amount equal to 5% of the institution's total assets at the
time the institution became undercapitalized, or (ii) the amount which is
necessary (or would have been necessary) to bring the institution into
compliance with all capital standards as of the time the institution failed to
comply with such capital restoration plan.
Under the BHC Act, the Company is required to file periodic reports and
other information of its operations with, and is subject to examination by, the
FRB.
The Company is under the jurisdiction of the Securities and Exchange
Commission and various state securities commissions for matters relating to the
offer and sale of its securities and is subject to the Securities and Exchange
Commission's rules and regulations relating to periodic reporting, reporting to
shareholders, proxy solicitation and insider trading.
The Company, as an affiliate of the Banks within the meaning of the Federal
Reserve Act, is subject to certain restrictions under the Federal Reserve Act
regarding extension of credit to it by any of the Banks and the use of the stock
or other securities of the Company as collateral for loans by the Banks to any
borrower. Further, under the Federal Reserve Act and the FRB regulations, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with an extension of credit or provision of
credit or provision of any property or services. These so called "anti-tie-in
provisions" generally provide that a bank may not extend credit, lease or sell
property or furnish any service or fix or vary the consideration for any of the
foregoing to, or obtain the same from, a customer on the condition or
requirement that the customer provide some additional credit, property or
service to the bank, to the bank's holding company or to any other subsidiary of
the bank's holding
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company, or on the condition or requirement that the customer not obtain other
credit, property or services from a competitor of the bank, the bank's holding
company or any subsidiary of the bank's holding company.
Omega Bank and Penn Central Bank. Omega Bank and Penn Central Bank, as
national banks, are subject to the National Bank Act. Such banks are also
subject to the supervision of, and are regularly examined by, the Office of the
Comptroller of the Currency (the "OCC") and are required to furnish quarterly
reports to the OCC. The approval of the OCC is required for the establishment of
additional branch offices by any national bank, subject to applicable state law
restrictions. Under current Pennsylvania law, banking institutions, such as
these banking subsidiaries, may establish branches within any county in
Pennsylvania, subject to the prior approval of the OCC.
Omega Bank and Penn Central Bank are members of the Federal Deposit
Insurance Corporation (the "FDIC") and members of the Federal Reserve System
and, therefore, are subject to additional regulation by these agencies. Some of
the aspects of the lending and deposit business of these banks which are
regulated by these agencies include personal lending, mortgage lending and
reserve requirements. The operations of these banking subsidiaries are also
subject to numerous Federal, state and local laws and regulations which set
forth specific restrictions and procedural requirements with respect to the
extension of credit, credit practices, the disclosure of credit terms and
discrimination in credit transactions. The deposits of the Banks are insured by
the Bank Insurance Funds ("BIF") of the FDIC.
Hollidaysburg Trust Company. Hollidaysburg Trust Company is a state
chartered non-member banking institution subject to regulation by the
Pennsylvania Department of Banking. As an insured bank under the Federal Deposit
Insurance Act, Hollidaysburg is also regulated by the FDIC. Some of the aspects
of the lending and deposit business of Hollidaysburg which are regulated include
consumer lending, mortgage lending, interest rates, both as they relate to
lending and interest paid on deposits, and reserve requirements. Representatives
of the Pennsylvania Department of Banking and the FDIC regularly conduct
examinations of Hollidaysburg's affairs and records, and Hollidaysburg must
furnish quarterly reports to the Pennsylvania Department of Banking and the
FDIC.
Montour Bank. Montour Bank was organized in 1989. It is a
Pennsylvania-chartered banking institution and member of the Federal Reserve
System. Its deposits are insured by the FDIC under the Bank Insurance Fund. The
operations of Montour Bank are subject to federal and state statutes applicable
to banks chartered under the banking laws of the Commonwealth of Pennsylvania,
to members of the Federal Reserve System, and to banks, whose deposits are
insured by the FDIC. Montour Bank's operations are also subject to regulations
of the Pennsylvania Department of Banking, the FRB and the FDIC.
The Banks are subject to certain limitations on the amount of cash
dividends that they can pay. See Note 18 of Notes to the Company's Consolidated
Financial Statements.
Capital Regulation. The Company and the Banks are subject to risk-based
capital standards by which all bank holding companies and banks are evaluated in
terms of capital adequacy. These standards relate a banking company's capital to
the risk profile of its assets. The risk-based capital standards require that
bank holding companies and banks must have Tier 1 capital of at least 4% and
total capital, including Tier 1 capital, equal to at least 8% of its total
risk-adjusted assets. Tier 1 capital includes common stockholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. The remaining portion of this capital standard, known as Tier
2 capital, may be comprised of limited life preferred stock, qualifying
subordinated debt instruments, and the reserves for possible loan losses.
Additionally, banking organizations must maintain a minimum leverage ratio
of 3% measured as the ratio of Tier 1 capital to adjusted average assets. This
3% leverage ratio is a minimum for the top-rated banking organizations without
any supervisory, financial or operational weaknesses or deficiencies
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and other banking organizations are expected to maintain leverage capital ratios
100 to 200 basis points above the minimum depending on their financial
condition.
The table below provides a comparison of Omega's and each of the Bank's
risk-based capital ratios and leverage ratio to the minimum regulatory
requirements for the periods indicated:
Minimum
December 31, December 31 Regulatory
1995 1994 Requirements
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Omega
Risk based capital ratios:
Tier 1......... 17.21% 17.55% 4.00%
Total capital.. 18.47 18.80 8.00
Leverage ratio.... 11.85 11.76 3.00
Omega Bank
Risk based capital ratios:
Tier 1......... 16.48% 15.65% 4.00%
Total capital.. 17.73 16.90 8.00
Leverage ratio.... 11.38 10.71 3.00
Hollidaysburg Trust Company
Risk based capital ratios:
Tier 1......... 14.98% 14.55% 4.00%
Total capital.. 16.24 15.80 8.00
Leverage ratio.... 10.58 10.12 3.00
Penn Central National Bank
Risk based capital ratios:
Tier 1......... 19.02% 19.48% 4.00%
Total capital.. 20.29 20.73 8.00
Leverage ratio.... 11.74 11.37 3.00
Montour Bank
Risk based capital ratios:
Tier 1......... 9.71% N/A 4.00%
Total capital.. 10.97 N/A 8.00
Leverage ratio.... 7.93 N/A 3.00
The 1991 Act, which became law in December, 1991, and required each federal
banking agency, including the FRB and OCC, to revise its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risks of non-traditional activities,
as well as reflect the actual performance and expected risk of loss on
multi-family mortgages.
The 1991 Banking Law provided the federal banking agencies with broad
powers to take corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized."
The FDIC has issued a rule which sets the capital level for each of the
five capital categories established in the 1991 Banking Law. Under the rule a
bank is deemed to be "well capitalized" if the bank has a total risk-based
capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or
greater, has a leverage ratio of 5% or greater, and is not subject to any order
of final capital directive by the FDIC to meet and maintain a specific capital
level for any capital measure. A bank is deemed "adequately capitalized" if the
bank has a total risk-based capital ratio of 8% or greater, a Tier-1 risk-based
capital ratio of 4% or greater and a leverage capital ratio of 4% or greater (or
3% or greater for the most highly rated banks), and does not meet the definition
of a "well capitalized" bank. A bank that has total risk-based capital, Tier-1
risk-based capital and leverage capital that is less than 8%, 4% and 4%,
respectively, is deemed "undercapitalized." Under the regulation "significantly
undercapitalized" banks are those with total
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risk-based capital, Tier-1 risk-based capital and leverage capital that is less
than 5%, 3% and 3%, respectively. Finally, "critically undercapitalized" banks
are defined as those banks which have a ratio of tangible equity to total assets
that is equal to or less than 2%. A depository institution may be deemed to be
in a capitalization category that is lower than is indicated by its actual
capital position if it received an unsatisfactory examination rating.
All of the bank regulatory agencies recently issued a final rule that
amends their capital guidelines for interest rate risk and requires such
agencies to consider in their evaluation of a bank's capital adequacy the
exposure of a bank's capital and economic value to changes in interest rates.
This final rule does not establish an explicit supervisory threshold. The
agencies intend, at a subsequent date, to incorporate explicit minimum
requirements for interest rate risk into their risk based capital standards and
have proposed a supervisory model to be used together with bank internal models
to gather data and hopefully propose at a later date explicit minimum
requirements.
RECENT LEGISLATION
On September 29, 1994, the President signed into law the "Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994" (the "Interstate Act").
Among other things, the Interstate Act permits bank holding companies to acquire
banks in any state one year after enactment. Pennsylvania law was recently
amended to authorize any out-of-state bank holding company to acquire control of
any state or national bank located in Pennsylvania after it receives prior
written approval from the Pennsylvania Department of Banking. Beginning June 1,
1997, a bank may merge with a bank in another state so long as both states have
not opted out of interstate branching between the date of enactment of the
Interstate Act and May 31, 1997. States may enact laws opting out of interstate
branching before June 1, 1997, subject to certain conditions. States may also
enact laws permitting interstate merger transactions before June 1, 1997 and
host states may impose conditions on a branch resulting from an interstate
merger transaction that occurs before June 1, 1997, if the conditions do not
discriminate against out-of-state banks, are not preempted by Federal law and do
not apply or require performance after May 31, 1997. Pennsylvania has recently
enacted a law opting in immediately to interstate merger and interstate
branching transactions. Interstate acquisitions and mergers would both be
subject, in general, to certain concentration limits and state entry rules
relating to the age of the bank.
Under the Interstate Act, the Federal Deposit Insurance Act is amended to
permit the responsible Federal regulatory agency to approve the acquisition of a
branch of an insured bank by an out-of-state bank or bank holding company
without the acquisition of the entire bank or the establishment of a "de novo"
branch only if the law of the state in which the branch is located permits
out-of-state banks to acquire a branch of a bank without acquiring the bank or
permits out-of-state banks to establish "de-novo" branches. Pennsylvania
recently passed such a law.
On September 23, 1994, the President signed into law the "Riegle Community
Development and Regulatory Improvement Act of 1994" (the "Development Act").
Among other things, the Development Act establishes a $382 million fund (the
"Fund") to promote economic development and credit availability in underserved
communities by providing financial and technical assistance to community
development financial institutions ("CDFI's").
CDFI's include banks, savings associations and bank holding companies which
have a primary mission of promoting community development. Institutions
receiving monies from the Fund will be required to provide matching funds dollar
for dollar. Under the Fund, a CDFI may receive up to $5 million over a 3-year
period, with affiliates in other states not presently served eligible to receive
up to an additional $3.75 million over 3 years.
One third of the Fund will be used to finance the Bank Enterprise Act, an
existing (but previously unfunded) incentive program designed to encourage
depository institutions to increase funding in distressed neighborhoods.
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In addition to the above, the Development Act contains provisions relating
to, among others, small business capital formation, small business loan
securitization, consumer protection for "reverse mortgages," paperwork reduction
and reform of the national flood insurance program.
The foregoing necessarily is a summary and general description of certain
provisions of each of the Interstate Act and the Development Act and does not
purport to be complete. Many of the provisions of each will be implemented
through the adoption of regulations by the various Federal banking agencies.
Moreover, many of the significant provisions of the legislation have not yet
become effective. As of the date hereof, the Company is continuing to study the
legislation and regulations relating to the legislation but cannot yet assess
its impact on the Company.
NATIONAL MONETARY POLICY
In addition to being affected by general economic conditions, the earnings
and growth of the Banks and, therefore, the earnings and growth of the Company,
are affected by the policies of regulatory authorities, including the OCC, the
FRB and the FDIC. An important function of the FRB is to regulate the money
supply and credit conditions. Among the instruments used to implement these
objectives are open market operations in U.S. government securities, setting the
discount rate and changes in reserve requirements against bank deposits. These
instruments are used in varying combinations to influence overall growth and
distribution of credit, bank loans, investments and deposits, and their use may
also affect interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the FRB have had a significant
effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future. The affects of such policies upon the future
businesses, earnings and growth of the Banks cannot be predicted.
EMPLOYEES
As of December 31, 1995, the Company had a total of 461 full-time employees
and 93 part-time employees.
INVESTMENT CONSIDERATIONS
In analyzing whether to make or to continue an investment in the Company,
investors should consider, among other factors, the following:
Economic Conditions and Related Uncertainties. Commercial banking is
affected, directly and indirectly, by local, domestic, and international
economic and political conditions, and by governmental monetary and fiscal
policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, real estate values, international conflicts
and other factors beyond the Company's control may adversely affect the
potential profitability of the Company. Any future rises in interest rates,
while increasing the income yield on the Company's earnings assets, may
adversely affect loan demand and the cost of funds and, consequently, the
profitability of the Company. Any future decreases in interest rates may
adversely affect the Company's profitability because such decreases may reduce
the amounts which the Company may earn on its assets. Economic downturns could
result in the delinquency of outstanding loans. Management does not expect any
one particular factor to materially affect the Company's results of operations.
However, continued downtrends in several areas, including real estate,
construction and consumer spending, could have an adverse impact on the
Company's ability to remain profitable.
Effect of Interest Rates on the Banks and the Company. The operations of
financial institutions such as the Company are dependent to a large degree on
net interest income which is the difference between interest income from loans
and investments and interest expense on deposits and borrowings. An
institution's net interest income is significantly affected by market rates of
interest which in turn are affected by prevailing economic conditions, by the
fiscal and monetary policies of the federal government and by the policies of
various regulatory agencies. At December 31, 1995, total interest earning assets
maturing or repricing within one year exceeded total interest bearing
liabilities maturing or
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repricing during the same time period by $14.299 million, representing a
positive cumulative one year sensitivity ratio of 1.03. If interest rates fall,
the Company would experience a decrease in net interest income. Like all
financial institutions, the Company's balance sheet is affected by fluctuations
in interest rates. Volatility in interest rates can also result in
disintermediation, which is the flow of funds away from financial institutions
into direct investments, such as US Government and corporate securities and
other investment vehicles, including mutual funds, which, because of the absence
of federal insurance premiums and reserve requirements, generally pay higher
rates of return than financial institutions. See "Item 7: Management's
Discussion of Financial Condition and Results of Operations."
Federal and State Government Regulations. The operations of the Company and
the Banks are heavily regulated and will be affected by present and future
legislation and by the policies established from time to time by various federal
and state regulatory authorities. In particular, the monetary policies of the
Federal Reserve Board have had a significant effect on the operating results of
banks in the past, and are expected to continue to do so in the future. Among
the instruments of monetary policy used by the Federal Reserve Board to
implement its objectives are changes in the discount rate charged on bank
borrowings and changes in the reserve requirements on bank deposits. It is not
possible to predict what changes, if any, will be made to the monetary polices
of the Federal Reserve Board or to existing federal and state legislation or the
effect that such changes may have on the future business and earnings prospects
of the Company.
During the past several years, significant legislative attention has been
focused on the regulation and deregulation of the financial services industry.
Non-bank financial institutions, such as securities brokerage firms, insurance
companies and money market funds, have been permitted to engage in activities
which compete directly with traditional bank business.
Competition. The Company faces strong competition from other banks, savings
institutions and other financial institutions which have branch offices or
otherwise operate in the Company's market area, as well as many other companies
now offering a range of financial services. Many of these competitors have
substantially greater financial resources and larger branch systems than the
Company. In addition, many of the Banks' competitors have higher legal lending
limits than do the Banks. Particularly intense competition exists for sources of
funds including savings and retail time deposits and for loans, deposits and
other services that the Banks offer. See "Item 1: BUSINESS - Competition."
Allowance for Loan Losses. The Company has established an allowance for
loan losses which management believes to be adequate to offset potential loses
on the Company's existing loans. However, there is no precise method of
predicting loan losses. There can be no assurance that any future declines in
real estate market conditions, general economic conditions or changes in
regulatory policies will not require the Company to increase its allowance for
loan loses.
Dividends. While the Board of Directors expects to continue its policy of
regular quarterly dividend payments, this dividend policy will be reviewed
periodically in light of future earnings, regulatory restrictions and other
considerations. No assurance can be given, therefore, that cash dividends on
common stock will be paid in the future. See "Item 5: Market for the
Registrant's Common Stock and Related Shareholder Matters."
Market for Common Stock. Although the Company's Common Stock is listed on
the NASDAQ National Market System, there has been only limited trading in the
Common Stock. There can be no assurance that a regular and active market for the
Common Stock will develop in the foreseeable future. See "Item 5: Market for the
Registrant's Common Stock and Related Stockholder Matters." Investors in the
shares of Common Stock must, therefore, be prepared to assume the risk of their
investment for an indefinite period of time.
"Anti-Takeover" and "Anti-Greenmail" Provisions and Management
Implications. The Articles of the Company presently contain certain provisions
which may be deemed to be "anti-takeover" and "anti-greenmail" in nature in that
such provisions may deter, discourage or make more difficult the assumption of
control of the Company by another corporation or person through a tender offer,
merger, proxy contest or similar transaction or series of transactions. The
overall effects of the "anti-takeover" and
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"anti-greenmail" provisions may be to discourage, make more costly or more
difficult, or prevent a future takeover offer, prevent shareholders from
receiving a premium for their securities in a takeover offer, and enhance the
possibility that a future bidder for control of the Company will be required to
act through arm-length negotiation with the Company's Board of Directors. Copies
of the Articles of the Company are on file with the Securities and Exchange
Commission and the Pennsylvania Secretary of State.
Stock Not an Insured Deposit. Investments in the shares of the Company's
Common Stock are not deposits insured against loss by the FDIC or any other
entity.
Bespeaks Caution Doctrine. Investors should be aware that the United States
Court of Appeals for the Third Circuit, in a case entitled In Re: Donald J.
Trump Casino Securities Litigation - Taj Mahal Litigation (No. 92-5350, filed
October 14, 1993), adopted a legal doctrine entitled the "Bespeaks Caution
Doctrine" which may prevent holders of the Company's Common Stock from
recovering from the Company based upon material misstatements and omissions
contained in the annual Report on Form 10-K and the Company's other disclosure
documents to the extent that this Form 10-K or such other documents contained
cautionary statements to apprise investors of the risks of the Company's
securities. The foregoing investment considerations may have the effect of
bringing this Form 10-K, as well as other Company disclosure documents, within
the purview of the Bespeaks Caution Doctrine.
Item 2: Properties
The Company's corporation headquarters are located at 366 Walker Drive,
State College, Pennsylvania. This building is owned by the Company, subject to a
mortgage in the original principal amount of $5,000,000 held by Mid-State Bank
and Trust Co. The Company occupies the first two floors and a portion of the
third floor of this building and is leasing office space on the third floor. In
addition, the Banks operate branch offices and automated teller machines,
indicated by (ATM), at the following locations which are owned by the Company.
Omega Bank
117 South Allen Street, State College, PA (Main Office) (ATM)
222 South Allen Street, State College, PA
1480 East College Ave., State College, PA (ATM)
137 North Allegheny Street, Bellefonte, PA (ATM)
Fourth and Olive Streets, Snow Shoe, PA
Main Street, Rebersburg, PA
Main Street, Millheim, PA
Main Street and Route 45, Boalsburg, PA (ATM)
Routes 220 and 322, Port Matilda, PA (ATM)
Main and Mill Streets, Loganton, PA
1667 North Atherton Street, State College, PA (ATM)
201 Mill Street, Milesburg, PA
32 East Market St., Lewistown, PA (Main Office) (ATM)
1250 West Fourth St., Lewistown, PA
111 North Logan Blvd., Burnham, PA
Main Street, Mifflin, PA
On the Square, Thompsontown, PA
10 Carriage House Lane, Reedsville, PA (ATM)
East Main Street, Allensville, PA
Route 522 North, Lewistown, PA (ATM only)
Hollidaysburg Trust Company
218 - 224 Allegheny Street, Hollidaysburg, PA (Main Office)
113 West Allegheny Street, Martinsburg, PA (ATM)
11
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201 High Street, Williamsburg, PA
1567 East Pleasant Valley Boulevard, Altoona, PA
430 East 25th Avenue, Altoona, PA (ATM)
Penn Central National Bank
431 Penn Street, Huntingdon, PA (Main Office)
18-20 East Shirley Street, Mount Union, PA
Main Street, Alexandria, PA
Route 26, James Creek, PA
911 Church Street, Saxton, PA
708 Main Street, Saxton, PA (ATM only)
Montour Bank
1519 Bloom Road, Danville, PA
The Banks operate branch offices and ATMs at the following locations which
are leased by the Company. The leases for these properties have expiration dates
ranging from 1995 to 2030.
Branches
Westerly Parkway, State College, PA (ATM)
1811 South Atherton Street, State College, PA (ATM) building owned,
land leased.
1667 North Atherton Street, State College, PA (ATM) building owned,
land leased.
Routes 45 and 144, Centre Hall, PA 366 East
College Avenue, State
College, PA (ATM)
520 Third Avenue, Duncansville, PA (ATM)
3014 Pleasant Valley Boulevard, Altoona, PA (ATM)
300 Spring Plaza, Roaring Spring, PA (ATM)
5812 Sixth Avenue, Altoona, PA (ATM)
ATMs
Weis Shopping Plaza, Mifflintown, PA Penn State University Campus,
State College, PA (2)
414 East College Avenue, State College, PA
2844 West College Avenue, State College, PA
110 1/2 Burrowes Street, State College, PA
Centre Community Hospital, 1800 East Park Avenue, State College, PA
116 W. College Ave., State College, PA
135 S. Pugh Street, State College, PA
I80 Exit 22 and Rt 144, Snow Shoe, PA
Sheetz Store, 1671 East Pleasant Valley Boulevard, Altoona, PA
Sheetz Store, 1100 Blair Street, Hollidaysburg, PA
Martin General Store, Route 22, Alexandria, PA
JC Blair Memorial Hospital, Warm Springs Avenue, Huntingdon, PA
Ames Store, Route 22 Plaza, Huntingdon, PA
Sheetz Store, 4th Street and Rt. 22, Huntingdon, PA
Sheetz Store, Jefferson Street, Mount Union, PA
Sheetz Store, 14th and Moore Streets, Huntingdon, PA
Martin General Store, East First Street, Williamsburg, PA
12
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Item 3: Legal Proceedings
The Company and the Banks are involved in various legal proceedings
incidental to their business. Neither the Company, the Banks nor any of their
properties is subject to any material legal proceedings, nor are any such
proceedings known to be contemplated by any governmental authority.
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 4.1: Executive Officers of the Registrant
Set forth below is certain information concerning the executive officers of
the Company who are not also directors.
On March 18, 1995, Omega's banking subsidiaries, Peoples National Bank of
Central Pennsylvania ("Peoples Bank") and The Russell National Bank ("Russell
Bank"), merged to form Omega Bank. Any reference below to service with Omega
Bank includes service with Omega Bank's predecessors prior to such merger.
Name Age Position
---- --- --------
Daniel L. Warfel 49 Executive Vice President and Chief
Financial Officer of the Company since
1987; Senior Vice President and Chief
Financial Officer of Heritage from 1983
to 1986; Executive Vice President and
Director of Omega Bank since 1983.
David N. Thiel 52 Senior Vice President and Secretary of
the Company since 1987; Secretary of
Peoples from 1982 to 1986; Vice
President, Secretary and Cashier of Omega
Bank since 1973.
JoAnn N. McMinn 43 Senior Vice President and Controller of
the Company since 1988; Vice President
and Controller of Omega Bank since 1976.
13
<PAGE>
PART II
Item 5: Market for the Registrant's Common Stock and Related Stockholder Matters
Incorporated by reference from the section entitled "Common Stock Market
Prices and Dividends" in the Company's Annual Report to Shareholders for the
year ended December 31, 1995. As of March 1, 1996, the number of shareholders of
the Company's common stock was 2,882.
Item 6: Selected Financial Data
Incorporated by reference from the section entitled "Selected Financial
Data" in the Company's Annual Report to Shareholders for the year ended December
31, 1995.
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Incorporated by reference from the sections entitled "Management's
Discussion and Analysis - Results of Operations" and " - Financial Condition" in
the Company's Annual Report to Shareholders for the year ended December 31,
1995.
Item 8: Financial Statements and Supplementary Data
Incorporated by reference from the Company's Consolidated Financial
Statements and the Notes to Consolidated Financial Statements thereto included
in the Company's Annual Report to Shareholders for the year ended December 31,
1995.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
14
<PAGE>
PART III
Item 10: Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's Proxy Statement relating to
the 1996 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K, except information concerning certain Executive
Officers of the Company which is set forth in Item 4.1 hereof.
Item 11: Executive Compensation
Incorporated by reference from the Company's Proxy Statement relating to
the 1996 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the Company's Proxy Statement relating to
the 1996 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
Item 13: Certain Relationships and Related Transactions
Incorporated by reference from the Company's Proxy Statement relating to
the 1996 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
15
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements. The following consolidated financial statements
and the notes thereto of the Company, which are included in the Company's Annual
Report to Shareholders for the year ended December 31, 1995, and the report of
independent public accountants which is also included in such Annual Report, are
incorporated herein by reference into Item 8 of this Report:
Consolidated Balance Sheets -
December 31, 1995 and 1994
Consolidated Statements of Income
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
(2) Financial Statement Schedules. Financial statement schedules are
omitted because they are not applicable or the required information is shown in
the financial statements or notes thereto.
Exhibits filed pursuant to Item 601 of Regulation S-K
Number Title
------ -----
2.1 Agreement and Plan of Reorganization with Montour Bank.
The schedules to this Agreement are not filed as an
exhibit pursuant to Regulation S-K, Item 601(b)(2);
however, Omega will furnish copies of these schedules to
the Commission upon its request.
2.2 Agreement and Plan of Merger with Montour Bank
3.1(1) Amended and Restated Articles of Incorporation of
Omega
3.2(6) Articles of Amendment to the Amended and Restated
Articles of Incorporation.
3.3(13) Articles of Amendment to the Amended and Restated
Articles of Incorporation
3.4(8) Amended and Restated By-Laws of Omega, as amended.
10.1 Intentionally Omitted
10.2 Intentionally Omitted
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<PAGE>
Number Title
------ -----
*10.3(7) Severance Agreement by and among David B. Lee, the
Company, and Peoples Bank dated March 15, 1990.
*10.4(7) Severance Agreement by and among Daniel L. Warfel and
the Company dated December 18, 1990.
*10.5(2) Peoples (now Omega) Employee Stock Purchase Plan.
*10.6(2) Peoples (now Omega) Stock Option Plan (1986).
*10.7(7) Amendment No. 1 to Stock Option Plan (1986).
*10.8(7) Omega Amended and Restated Employee Stock Ownership
Plan.
*10.8.1(7) ESOP Trust Agreement
*10.9(4) Peoples (now Omega) Employee Retirement Plan.
*10.10(4) Second Amendment to Peoples (now Omega) Employee
Retirement Plan.
*10.11(7) TRA '86 Amendments to Peoples (now Omega) Employee
Retirement Plan.
*10.12(5) Form of Peoples Bank Executive Supplemental Income
Agreement.
*10.13(1) Form of Russell Bank Deferred Compensation Agreement
for Directors.
*10.14(1) Credit Agreement, dated December 6, 1985, between the
Company and Pittsburgh National Bank.
*10.15(3) Salary Continuation Agreement, dated January 15,
1985, between the Company and Charles H. Zendt, Jr.
*10.16 Intentionally omitted.
*10.17(4) Omega Executive Incentive Compensation Plan.
*10.18(8) Omega Amended and Restated 401(k) Profit Sharing Plan.
*10.19(10) First Amendment to Amended and Restated 401(k) Profit
Sharing Plan.
10.20(7) Purchase Agreement (with Exhibits) between Omega and
Mid-State Bank & Trust Company ("Mid-State").
10.21(7) Assignment of Promissory Note from Omega to Mid-State
together with $5,000,000 Secured Promissory Note of
Omega Financial Corporation Employee Stock Ownership
Plan Trust ("ESOP Trust").
10.22(7) Pledge and Security Agreement between Omega and the
ESOP Trust.
10.23(7) Mortgage from Omega to Mid-State.
*10.24(10) Severance Agreement, as amended, with D. Stephen
Martz.
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<PAGE>
Number Title
------ -----
*10.25(10) Severance Agreement, as amended, with Robert T. Gentry
*10.26(11) 1994 Stock Option Plan for Non-Employee Directors
*10.27(13) Hollidaysburg Trust Company Profit Sharing Plan
*10.28(13) Directors Deferred Compensation Agreements for
Peoples National Bank and Omega Financial Corporation
*10.29 1996 Employee Stock Option Plan (filed herewith)
13.1 Annual Report to Shareholders for the year ended
December 31, 1995 (such reports, except for those
portions expressly incorporated by reference in this
Annual Report on Form 10-K, is furnished for the
information of the Commission and is not to be deemed
filed as part of this Report).
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Arthur Andersen L.L.P.
23.2 Consent of Deloitte and Touche L.L.P.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
- --------------------------------------
* Indicates management contract or compensatory plan, contract or
arrangement.
(1) Incorporated by reference from Omega's (formerly Peoples') Annual
Report on Form 10-K for the year ended December 31, 1986.
(2) Incorporated by reference from Omega's (formerly Peoples'
Registration Statement on Form S-4 (File No. 33-9045).
(3) Incorporated by reference from Omega's Annual Report on Form 10-K
for the year ended December 31, 1987.
(4) Incorporated by reference from Omega's Annual Report on Form 10-K
for the year ended December 31, 1988.
(5) Incorporated by reference from Omega's Annual Report on Form 10-K
for the year ended December 31, 1989.
(6) Incorporated by reference from Omega's Quarterly Report on Form 10-Q
for the period ended June 30, 1990.
(7) Incorporated by reference from Omega's Annual Report on Form 10-K
for the year ended December 31, 1990.
(8) Incorporated by reference from Omega's Annual Report on Form 10-K
for the year ended December 31, 1992.
(9) Incorporated by reference from Omega's Registration Statement on
Form S-4 (File No. 33-71070).
(10)Incorporated by reference from Omega's Annual Report on Form 10-K
for the year ended December 31, 1993.
(11)Incorporated by reference from Omega's Registration Statement on
Form S-8 (Registration No. 33-82214).
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<PAGE>
(12)Incorporated by reference from Omega's Registration Statement on
Form S-4 (Registration No. 33-91472).
(13)Incorporated by reference from Omega's Annual Report on Form 10-K
for the year ended December 31, 1994.
19
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OMEGA FINANCIAL CORPORATION
By: _______________________________________
David B. Lee, Chairman of the Board and
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
______________________ Chairman of the Board, and ________________
David B. Lee Chief Executive Officer and
Director (Principal Executive)
Officer
______________________ President and Chief ________________
D. Stephen Martz Operating Officer and Director
______________________ Executive Vice President - ________________
Robert T. Gentry Director
______________________ Executive Vice President and ________________
Daniel L. Warfel Chief Financial Officer (Principal
Financial Officer)
_______________________ Senior Vice President and Controller ________________
JoAnn N. McMinn (Principal Accounting Officer)
_______________________ Director ________________
Raymond F. Agostinelli
_______________________ Director ________________
Merle K. Evey
_______________________ Director ________________
Philip E. Gingerich
_______________________ Director ________________
David K. Goodman, Sr.
20
<PAGE>
_______________________ Director ________________
William E. Henry
_______________________ Director ________________
George R. Lovette
_______________________ Director ________________
Don C. Meyer
_______________________ Director ________________
Robert N. Oliver
_______________________ Director ________________
James W. Powers, Sr.
_______________________ Director ________________
Stanton R. Sheetz
_______________________ Director ________________
Robert A. Szeyller
_______________________ Director ________________
Samuel D. Zeiders, Jr.
21
EXHIBIT 10.29
Omega Financial Corporation
1996 EMPLOYEE STOCK OPTION PLAN
1. Purpose of Plan
The purpose of the 1996 Employee Stock Option Plan (the "Plan") is
to provide additional incentive to officers and other key employees of Omega
Financial Corporation ("Omega") and each present or future parent or subsidiary
corporation by encouraging them to invest in shares of Omega's common stock,
$5.00 par value ("Common Stock"), and thereby acquire a proprietary interest in
Omega and an increased personal interest in Omega's continued success and
progress, to the mutual benefit of officers, employees and shareholders.
2. Aggregate Number of Shares
1,000,000 shares of Omega's Common Stock shall be the aggregate
number of shares which may be issued under this Plan. Notwithstanding the
foregoing, in the event of any change in the outstanding shares of the Common
Stock of Omega by reason of a stock dividend, stock split, combination of
shares, recapitalization, merger, consolidation, transfer of assets,
reorganization, conversion or what the Compensation Committee (defined in
Section 4(a)), deems in its sole discretion to be similar circumstances, the
aggregate number and kind of shares which may be issued under this Plan shall be
appropriately adjusted in a manner determined in the sole discretion of the
Compensation Committee. Reacquired shares of Omega's Common Stock, as well as
unissued shares, may be used for the purpose of this Plan. Common Stock of Omega
subject to options which have terminated unexercised, either in whole or in
part, shall be available for future options granted under this Plan.
3. Class of Persons Eligible to Receive Options; Limitations
All officers and key employees of Omega and of any present or future
Omega parent or subsidiary corporation are eligible to receive an option or
options under this Plan. The individuals who shall, in fact, receive an option
or options shall be selected by the Compensation Committee, in its sole
discretion, except as otherwise specified in Section 4 hereof. During the term
of this Plan, no optionee under this Plan shall be entitled to be granted
options to purchase shares of Omega's Common Stock in excess of the total number
of shares set forth in Section 2 of this Plan (as adjusted pursuant to Section
2).
4. Administration of Plan
(a) This Plan shall be administered by the Compensation Committee
("Committee") appointed by Omega's Board of Directors. The Committee shall
consist of a minimum of two and a maximum of seven members of the Board of
Directors, each of whom shall be a "disinterested person" within the meaning of
Rule 16b-3(c)(2)(i) under the Securities Exchange Act of 1934, as amended, or
any future corresponding rule. The Committee shall, in addition to its other
authority and subject to the provisions of this Plan, determine which
individuals shall in fact be granted an option or options, whether the option
shall be an Incentive Stock Option or a Non-Qualified Stock Option (as such
terms are defined in Section 5(a)), the number of shares to be subject to each
of the options, the time or times at which the options shall be granted, the
rate of option exercisability, and, subject to Section 5 hereof, the price at
which each of the options is exercisable and the duration of the option.
(b) The Committee shall adopt such rules for the conduct of its
business and administration of this Plan as it considers desirable. A majority
of the members of the Committee shall constitute a quorum for all purposes. The
vote or written consent of a majority of the members of the Committee on a
particular matter shall constitute the act of the Committee on such matter. The
Committee shall have the right to construe the Plan and the options issued
pursuant to it, to correct defects and
22
<PAGE>
omissions and to reconcile inconsistencies to the extent necessary to effectuate
the Plan and the options issued pursuant to it, and such action shall be final,
binding and conclusive upon all parties concerned. No member of the Committee or
the Board of Directors shall be liable for any act or omission (whether or not
negligent) taken or omitted in good faith, or for the exercise of an authority
or discretion granted in connection with the Plan to a Committee or the Board of
Directors, or for the acts or omissions of any other members of a Committee or
the Board of Directors. Subject to the numerical limitations on Committee
membership set forth in Section 4(a) hereof, the Board of Directors may at any
time appoint additional members of the Committee and may at any time remove any
member of the Committee with or without cause. Vacancies in the Committee,
however caused, may be filled by the Board of Directors, if it so desires.
5. Incentive Stock Options and Non-Qualified Stock Options
(a) Options issued pursuant to this Plan may be either Incentive
Stock Options granted pursuant to Section 5(b) hereof or Non-Qualified Stock
Options granted pursuant to Section 5(c) hereof, as determined by the Committee.
An "Incentive Stock Option" is an option which satisfies all of the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and
the regulations thereunder, and a "Non-Qualified Stock Option" is an option
which either does not satisfy all of those requirements or the terms of the
option provide that it will not be treated as an Incentive Stock Option. The
Committee may grant both an Incentive Stock Option and a Non-Qualified Stock
Option to the same person, or more than one of each type of option to the same
person. The option price for Incentive Stock Options issued under this Plan
shall be equal at least to the fair market value (as defined below) of Omega's
Common Stock on the date of the grant of the option. The option price for
Non-Qualified Stock Options issued under this Plan may, in the sole discretion
of the Compensation Committee, be less than the fair market value of Omega's
Common Stock on the date of the grant of the option. The fair market value of
Omega's Common Stock on any particular date shall mean it's fair market value as
of such date as determined by the Committee in accordance with it's
interpretation of the requirements of Section 422 of the Code and the
regulations thereunder.
(b) Subject to the authority of the Committee set forth in Section
4(a) hereof, Incentive Stock Options issued pursuant to this Plan shall be
issued substantially in the form set forth in Appendix I hereof, which form is
hereby incorporated by reference and made a part hereof, and shall contain
substantially the terms and conditions set forth therein. Incentive Stock
Options shall not be exercisable after the expiration of ten years from the date
such options are granted, unless terminated earlier under the terms of the
option. At the time of the grant of an Incentive Stock Option hereunder, the
Committee may, in its discretion, amend or supplement any of the option terms
contained in Appendix I for any particular optionee, provided that the option as
amended or supplemented satisfies the requirements of Section 422 of the Code
and the regulations thereunder. Each of the options granted pursuant to this
Section 5(b) is intended, if possible, to be an "Incentive Stock Option" as that
term is defined in Section 422 of the Code and the regulations thereunder. In
the event this Plan or any option granted pursuant to this Section 5(b) is in
any way inconsistent with the applicable legal requirements of the Code or the
regulations thereunder for an Incentive Stock Option, this Plan and such option
shall be deemed automatically amended as of the date hereof to conform to such
legal requirements, if such conformity may be achieved by amendment.
(c) Subject to the authority of the Committee set forth in Section
4(a) hereof, Non-Qualified Stock Options issued pursuant to this Plan shall be
issued substantially in the form set forth in Appendix II hereof, which form is
hereby incorporated by reference and made a part hereof, and shall contain
substantially the terms and conditions set forth therein. Non-Qualified Stock
Options shall expire ten years and 10 days after the date they are granted,
unless terminated earlier under the option terms. At the time of granting a
Non-Qualified Stock Option hereunder, the Committee may, in its discretion,
amend or supplement any of the option terms contained in Appendix II for any
particular optionee.
(d) Neither Omega nor any of its current or future parent,
subsidiaries or affiliates, nor their officers, directors, shareholders, stock
option plan committees, employees or agents shall have any liability to any
optionee in the event (i) an option granted pursuant to Section 5(b) hereof does
not qualify as an "Incentive Stock Option" as that term is used in Section 422
of the Code and the regulations thereunder; (ii) any optionee does not obtain
the tax treatment pertaining to an Incentive Stock Option; or (iii) any option
granted pursuant to Section 5(c) hereof is an "Incentive Stock Option."
23
<PAGE>
6. Amendment, Supplement, Suspension and Termination
Options shall not be granted pursuant to this Plan after the
expiration of ten years from the date the Plan is adopted by the Board of
Directors of Omega. The Board of Directors reserves the right at any time, and
from time to time, to amend or supplement this Plan in any way, or to suspend or
terminate it, effective as of such date, which date may be either before or
after the taking of such action, as may be specified by the Board of Directors;
provided, however, that such action shall not affect options granted under the
Plan prior to the actual date on which such action occurred. If an amendment or
supplement of this Plan is required by the Code or the regulations thereunder to
be approved by the shareholders of Omega in order to permit the granting of
"Incentive Stock Options" (as that term is defined in Section 422 of the Code
and regulations thereunder) pursuant to the amended or supplemented Plan, such
amendment or supplement shall also be approved by the shareholders of Omega in
such manner as is prescribed by the Code and the regulations thereunder. If the
Board of Directors voluntarily submits a proposed amendment, supplement,
suspension or termination for shareholder approval, such submission shall not
require any future amendments, supplements, suspensions or terminations (whether
or not relating to the same provision or subject matter) to be similarly
submitted for shareholder approval.
7. Effectiveness of Plan
This Plan shall become effective on the date of its adoption by
Omega's Board of Directors, subject however to approval by the holders of
Omega's Common Stock in the manner as prescribed in the Code and the regulations
thereunder. Options may be granted under this Plan prior to obtaining
shareholder approval, provided such options shall not be exercisable until
shareholder approval is obtained.
8. General Conditions
(a) Nothing contained in this Plan or any option granted pursuant to
this Plan shall confer upon any employee the right to continue in the employ of
Omega or any affiliated or subsidiary corporation or interfere in any way with
the rights of Omega or any affiliated or subsidiary corporation to terminate his
employment in any way.
(b) Corporate action constituting an offer of stock for sale to any
employee under the terms of the options to be granted hereunder shall be deemed
complete as of the date when the Committee authorizes the grant of the option to
the employee, regardless of when the option is actually delivered to the
employee or acknowledged or agreed to by him.
(c) The terms "parent corporation" and "subsidiary corporation" as
used throughout this Plan, and the options granted pursuant to this Plan, shall
(except as otherwise provided in the option form) have the meaning that is
ascribed to that term when contained in Section 422(b) of the Code and the
regulations thereunder, and Omega shall be deemed to be the grantor corporation
for purposes of applying such meaning.
(d) References in this Plan to the Code shall be deemed to also
refer to the corresponding provisions of any future United States revenue law.
(e) The use of the masculine pronoun shall include the feminine
gender whenever appropriate.
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<PAGE>
APPENDIX I
INCENTIVE STOCK OPTION
To:
Name
Address
Date of Grant: ___________
You are hereby granted an option, effective as of the date hereof, to
purchase __________ shares of common stock, $5.00 par value ("Common Stock"), of
Omega Financial Corporation ("Omega") at a price of $____ per share pursuant to
Omega's 1996 Employee Stock Option Plan (the "Plan").
Your option may first be exercised on and after one year from the date of
grant, but not before that time. On and after one year and prior to ten years
from the date of grant, your option may be exercised for up to 100% of the total
number of shares subject to the option minus the number of shares previously
purchased by exercise of the option (as adjusted for any change in the
outstanding shares of the Common Stock of Omega by reason of a stock dividend,
stock split, combination of shares, recapitalization, merger, consolidation,
transfer of assets, reorganization, conversion or what the Compensation
Committee deems in its sole discretion to be similar circumstances). No
fractional shares shall be issued or delivered. This option shall terminate and
is not exercisable after ten years from the date of its grant (the "Scheduled
Termination Date"), except if terminated earlier as hereafter provided.
In the event of a "change of control" (as hereafter defined) of Omega,
your option may, from and after the date of the change of control, and
notwithstanding the foregoing paragraph, be exercised for up to 100% of the
total number of shares then subject to the option minus the number of shares
previously purchased upon exercise of the option (as adjusted for any change in
the outstanding shares of the Common Stock of Omega by reason of a stock
dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Compensation Committee deems in its sole discretion to be similar
circumstances). A "change of control" shall be deemed to have occurred upon the
happening of any of the following events:
1. A change within a twelve-month period in a majority of the members of
the board of directors of Omega;
2. A change within a twelve-month period in the holders of more than 50%
of the outstanding voting stock of Omega; or
3. Any other event deemed to constitute a "change of control" by the
Compensation Committee.
You may exercise your option by giving written notice to the Secretary of
Omega on forms supplied by Omega at its then principal executive office,
accompanied by payment of the option price for the total number of shares you
specify that you wish to purchase. The payment may be in any of the following
forms: (a) cash, which may be evidenced by a check and includes cash received
from a stock brokerage firm in a so-called "cashless exercise;" (b) (unless
prohibited by the Compensation Committee) certificates representing shares of
Common Stock of Omega, which will be valued by the Secretary of Omega at the
fair market value per share of Omega's Common Stock (as determined in accordance
with the Plan) on the date of delivery of such certificates to Omega,
accompanied by an assignment of the stock to Omega; or (c) (unless prohibited by
the Compensation Committee) any combination of cash and Common Stock of Omega
valued as provided in clause (b). Any assignment of stock shall be in a form and
substance satisfactory to the Secretary of Omega, including guarantees of
signature(s) and payment of all transfer taxes if the Secretary deems such
guarantees necessary or desirable.
Your option will, to the extent not previously exercised by you, terminate
one year after the date on which your employment by Omega or an Omega subsidiary
corporation is terminated (whether such termination be voluntary or involuntary)
other than by reason of retirement at age 65 (or such earlier retirement age as
may be approved by the Compensation Committee), disability as defined in Section
22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations thereunder, or death, in which case your option will terminate one
year from the date of termination of employment due to retirement, disability or
death (but in no event later than the Scheduled Termination
25
<PAGE>
Date). After the date your employment is terminated, as aforesaid, you may
exercise this option only for the number of shares which you had a right to
purchase and did not purchase on the date your employment terminated. If you are
employed by an Omega subsidiary corporation, your employment shall be deemed to
have terminated on the date your employer ceases to be an Omega subsidiary
corporation, unless you are on that date transferred to Omega or another Omega
subsidiary corporation. Your employment shall not be deemed to have terminated
if you are transferred from Omega to an Omega subsidiary corporation, or vice
versa, or from one Omega subsidiary corporation to another Omega subsidiary
corporation.
If you die while employed by Omega or an Omega subsidiary corporation,
your executor or administrator, as the case may be, may, at any time within one
year after the date of your death (but in no event later than the Scheduled
Termination Date), exercise the option as to any shares which you had a right to
purchase and did not purchase during your lifetime. If your employment with
Omega or an Omega parent or subsidiary corporation is terminated by reason of
your becoming disabled (within the meaning of Section 22(e)(3) of the Code and
the regulations thereunder), you or your legal guardian or custodian may at any
time within one year after the date of such termination (but in no event later
than the Scheduled Termination Date), exercise the option as to any shares which
you had a right to purchase and did not purchase prior to such termination. Your
executor, administrator, guardian or custodian must present proof of his
authority satisfactory to Omega prior to being allowed to exercise this option.
In the event of any change in the outstanding shares of the Common Stock
of Omega by reason of a stock dividend, stock split, combination of shares,
recapitalization, merger, consolidation, transfer of assets, reorganization,
conversion or what the Compensation Committee deems in its sole discretion to be
similar circumstances, the number and kind of shares subject to this option and
the option price of such shares shall be appropriately adjusted in a manner to
be determined in the sole discretion of the Compensation Committee.
This option is not transferable otherwise than by Will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal guardian or custodian in the event of
disability. Until the option price has been paid in full pursuant to due
exercise of this option and the purchased shares are delivered to you, you do
not have any rights as a shareholder of Omega. Omega reserves the right not to
deliver to you the shares purchased by virtue of the exercise of this option
during any period of time in which Omega deems, in its sole discretion, that
such delivery would violate a federal, state, local or securities exchange rule,
regulation or law.
Notwithstanding anything to the contrary contained herein, this option is
not exercisable until all the following events occur and during the following
periods of time:
(a) Until the Plan pursuant to which this option is granted is
approved by the shareholders of Omega in the manner prescribed by the Code and
the regulations thereunder;
(b) Until this option and the optioned shares are approved and/or
registered with such federal, state and local regulatory bodies or agencies and
securities exchanges as Omega may deem necessary or desirable;
(c) During any period of time in which Omega deems that the
exercisability of this option, the offer to sell the shares optioned hereunder,
or the sale thereof, may violate a federal, state, local or securities exchange
rule, regulation or law, or may cause Omega to be legally obligated to issue or
sell more shares than Omega is legally entitled to issue or sell; or
(d) Until you have paid or made suitable arrangements to pay (i) all
federal, state and local income tax withholding required to be withheld by Omega
in connection with the option exercise and (ii) the employee's portion of other
federal, state and local payroll and other taxes due in connection with the
option exercise.
The following two paragraphs shall be applicable if, on the date of
exercise of this option, the Common Stock to be purchased pursuant to such
exercise has not been registered under the Securities Act of 1933, as amended,
and under applicable state securities laws, and shall continue to be applicable
for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that he will
acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to Omega to the effect that the
proposed transaction will be exempt from such registration. The optionee shall
execute such instruments, representations, acknowledgements and agreements as
Omega may, in its sole discretion, deem advisable to avoid any violation of
federal, state, local or securities exchange rule, regulation or law.
26
<PAGE>
(b) The certificates for Common Stock to be issued to the optionee
hereunder shall bear the following legend:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or under applicable state
securities laws. The shares have been acquired for investment and may not
be offered, sold, transferred, pledged or otherwise disposed of without an
effective registration statement under the Securities Act of 1933, as
amended, and under any applicable state securities laws or an opinion of
counsel acceptable to Omega that the proposed transaction will be exempt
from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to Omega that said
registration is no longer required.
The sole purpose of the agreements, warranties, representations and legend
set forth in the two immediately preceding paragraphs is to prevent violations
of the Securities Act of 1933, as amended, and any applicable state securities
laws.
It is the intention of Omega and you that this option shall, if possible,
be an "Incentive Stock Option" as that term is used in Section 422 of the Code
and the regulations thereunder. In the event this option is in any way
inconsistent with the legal requirements of the Code or the regulations
thereunder for an "Incentive Stock Option," this option shall be deemed
automatically amended as of the date hereof to conform to such legal
requirements, if such conformity may be achieved by amendment.
Nothing herein shall modify your status as an at-will employee of Omega.
Further, nothing herein guarantees you employment for any specified period of
time. This means that either you or Omega may terminate your employment at any
time for any reason, or no reason. You recognize that, for instance, you may
terminate your employment or Omega may terminate your employment prior to the
date on which your option becomes vested.
Any dispute or disagreement between you and Omega with respect to any
portion of this option or its validity, construction, meaning, performance or
your rights hereunder shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to
arbitration you will attempt to resolve any disputes or disagreements with Omega
over this option amicably and informally, in good faith, for a period not to
exceed two weeks. Thereafter, the dispute or disagreement will be submitted to
arbitration. At any time prior to a decision from the arbitrator(s) being
rendered, you and Omega may resolve the dispute by settlement. You and Omega
shall equally share the costs charged by the American Arbitration Association or
its successor, but you and Omega shall otherwise be solely responsible for your
own respective counsel fees and expenses. The decision of the arbitrator(s)
shall be made in writing, setting forth the award, the reasons for the decision
and award and shall be binding and conclusive on you and Omega. Further, neither
you nor Omega shall appeal any such award. Judgment of a court of competent
jurisdiction may be entered upon the award and may be enforced as such in
accordance with the provisions of the award.
This option shall be subject to the terms of the Plan in effect on the
date this option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the terms
of this option and the terms of the Plan in effect on the date of this option,
the terms of the Plan shall govern. This option constitutes the entire
understanding between Omega and you with respect to the subject matter hereof
and no amendment, supplement or waiver of this option, in whole or in part,
shall be binding upon Omega unless in writing and signed by the President of
Omega. This option and the performances of the parties hereunder shall be
construed in accordance with and governed by the laws of the Commonwealth of
Pennsylvania.
Please sign the copy of this option and return it to Omega's Secretary,
thereby indicating your understanding of and agreement with its terms and
conditions.
OMEGA FINANCIAL CORPORATION
By:
---------------------------
I hereby acknowledge receipt of a copy of the foregoing stock option and,
having read it hereby signify my understanding of, and my agreement with, its
terms and conditions.
27
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- ------------ ------------------------
(Date) (Signature)
28
<PAGE>
APPENDIX II
NON-QUALIFIED STOCK OPTION
To:
Name
Address
Date of Grant: ___________
You are hereby granted an option, effective as of the date hereof, to
purchase _________ shares of common stock, $5.00 par value ("Common Stock"), of
Omega Financial Corporation ("Omega") at a price of $____ per share pursuant to
Omega's 1996 Employee Stock Option Plan (the "Plan").
Your option may first be exercised on and after one year from the date of
grant, but not before that time. On and after one year and prior to ten years
and thirty days from the date of grant, your option may be exercised for up to
100% of the total number of shares subject to the option minus the number of
shares previously purchased by exercise of the option (as adjusted for any
change in the outstanding shares of the Common Stock of Omega by reason of a
stock dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Compensation Committee deems in its sole discretion to be similar
circumstances). No fractional shares shall be issued or delivered. This option
shall terminate and is not exercisable after ten years and ten days from the
date of its grant (the "Scheduled Termination Date"), except if terminated
earlier as hereafter provided.
In the event of a "change of control" (as hereafter defined) of Omega,
your option may, from and after the date of the change of control, and
notwithstanding the foregoing paragraph, be exercised for up to 100% of the
total number of shares then subject to the option minus the number of shares
previously purchased upon exercise of the option (as adjusted for any change in
the outstanding shares of the Common Stock of Omega by reason of a stock
dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Compensation Committee deems in its sole discretion to be similar
circumstances). A "change of control" shall be deemed to have occurred upon the
happening of any of the following events:
1. A change within a twelve-month period in a majority of the members of
the board of directors of Omega;
2. A change within a twelve-month period in the holders of more than 50%
of the outstanding voting stock of Omega; or
3. Any other event deemed to constitute a "change of control" by the
Compensation Committee.
You may exercise your option by giving written notice to the Secretary of
Omega on forms supplied by Omega at its then principal executive office,
accompanied by payment of the option price for the total number of shares you
specify that you wish to purchase. The payment may be in any of the following
forms: (a) cash, which may be evidenced by a check and includes cash received
from a stock brokerage firm in a so-called "cashless exercise;" (b) (unless
prohibited by the Compensation Committee) certificates representing shares of
Common Stock of Omega, which will be valued by the Secretary of Omega at the
fair market value per share of Omega's Common Stock (as determined in accordance
with the Plan) on the date of delivery of such certificates to Omega,
accompanied by an assignment of the stock to Omega; or (c) (unless prohibited by
the Compensation Committee) any combination of cash and Common Stock of Omega
valued as provided in clause (b). Any assignment of stock shall be in a form and
substance satisfactory to the Secretary of Omega, including guarantees of
signature(s) and payment of all transfer taxes if the Secretary deems such
guarantees necessary or desirable.
Your option will, to the extent not previously exercised by you, terminate
one year after the date on which your employment by Omega or an Omega subsidiary
corporation is terminated (whether such termination be voluntary or involuntary)
other than by reason of retirement at age 65 (or such earlier retirement age as
may be approved by the Compensation Committee), disability as defined in Section
22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations thereunder, or death, in which case your option will terminate one
year from the date of termination of employment due to retirement, disability or
death (but in no event later than the Scheduled Termination Date). After the
date your employment is terminated, as aforesaid, you may exercise this option
only for the number of
29
<PAGE>
shares which you had a right to purchase and did not purchase on the date your
employment terminated. If you are employed by an Omega subsidiary corporation,
your employment shall be deemed to have terminated on the date your employer
ceases to be an Omega subsidiary corporation, unless you are on that date
transferred to Omega or another Omega subsidiary corporation. Your employment
shall not be deemed to have terminated if you are transferred from Omega to an
Omega subsidiary corporation, or vice versa, or from one Omega subsidiary
corporation to another Omega subsidiary corporation.
If you die while employed by Omega or an Omega subsidiary corporation,
your executor or administrator, as the case may be, may, at any time within one
year after the date of your death (but in no event later than the Scheduled
Termination Date), exercise the option as to any shares which you had a right to
purchase and did not purchase during your lifetime. If your employment with
Omega or an Omega parent or subsidiary corporation is terminated by reason of
your becoming disabled (within the meaning of Section 22(e)(3) of the Code and
the regulations thereunder), you or your legal guardian or custodian may at any
time within one year after the date of such termination (but in no event later
than the Scheduled Termination Date), exercise the option as to any shares which
you had a right to purchase and did not purchase prior to such termination. Your
executor, administrator, guardian or custodian must present proof of his
authority satisfactory to Omega prior to being allowed to exercise this option.
In the event of any change in the outstanding shares of the Common Stock
of Omega by reason of a stock dividend, stock split, combination of shares,
recapitalization, merger, consolidation, transfer of assets, reorganization,
conversion or what the Compensation Committee deems in its sole discretion to be
similar circumstances, the number and kind of shares subject to this option and
the option price of such shares shall be appropriately adjusted in a manner to
be determined in the sole discretion of the Compensation Committee.
This option is not transferable otherwise than by Will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal guardian or custodian in the event of
disability. Until the option price has been paid in full pursuant to due
exercise of this option and the purchased shares are delivered to you, you do
not have any rights as a shareholder of Omega. Omega reserves the right not to
deliver to you the shares purchased by virtue of the exercise of this option
during any period of time in which Omega deems, in its sole discretion, that
such delivery would violate a federal, state, local or securities exchange rule,
regulation or law.
Notwithstanding anything to the contrary contained herein, this option is
not exercisable until all the following events occur and during the following
periods of time:
(a) Until the Plan pursuant to which this option is granted is
approved by the shareholders of Omega in the manner prescribed by the Code and
the regulations thereunder;
(b) Until this option and the optioned shares are approved and/or
registered with such federal, state and local regulatory bodies or agencies and
securities exchanges as Omega may deem necessary or desirable;
(c) During any period of time in which Omega deems that the
exercisability of this option, the offer to sell the shares optioned hereunder,
or the sale thereof, may violate a federal, state, local or securities exchange
rule, regulation or law, or may cause Omega to be legally obligated to issue or
sell more shares than Omega is legally entitled to issue or sell; or
(d) Until you have paid or made suitable arrangements to pay (i) all
federal, state and local income tax withholding required to be withheld by Omega
in connection with the option exercise and (ii) the employee's portion of other
federal, state and local payroll and other taxes due in connection with the
option exercise.
The following two paragraphs shall be applicable if, on the date of
exercise of this option, the Common Stock to be purchased pursuant to such
exercise has not been registered under the Securities Act of 1933, as amended,
and under applicable state securities laws, and shall continue to be applicable
for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that he will
acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to Omega to the effect that the
proposed transaction will be exempt from such registration. The optionee shall
execute such instruments, representations, acknowledgements and agreements as
Omega may, in its sole discretion, deem advisable to avoid any violation of
federal, state, local or securities exchange rule, regulation or law.
30
<PAGE>
(b) The certificates for Common Stock to be issued to the optionee
hereunder shall bear the following legend:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or under applicable state
securities laws. The shares have been acquired for investment and may not
be offered, sold, transferred, pledged or otherwise disposed of without an
effective registration statement under the Securities Act of 1933, as
amended, and under any applicable state securities laws or an opinion of
counsel acceptable to Omega that the proposed transaction will be exempt
from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to Omega that said
registration is no longer required.
The sole purpose of the agreements, warranties, representations and legend
set forth in the two immediately preceding paragraphs is to prevent violations
of the Securities Act of 1933, as amended, and any applicable state securities
laws.
It is the intention of Omega and you that this option shall not be an
"Incentive Stock Option" as that term is used in Section 422 of the Code and the
regulations thereunder.
Nothing herein shall modify your status as an at-will employee of Omega.
Further, nothing herein guarantees you employment for any specified period of
time. This means that either you or Omega may terminate your employment at any
time for any reason, or no reason. You recognize that, for instance, you may
terminate your employment or Omega may terminate your employment prior to the
date on which your option becomes vested.
Any dispute or disagreement between you and Omega with respect to any
portion of this option or its validity, construction, meaning, performance or
your rights hereunder shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to
arbitration you will attempt to resolve any disputes or disagreements with Omega
over this option amicably and informally, in good faith, for a period not to
exceed two weeks. Thereafter, the dispute or disagreement will be submitted to
arbitration. At any time prior to a decision from the arbitrator(s) being
rendered, you and Omega may resolve the dispute by settlement. You and Omega
shall equally share the costs charged by the American Arbitration Association or
its successor, but you and Omega shall otherwise be solely responsible for your
own respective counsel fees and expenses. The decision of the arbitrator(s)
shall be made in writing, setting forth the award, the reasons for the decision
and award and shall be binding and conclusive on you and Omega. Further, neither
you nor Omega shall appeal any such award. Judgment of a court of competent
jurisdiction may be entered upon the award and may be enforced as such in
accordance with the provisions of the award.
This option shall be subject to the terms of the Plan in effect on the
date this option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the terms
of this option and the terms of the Plan in effect on the date of this option,
the terms of the Plan shall govern. This option constitutes the entire
understanding between Omega and you with respect to the subject matter hereof
and no amendment, supplement or waiver of this option, in whole or in part,
shall be binding upon Omega unless in writing and signed by the President of
Omega. This option and the performances of the parties hereunder shall be
construed in accordance with and governed by the laws of the Commonwealth of
Pennsylvania.
Please sign the copy of this option and return it to Omega's Secretary,
thereby indicating your understanding of and agreement with its terms and
conditions.
OMEGA FINANCIAL CORPORATION
By:________________________
I hereby acknowledge receipt of a copy of the foregoing stock option and, having
read it hereby signify my understanding of, and my agreement with, its terms and
conditions.
31
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(Date) (Signature)
32
Exhibit 13.1
Annual Report to Shareholders
<PAGE>
[LOGO]
OMEGA
FINANCIAL
CORPORATION
1995 ANNUAL REPORT
1
<PAGE>
TO OUR SHAREHOLDERS AND FRIENDS:
1995 was another successful year for Omega Financial Corporation. We are
pleased to report that Omega finished the year at $14.07 million in net income,
a 10% increase over the $12.79 million in earnings we reported for 1994.
Among our key profitability ratios, Omega's return on average assets
(ROA) for the year was 1.47%, up 8.1% from 1994's figure of 1.36%. Based on the
latest available ROA figures for financial institutions, this performance
continues to rank Omega in the top 20% of its peer group. With exceptional
earnings adding to our equity each year, it is a constant challenge to keep our
return on equity (ROE) growing. Yet, in 1995, we met that challenge. Return on
average equity increased by 1.3% to 11.90%.
A pattern that has remained consistent throughout the year for Omega is
our ability to generate increased earnings through increased income from credit
activities and wider net interest margins. The net interest margin for the year
increased to 5.05% on a fully tax-equivalent basis, up 3.1%, compared to 1994.
As reported during the 1995 year, the increased net interest margin was
largely due to a shift in our emphasis to higher-yielding loan products from
investment securities. The effect of this shift was enhanced by a higher
interest rate environment. As of December 31, 1995, total assets were $994.8
million, a 5.8% increase for the year, largely attributed to increased lending.
Net loans were up 8.5% for the year, and that rise led to 5.9% higher income
from credit activities.
Another success of our loan programs has been our effort to maintain a
high-quality portfolio. Our pursuit of loan growth is aggressive, but so is our
attention to credit quality. Omega added $713,000 to its provision for loan
losses in 1995, compared to $623,000 in 1994. Our loan loss reserve to loans
ratio at year-end was a sound 1.65%.
2
<PAGE>
We also maintain a constant focus on total non-interest income and
expense. Non-interest income increased by 2.8% to $8.02 million in 1995 while
the Corporation's expenses remained within budgeted projections.
With an eye to continuing our control of expenses in 1995, we began an
ambitious project to centralize loan administration for our banking affiliates.
Investments in state-of-the-art equipment will allow us to convert cumbersome
and expensive manual filing systems to easily accessible, computerized images.
At the same time, we will link our offices through high-speed, digital
communication lines to assure prompt, efficient and personal service for our
customers.
Success in managing our earnings and assets leads to increased
shareholder value. Market value per share of Omega stock was $31.50 at year-end,
a 28.6% increase over 1994's $24.50. Primary per share earnings for the year
were $2.28, up 9.6% from $2.08 in 1994. Common stock dividends per share for the
year were up by 9.1%.
The company's marketing program concluded the year with multi-media
fourth quarter product promotions. We are using radio, newspapers and billboards
and have recently added TV coverage to help us tell the story of what our banks
have to offer. Our latest campaign emphasizes a choice of special rates on home
equity and personal installment loans to meet a variety of borrowing needs. This
campaign was promoted in all of our banks' markets and continues in the first
quarter of 1996.
We are proud to announce that, this year, banking affiliate Penn Central
National joined sister banks, Hollidaysburg Trust Company and Omega Bank, with
an "outstanding" rating in community reinvestment from the Office of the
Comptroller of the Currency. This is the highest Community Reinvestment Act
ranking a bank can receive. The designation is based on a set of 12 factors
which measure a bank's commitment to assessing and meeting the credit needs of
the communities it serves.
We take pride in the recognition this CRA rating represents for Penn
Central because it reflects the strong tradition of local involvement that
people expect from our hometown banks. Our banks take leadership roles in their
community affairs. Our investment includes corporate support of regional
organizations and events as well as the personal involvement of our directors,
officers and staff members.
Omega Financial's strong performance does not occur by chance. It
represents our commitment as hometown bankers, serving our central Pennsylvania
customers. Omega's 1995 performance also reflects our focus on combining solid
revenue growth with effective expense control. We believe that this philosophy
and these strategies will pay off during future years, as they have in 1995.
Sincerely,
David B. Lee D. Stephen Martz
Chairman & CEO President & COO
3
<PAGE>
CORPORATE DIRECTORS AND OFFICERS
The lists on this page and the following two pages present the
directors, officers and affiliates of Omega Financial Corporation as of December
31, 1995.
BOARD OF DIRECTORS
Raymond F. Agostinelli
President and owner
McLanahan Drug Store Management Co., Inc.
Merle K. Evey, Esq.
Attorney at Law
Robert T. Gentry
Executive officer of Omega Financial Corporation
Philip E. Gingerich
Self employed Real Estate Appraiser and Consultant
David K. Goodman, Sr.
President
D.C. Goodman and Sons, Inc.
William E. Henry, O.D., Vice Chairman
Optometrist
David B. Lee, Chairman
Executive officer of Omega Financial Corporation
George R. Lovette
Retired
Former V.P. for Business and Operations
The Pennsylvania State University
D. Stephen Martz
Executive officer of Omega Financial Corporation
Don C. Meyer
President and owner
Autoport Motel and Restaurant, Inc.
Robert N. Oliver
Owner, Oliver Farms
James W. Powers, Sr.
President, Polestar Plastics
Manufacturing Company
Stanton R. Sheetz
President and C.E.O.
Sheetz, Inc.
Retail Convenience Stores
Robert A. Szeyller
Managing partner, Pennsylvania Financial Group, Inc.
Pension and Insurance consulting firm
Samuel D. Zeiders, Jr., D.D.S.
Retired dentist
DIRECTORS EMERITI
Ned C. Cummings
Albert N. Masood
John R. Miller, Jr., Esq.
Mervin B. Krentzman
OFFICERS
David B. Lee................................Chairman and Chief Executive Officer
D. Stephen Martz...........................President and Chief Operating Officer
Daniel L. Warfel, CPA.......Executive Vice President and Chief Financial Officer
Robert T. Gentry........................................Executive Vice President
JoAnn N. McMinn...................Senior Vice President and Corporate Controller
David N. Thiel...............................Senior Vice President and Secretary
Donita R. Koval.....................Senior Vice President, Credit Administration
Teresa M. Ciambotti.............................Vice President, Funds Management
John A. Cook...................Vice President and Director of Sales and Training
Ronald A. Donaldson........................Vice President and Operations Officer
Robert A. Frederick.....................Vice President and Director of Marketing
William F. Frey............................Vice President and Compliance Officer
Faye L. Maring....................Vice President and Director of Human Resources
Lowell I. Rohrer...................Vice President and Manager of Data Processing
R. Keith Sipe...................................Vice President and Chief Auditor
Robin R. Weikel...........................Vice President and Regional Controller
CORPORATE ADDRESS
366 Walker Drive
P.O. Box 619
State College, Pennsylvania 16804-0619
PRINCIPAL SUBSIDIARIES OF OMEGA FINANCIAL CORPORATION
Omega Bank, N.A.
P.O. Box 298
State College, PA 16804
Hollidaysburg Trust Company
224 Allegheny Street
Hollidaysburg, PA 16648
Penn Central National Bank
431 Penn Street
Huntingdon, PA 16652
Montour Bank
1519 Bloom Road
Danville, PA 17821
Central Pennsylvania Investment Company
1409 Foulk Rd., Suite 102
Wilmington, DE 19803
Central Pennsylvania Life Insurance Company
1421 E. Thomas Road
Phoenix, AZ 85014
4
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BANK DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
OMEGA BANK, N.A.
- --------------------------------
Board Of Directors
- ------------------
Raymond F. Agostinelli Stephen M. Krentzman
Richard L. Campbell, Esq. David B. Lee
Mary Jane Crain George R. Lovette
Philip E. Gingerich Don C. Meyer
Herbert C. Graves James W. Powers, Sr.
Darl H. Heller Richard B. Roush
William E. Henry, O.D. Robert A. Szeyller
Frederick J. Kissinger Samuel D. Zeiders, Jr.,D.D.S.
Charles H. Zendt, Jr.
Directors Emeriti
- -----------------
David D. Borland Mervin B. Krentzman
J. Harold Boyer Nathan H. Krauss
Ned C. Cummings John R. Miller, Jr., Esq.
John L. Dillon D. Ronald L. Robison
H. Richard Ishler, M.D. George R. Smith
Jonas B. Kauffman, Jr. John A. R. Welsh, Esq.
Officers
- --------
George R. Lovette.....................................Chairman
David B. Lee.............President and Chief Executive Officer
Charles H. Zendt, Jr..................Executive Vice President
Donita R. Koval..........................Senior Vice President
C. Leonard Eby, Jr..............Senior Vice President, Lending
Dennis E. Hampton.................Senior Vice President, Trust
William D. Karch................Senior Vice President, Lending
David N. Thiel.............Senior Vice President and Secretary
Stephen R. Crawford......Vice President, Regional Loan Officer
John E. Gravish..........Vice President, Regional Loan Officer
Ronald S. Haring.......Vice President, Commercial Loan Officer
Robert C. Snyder..........Vice President, Branch Administrator
Jesse Weaver.....................Vice President, Trust Officer
Regional Bank Boards
- --------------------
Centre/Clinton Region
Larry R. Breon Daniel C. Schrack
Charles L. Frazier Kenneth Teaman
Jay R. Montgomery William E. Young, D.O.
C. Guy Rudy
Mifflin/Juniata Region
Thomas G. Clark Roy A. Leister
C. Richard Dimm Steven L. Palm
Ralph A. Germak Kenneth O. Stuck, D. Ed.
Sherman L. Glick William S. Taylor, III
Jerry Leach Mervin R. Zendt
Directors Emeriti
- -----------------
William Bamat E. J. Straley, V.M.D.
Raymond S. Carlin Jay Struble
Miles X. Clevenstine Peter Swistock, Sr.
James G. Corman Elwood A. Way
Robert L. Homan Gail K. Weaver
Lawrence L. Hoverter Carl D. Vogt
Garver McNitt R. Lee Ziegler, Esq.
Lee E. Sausman Warren K. Zook
MONTOUR BANK
- --------------------------------
Board Of Directors
- ------------------
M. Ralph Campbell Francis C. Moyer
James P. Garman George A. Park
Carol Houk Hasu P. Shah
Charles I. Keiter Larry Underkoffler
David B. Lee Daniel L. Warfel, C.P.A.
Thomas N. Mertz
Officers
- --------
M. Ralph Campbell.....................................Chairman
David B. Lee.............President and Chief Executive Officer
Francis C. Moyer................................Vice President
5
<PAGE>
BANK DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
HOLLIDAYSBURG TRUST COMPANY
- --------------------------------
Board Of Directors
- ------------------
Merle K. Evey, Esq. D. Stephen Martz
Rex W. Hershberger Dorothea D. Nelson
David C. Hileman Stanton R. Sheetz
John P. Kinney Joseph Tanner, Jr.
Charles I. Kreider Vincent C. Turiano
Directors Emeriti
- -----------------
John S. Clapper Lester E. Plank
Joseph R. Good Roy F. Rumbaugh
James J. Madden
Officers
- --------
D. Stephen Martz......................Chairman, President,
Chief Executive Officer
Rex W. Hershberger...........................Vice Chairman
Vincent C. Turiano...............Executive Vice President,
Chief Operating Officer
Bruce R. Erb..................Senior Vice President, Trust
Richard A. Scholton.........Senior Vice President, Lending
Steven C. Lewis............................Vice President,
Community Banking, Treasurer
Robert K. Howsare..........................Vice President,
Credit Department
Dennis C. O'Conner.........................Vice President,
Commercial Services
Roger W. Oswald............................Vice President,
Agricultural Manager
Advisory Commitee
- -----------------
Darl E. Bechtel Allan G. Hancock
E. Emile Dilling Harold R. Mallow
Louis K. Elliott G. Reid Shaffer
Allen E. Gibboney A. Lloyd Steele
Robert M. Greenleaf Joseph Tanner, Jr.
Emeriti
- -------
A. Dean Fay Ruth B. Weaver
John A. Loose
PENN CENTRAL NATIONAL BANK
- --------------------------------
Board Of Directors
- ------------------
Edward J. Anderson Ralph B. Everhart
Phyllis J. Bard Robert T. Gentry
Carl H. Baxter David K. Goodman, Sr.
Robert W. Black Samuel L. Hinish
Harry M. Enyeart Robert N. Oliver
Directors Emeriti
- -----------------
John R. Gates Albert N. Masood
J. Melvin Isett William E. Swigart, Jr.
Officers
- --------
Samuel L. Hinish................................Chairman
Robert T. Gentry............................. President,
Chief Executive Officer
John R. Franks....................Senior Vice President,
Chief Operating Officer
James D. Howard...........Senior Vice President, Lending
William J. Bishop.........................Vice President
Ronald A. Casner..........................Vice President
Thomas C. Landis..........................Vice President
Susan B. Rumbaugh..................Vice President, Trust
Advisory Board
- --------------
John B. Eberle W. Donald Talasky
Glenn E. Casner Daniel R. Vaughn
John E. Miller
6
<PAGE>
COMMON STOCK MARKET PRICESS AND DIVIDENDS
- --------------------------------------------------------------------------------
The common stock of Omega Financial Corporation is traded on the Nasdaq Stock
Market under the symbol OMEF. As of December 31, 1995, the number of
shareholders of the Corporation's common stock was 2,882.
The following table sets forth, for the periods indicated (1) the high and low
sale prices and (2) cash dividends:
1995 1994
----------------------------- -----------------------------
Cash Cash
Dividends Dividends
Quarter Ended High Low Paid High Low Paid
--------- --------- -------- --------- --------- --------
March 31 ........ $ 27.00 $ 24.50 $ 0.17 $ 26.75 $ 24.50 $ 0.16
June 30 ......... 27.00 25.50 0.18 26.50 24.00 0.16
September 30 .... 30.00 25.75 0.18 26.25 24.50 0.17
December 31 ..... 33.50 29.00 0.19 26.25 24.50 0.17
While the Corporation expects to continue its policy of regular quarterly
dividend payments, no assurance of future dividend payments can be given. Future
dividend payments will depend upon maintenance of a continued strong financial
condition, future earnings and capital and regulatory requirements. See
"Shareholders Equity and Capital Requirements" and Note 18 of the Notes to
Consolidated Financial Statements. Dividends on the common stock are also
subject to the prior payment of dividends on the Corporation's Series A ESOP
Preferred Stock. See Note 15 of the Notes to Consolidated Financial Statements.
The following firms have chosen to make a market in the stock of the
Corporation. Inquiries concerning their services should be directed to:
Legg Mason Wood Walker, Inc. Janney Montgomery Scott, Inc.
141 West Beaver Avenue 1801 Market Street
State College, PA 16801 Philadelphia, PA 19103
(814-234-7300) (800-526-6397)
F. J. Morrissey & Co. Ryan Beck & Co.
1700 Market St. Suite 1420 80 Main Street
Philadelphia, PA 19103-3913 West Orange, NJ 07052
(800-842-8928) (800-342-2325)
Herzog, Heine, & Geduld, Inc. The Chicago Corporation
26 Broadway 208 S. LaSalle Street
New York, NY 10004 Chicago, IL 60604
(212-908-4000) (800-621-0686)
Sandler O'Neill & Partners
Two World Trade Center - 104th Floor
New York, NY 10048
(212-466-7740)
Ferris, Baker Watts, Inc.
6 Bird Cage Walk
Hollidaysburg, PA 16648
(800-343-5149)
FORM 10-K
A copy of the Corporation's Annual Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1995 will be supplied
without charge (except for exhibits) upon written request. Please direct all
inquiries to Mr. David N. Thiel, 366 Walker Drive, State College, PA 16801.
INVESTMENT CONSIDERATIONS
In analyzing whether to make, or to continue, an investment in Omega, investors
should consider, among other factors, the information contained in this Annual
Report and certain investment considerations and other information more
particularly described in Omega's Annual Report on Form 10-K for the year ended
December 31, 1995, a copy of which can be obtained as described above.
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of Omega Financial Corporation will be held
at 10:00 a.m., Tuesday, April 23, 1996 at the Penn State Scanticon Conference
Center, 215 Innovation Boulevard, Penn State Research Park, State College, PA
16803.
REGISTRAR AND TRANSFER AGENT
Omega Bank, N.A.
Trust Department
P.O. Box 298, State College, PA 16804-0298
(814-237-7641)
7
<PAGE>
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following selected financial data of Omega Financial Corporation and
subsidiaries for the five years ended December 31, 1995 should be read in
conjunction with the consolidated financial statements of Omega and the notes
thereto, which are set forth elsewhere in the Annual Report.
Five-Year Financial Summary
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(In thousands of dollars, except share data)
BALANCE SHEET INFORMATION
at December 31
<S> <C> <C> <C> <C> <C>
Assets ......................................... $ 994,840 $ 939,953 $ 934,119 $ 915,749 $ 892,138
Deposits .................................... 850,182 801,736 809,778 805,065 787,514
Loans, net .................................. 703,125 647,933 635,961 622,803 602,815
Investment securities ....................... 219,708 227,822 236,750 190,081 189,804
Long term debt (including ESOP debt) ........ 10,073 5,568 5,699 6,200 6,961
Shareholders' equity ........................ 124,171 113,109 102,312 92,018 82,897
Number of shares outstanding - common * ..... 6,022,966 5,985,735 5,931,165 5,857,949 5,830,820
Number of shares outstanding - preferred .... 219,781 219,781 219,781 219,781 219,781
INCOME STATEMENT INFORMATION
Years Ended December 31
Total interest income ....................... $ 72,973 $ 65,090 $ 66,741 $ 72,286 $ 79,183
Net interest income ......................... 43,956 41,443 40,614 40,268 36,246
Provision for loan losses ................... 713 623 1,133 4,634 4,718
Income before income taxes and cummulative
effect of change in accounting principle . 19,802 17,662 16,172 15,452 10,381
Income tax expense .......................... 5,733 4,877 4,240 3,545 2,077
Net income ** .............................. 14,069 12,785 12,679 11,907 8,304
PER COMMON SHARE DATA*
Net income - primary *** .................... $ 2.28 $ 2.08 $ 2.07 $ 1.98 $ 1.36
Net income - fully diluted *** .............. 2.21 2.02 2.01 1.92 1.33
Cash dividends - common * ................... 0.72 0.66 0.60 0.53 0.53
Book value .................................. 20.62 18.90 17.25 15.71 14.22
FINANCIAL RATIOS
1995 1994 1993 1992 1991
--------------------------------------------------------------
Return on average equity **** .................. 11.90% 11.75% 12.91% 13.55% 10.07%
Return on average assets **** .................. 1.47 1.36 1.38 1.32 0.94
Dividend payout - common ....................... 30.65 30.80 28.00 25.44 36.22
Average equity to average assets ............... 12.35 11.61 10.71 9.77 9.33
</TABLE>
* 1991 has been restated to give effect to a 5% stock dividend in November
of 1992.
** Net income for 1993 includes a $747 favorable impact from the cumulative
effect of adoption of SFAS 109, Accounting for Income Taxes.
*** 1993 primary and fully diluted net income per share includes a $.12 per
share favorable impact from the adoption of SFAS 109.
**** Ratios for return on average equity and return on average assets in 1993
are 12.15% and 1.30%, respectively, before the cumulative effect of
accounting changes as a result of SFAS 109.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion concerns Omega Financial Corporation and the consolidated
results of its six active subsidiaries ("Omega" or the "Corporation"), Omega
Bank, N.A. ("Omega Bank"), Hollidaysburg Trust Company ("Hollidaysburg"), Penn
Central National Bank ("Penn Central"), Montour Bank ("Montour"), Central
Pennsylvania Investment Company ("CPI") and Central Pennsylvania Life Insurance
Company ("CPLI"). The purpose is to focus on information concerning Omega's
financial condition and results of operations which is not readily apparent from
the consolidated financial statements. In order to obtain a clear understanding
of this discussion, the reader should reference the consolidated financial
statements, the notes thereto and other financial information presented in this
Annual Report.
FORWARD LOOKING STATEMENTS
The information contained in this Annual Report contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934 and
the regulations thereunder), including without limitation, statements as to the
future loan and deposit volumes, the allowance and provision for possible loan
losses, future interest rates and their effect on Omega's financial condition or
results of operations, the classification of Omega's investment portfolio and
other statements as to trends or management's beliefs, expectations or opinions.
Such forward looking statements are subject to risks and uncertainties and may
be affected by various factors which may cause actual results to differ
materially from those in the forward looking statements. Certain of these risks,
uncertainties and other factors are discussed in this Annual Report or in
Omega's Annual Report on Form 10-K for the year ended December 31, 1995, a copy
of which may be obtained from Omega upon request and without charge (except for
the exhibits thereto).
NATURE OF OPERATIONS
Omega Financial Corporation is a bank holding company operating primarily in
Central Pennsylvania, with the purpose of delivering financial services within
its local market. Consisting of four banks and two non-bank subsidiaries, Omega
Financial Corporation provides retail and commercial banking services through 41
offices in Centre, Clinton, Mifflin, Juniata, Blair, Huntingdon, Bedford and
Montour counties. Omega's banks provide a full range of banking services
including an automatic teller machine network, checking accounts, NOW accounts,
savings accounts, money market accounts, investment certificates, fixed rate
certificates of deposit, club accounts, secured and unsecured commercial and
consumer loans, construction and mortgage loans, safe deposit facilities, credit
loans with overdraft checking protection, credit cards and student loans. The
banking affiliates also provide a variety of trust services. The Corporation has
a relatively stable deposit base with no major seasonal depositor or group of
depositors. Most of its commercial customers are small and mid-sized businesses
in Central Pennsylvania.
MERGERS AND ACQUISITIONS
On January 11, 1995, Omega entered into an Agreement and Plan of Reorganization
with Montour, a bank incorporated under the Pennsylvania Banking Code of 1965.
This merger was approved by the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation and the Department of Banking
of the Commonwealth of Pennsylvania, as well as the stockholders of Montour, and
was consummated on July 31, 1995.
The transaction was accounted for under the purchase method. For each share of
Montour, shareholders received, at their election and subject to certain
adjustments, one-half share of Omega common stock or $12.00 in cash, or a
combination of stock and cash, with 43.1% of the total outstanding shares being
converted to cash. Warrant holders received $2.00 per warrant. Total
consideration for the acquisition was $5,727,000 in the aggregate, with 123,957
shares of Omega stock issued and $2,442,000 paid in cash. Montour's assets at
July 31, 1995 were $44,641,000.
On January 28, 1994, Penn Central Bancorp was merged with and into Omega. This
transaction was accounted for as a pooling of interests for financial reporting
purposes, and as a result, all prior period financial information in the
following discussion has been restated to reflect the combination.
On September 24, 1993, the Corporation acquired two branches. The accompanying
financial statements reflect the results of these branches from the acquisition
date. The deposits acquired of $7,600,000 affected the average deposits by
$1,906,000 for 1993.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
FINANCIAL CONDITION
Omega functions as a financial intermediary and therefore its financial
condition should be viewed in terms of changes in its uses and sources of funds.
Table 1 depicts average daily balances, the dollar change and percentage change
for the past two years. This table is referenced for the discussion in this
section.
<TABLE>
<CAPTION>
TABLE 1
Changes in Uses and Sources of Funds
( $ in thousands)
1995 Increase (Decrease) 1994 Increase (Decrease) 1993
Average ------------------- Average ------------------- Average
Balance Amount % Balance Amount % Balance
--------- ---------- -------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Funding Uses:
Loans ................................... $ 673,812 $ 41,391 6.5% $ 632,421 $ 646 0.1% $ 631,775
Investment securities ................... 171,286 (7,214) (4.0) 178,500 24,346 15.8 154,154
Tax-exempt investment securities ........ 43,546 (12,694) (22.6) 56,240 1,071 1.9 55,169
Interest bearing deposits ............... 1,673 (1,467) (46.7) 3,140 (3,010) (48.9) 6,150
Federal funds sold ...................... 12,490 (388) (3.0) 12,878 (4,726) (26.8) 17,604
--------- --------- ----- --------- --------- ----- ---------
Total interest earning assets ........... 902,807 19,628 2.2 883,179 18,327 2.1 864,852
Non-interest earning assets ............. 66,376 1,486 2.3 64,890 1,284 2.0 63,606
Less: Allowance for loan losses ......... (11,368) (139) 1.2 (11,229) 409 (3.5) (11,638)
--------- --------- ----- --------- --------- ----- ---------
Total uses .............................. $ 957,815 $ 20,975 2.2% $ 936,840 $ 20,020 2.2% $ 916,820
========= ========= ===== ========= ========= ===== =========
Funding Sources:
----------------
Interest bearing demand deposits ........ $ 220,460 $ (17,860) (7.5%) $ 238,320 $ 7,961 3.5% $ 230,359
Savings deposits ........................ 105,858 (9,453) (8.2) 115,311 7,258 6.7 108,053
Time deposits ........................... 382,682 32,955 9.4 349,727 (13,254) (3.7) 362,981
Other ................................... 6,585 2,327 54.7 4,258 (206) (4.6) 4,464
--------- --------- ----- --------- --------- ----- ---------
Total interest bearing liabilities ...... 715,585 7,969 1.1 707,616 1,759 0.2 705,857
Demand deposits ......................... 110,687 2,081 1.9 108,606 8,988 9.0 99,618
Other liabilities ....................... 13,275 1,445 12.2 11,830 (1,300) (9.9) 13,130
Shareholders' equity .................... 118,268 9,480 8.7 108,788 10,573 10.8 98,215
--------- --------- ----- --------- --------- ----- ---------
Total sources ........................... $ 957,815 $ 20,975 2.2% $ 936,840 $ 20,020 2.2% $ 916,820
========= ========= ===== ========= ========= ===== =========
</TABLE>
Omega's funding sources have increased over the last two years at approximately
2.2%. This growth was achieved in 1995 primarily through market expansion,
specifically the purchase of Montour. Omega experienced a change in types of
deposit growth from 1994 to 1995 from transaction type deposits (demand,
interest-bearing demand and savings) to time deposits.
Uses of available funds also shifted from investment securities, which grew by
$24.3 million, or 15.8%, in 1994 to loans in 1995, which experienced a $41.4
million, or 6.5% increase, to average $673.8 million.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
[Graphic Omitted. In the printed document there is a stacked bar graph
depicting the following:]
Average Balances (in millions)
Investments Loans Deposits Assets
1991 232.5 600.0 781.0 883.9
1992 225.4 621.3 792.4 899.1
1993 233.1 631.8 801.0 916.8
1994 250.8 632.4 812.0 936.8
1995 231.2 673.8 819.7 957.8
OVERVIEW
Referencing the average balances chart over the past five years, it is clear
that Omega has enjoyed steady growth in all major areas of the balance sheet,
with loan growth out-pacing total asset growth each year from 1991 through 1995,
with the exception of 1994 when loan growth slowed to 0.1% while assets averaged
2.2% higher than in 1993.
Total deposits continued to grow in modest proportions each of the previous five
years with excess funds not required for loans being employed in various
investment instruments. For purposes of these charts, investments are defined to
include all interest earning assets except loans (i.e. investment securities
available for sale and held to maturity, federal funds sold and interest bearing
deposits).
As average loans leveled off in 1994, average investments increased by $17.7
million, or 7.6%. In 1995, loan growth surged, requiring the use of all deposit
growth and funds from investment maturities. 1995 was the strongest of the last
five years in terms of average loan volumes, which translates to the strongest
net interest yield, since higher yields can be realized on loans than
investments (See Table 5 on page 24). The average asset mix change chart (below)
depicts the percentage of loans and investments to total assets.
More detailed discussion of Omega's earning assets and interest bearing
liabilities will follow in sections titled Loans, Investments, Deposits and
Asset Liability Management.
LOANS
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Average Asset Mix Change
Average Average
Loans Investments
1991 67.9% 26.3%
1992 69.1% 25.1%
1993 68.9% 25.4%
1994 67.5% 26.8%
1995 70.3% 24.1%
In 1995, total average loans were $673.8 million as compared to $632.4 million
in 1994, an increase of $41.4 million, or 6.5%. As was expected, the personal
consumer loan portfolio experienced healthy growth in 1995, as a result of
aggressive marketing targeted to this sector, along with the addition of Montour
into Omega's organization. Commercial real estate lending also increased in
1995, particularly in the State College and Hollidaysburg regions of Omega's
market. The demand for these commercial loans began in late 1994 and continued
throughout 1995. Average loans in 1994 were $632.4 million, compared to $631.8
million in 1993. The following information should be considered when analyzing
the seemingly weak loan demand in 1994 and 1993 (growing 0.1% and 1.7% on
average in 1994 and 1993, respectively). In mid-1993,
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
approximately $14 million of long-term fixed rate mortgages were sold in the
secondary market in order to reduce interest rate risk associated with a rising
rate environment. Since then, on an on-going basis, some long-term fixed rate
mortgage originations have been sold in the secondary market on an individual
basis. Despite this fact, Omega's consumer mortgage portfolio has continued to
grow steadily since 1993. As has been reported, the national economy began to
expand in 1994 and continued to expand through 1995. Although Omega's market
lagged this expansion until the fourth quarter of 1994, it is evident that the
loan growth in 1995 reflects the effects of the expansion.
Omega's lending strategy stresses quality growth, diversified by product and
industry. A common credit policy is in place throughout the Corporation, and a
special credit committee reviews all large loan requests prior to approval.
Omega's commercial and consumer lenders make credit judgments based on a
customer's existing debt obligations, ability to pay and general economic
trends.
The loan portfolio as of December 31, 1995 was comprised of 60% consumer loans
and 40% commercial loans (including construction), as compared to 61% and 39%,
respectively, at December 31, 1994. In January of 1996, the state of
Pennsylvania had most of its counties declared disaster areas by the President
of the United States, as a result of a series of blizzards, cold weather and
devastating flooding. These counties included all eight of the counties in
central Pennsylvania where Omega focuses its business activities. Management
expects that this will slow down some of the consumer lending activity in 1996.
Despite this, commercial lending, particularly commercial real estate lending,
has been very active in the first part of 1996, and although no assurances can
be given, management believes this will continue throughout the year.
The loan portfolio carries the potential risk of past due, non-performing or,
ultimately, charged-off loans. Omega manages this risk through credit approval
standards as discussed above.
Loan loss reserves have been established in order to absorb potential future
loan losses. An annual provision is charged to current earnings to maintain the
reserve at adequate levels. Charge-offs and recoveries are recorded as an
adjustment to the reserve. The allowance for loan losses at December 31, 1995
was 1.65% of total loans, net of unearned discount, as compared to 1.70% of
total loans at the end of 1994. The allowance increased $611,000 from 1994 as
the provision of $713,000 exceeded net charge-offs of $518,000. The remainder of
the increase was due to the Montour acquisition (See Note 6 of Notes to
Consolidated Financial Statements). Net charge-offs for 1995 were 0.08% of
average loans as compared to 0.12% in 1994. The majority of charge-offs related
to personal loans in both years. The allowance for loan loss reserves had been
built to a high point of 1.82% of loans in 1992 when non-performing loans were
trending upward to 0.92% of loans. Since then, non-performing loans have been
significantly reduced, as have net charge-offs. Therefore, management had
cautiously and gradually been able to reduce the allowance through a lower
provision for loan losses charged to earnings through 1994. With the increase of
non-performing loans in 1995, management likewise increased the provision for
loan losses. Even though non-performing loans are only 0.66% of net loans at
December 31, 1995, this ratio has increased from 0.43% at December 31, 1994. The
largest component of non-performing loans is "accruing loans past due 90 days or
more" (see Table 2) at December 31, 1995, which is unusual for Omega.
Management's intent is to reduce this category in 1996 to more traditional
levels, while continuing to minimize loans carried as non-accrual.
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Allowance for Losses to Loans
at Year End
1991 1.34%
1992 1.82%
1993 1.75%
1994 1.70%
1995 1.65%
Management believes that the allowance for loan losses is adequate, based upon
its analysis of the loans, current economic conditions and certain risk
characteristics of the loan portfolio. This determination is made through a
structured review of impaired loans, non-performing loans and certain performing
loans designated as potential problems.
At December 31, 1995, non-performing loans (as defined in Table 2) as a
percentage of the allowance for loan losses were 39.7% as compared to 26.7% at
December 31, 1994. Of the $4,629,000 of non-performing loans at December 31,
1995, $2,943,000 was collateralized with real estate, $1,608,000 with other
assets, and $79,000 was unsecured.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
TABLE 2
Non-Performing Loans
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans ..................... $1,932 $1,596 $1,849 $4,542 $2,766
Accruing loans past due 90 days or more 2,697 1,317 952 1,009 2,228
Restructured loans .................... -- 44 -- 152 153
------ ------ ------ ------ ------
Total non-performing loans ............ $4,629 $2,957 $2,801 $5,703 $5,147
====== ====== ====== ====== ======
</TABLE>
Note 6 to the Consolidated Financial Statements summarizes the allowance for
loan losses for each of the last five years. Management's estimate of net
charge-offs for 1996 follows (in thousands):
Commercial, financial and agricultural..... $43
Real estate - commercial................... --
Real estate - mortgage..................... 28
Personal................................... 389
----
Total...................................... $460
====
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Non-Performing Loans to Loans
at Year End
1991 0.85%
1992 0.92%
1993 0.45%
1994 0.43%
1995 0.66%
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Net Charge-Offs to Average Loans
1991 0.47%
1992 0.22%
1993 0.21%
1994 0.12%
1995 0.08%
INVESTMENTS
Average investments (as defined above) decreased by $19.6 million, or 7.8%,
during 1995, after increasing by $17.7 million, or 7.6% during 1994. The
decrease in 1995 is a result of healthy loan growth, but modest deposit growth.
Funds from maturing invesments were used to fund loans rather than re-investing
in other investment securities. The increase in 1994 was a result of increased
funds available from deposits and shareholders' equity and reduced loan funding
needs. Primarily, the purpose of the investment function of Omega is to assure
liquidity and to try to manage the interest rate risk incurred by customer
demands while at the same time maintaining the loan to deposit ratio within
acceptable funds management guidelines. Therefore, these investments are
generally of a shorter term, lower yield and are more liquid.
The investment area is managed according to internally established guidelines
and quality standards. As a result of the adoption of Statement of Financial
Accounting Standard No. 115 on January 1, 1994, Omega was required to segregate
its investment securities portfolio into two classifications: those held to
maturity and those available for sale. The determination of which portfolio to
hold each security is made at the time of purchase, based on management's
intent. Omega classifies all marketable equity investments as available for
sale. Debt securities are classified as available for sale when the intent is
for the security to be available to be used for strategic asset/liability
management purposes such as to manage interest rate risk, prepayment risk or
liquidity needs. Securities are classified as held to maturity
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
when it is management's intent to hold these securities until maturity, for
matching against longer term funding. In December of 1995, the Corporation
reclassified approximately $93 million of investment securities from held to
maturity to available for sale. In order to provide management with additional
liquidity and flexibility for funding loan growth, $55,000,000 of U.S. Treasury
and Agency securities were reclassified. Also, approximately $38,000,000 in tax
exempt state and municipal securities were reclassified in order to provide
management with the ability to respond to implications of possible tax law
changes. This reclassification was allowed under Financial Accounting Standards
Board guidance which permitted institutions to make a one-time reassessment of
the appropriateness of investment security classifications. As a result of this
reclassification, the unrealized gain on securities recorded as a component of
shareholders' equity decreased approximately $59,000, net of tax. Note 4 to the
Consolidated Financial Statements analyzes the investment securities (including
the tax-exempt investment securities). At December 31, 1995, the market value of
the entire securities portfolio exceeded amortized cost by $3,731,000 as
compared to December 31, 1994 when market value was under amortized cost by
$5,228,000. Rates have fallen slightly, causing a general increase in market
value of debt securities since 1994. The weighted average maturity of the
investment portfolio is 2 years and 4 months as of December 31, 1995 as compared
to 2 years and 6 months at the end of 1994. The weighted average maturity has
remained short in order to assure liquidity and to take advantage of the
changing rate environment. Table 4 (located on page 20) shows the remaining
maturity or earliest possible repricing for investment securities.
NON-INTEREST EARNING ASSETS
Non-interest earning assets increased $1,486,000, or 2.3%, on average in 1995 as
compared to $1,284,000, or 2.0%, in 1994. These modest increases were the result
of normal operating activities.
DEPOSITS
Since 1991, Omega has seen limited growth in the deposit area. As reflected in
Table 3, average total deposits rose by 1.0%, or $7,723,000, in 1995. This
followed a year where average deposits increased by only 1.4%. The banking
industry in total continues to experience slow growth in deposits, due primarily
to the flow of funds into mutual funds and other investment options that compete
with bank deposits. Internally, from 1992 to 1994, customers had shifted their
deposits from longer term time deposits to more liquid transaction type deposits
such as interest-bearing demand and savings accounts (defined as core accounts).
This trend had helped reduce Omega's funding costs, as time deposits generally
command higher rates than the core deposits. Management believed that this shift
was a result of the relatively low rate environment that was in place over most
of that time period, leading many of our customers to avoid long-term
commitments, keeping funds in more liquid accounts until they perceived a more
investment-friendly environment. In 1995, however, as time deposit rates were
higher than in previous years, Omega experienced the beginning of a reversal of
this trend, as time deposits increased on average by $33.0 million, or 9.4%
(partly due to the Montour acquisition), and core transaction accounts averaged
$25.2 million, or 5.5% less than in 1994.
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Average Deposit Mix Change
Average Average
Core Deposits Time Deposits
1991 46.2% 53.8%
1992 50.1% 49.9%
1993 54.7% 45.3%
1994 56.9% 43.1%
1995 53.3% 46.7%
Management has been closely watching deposit activity during 1994 and 1995, but
because management believes that the level of the loan to deposit ratio is
satisfactory (averaging 82.2% in 1995 and 77.9% in 1994), has not felt the need
to boost rates beyond local markets in the time deposit products. Increasing
rates paid on time deposits would have had the likely effect of increasing
deposits and thereby lowering the loan to deposit ratio and decreasing the net
interest margin.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
TABLE 3
Changes in Deposits
($ in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
Average Increase (Decrease) Average Increase (Decrease) Average
------------------- -------------------
Balance Amount % Balance Amount % Balance
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest bearing demand deposits $220,460 $(17,860) (7.5)% $238,320 $ 7,961 3.5% $230,359
Savings deposits ................ 105,858 (9,453) (8.2) 115,311 7,258 6.7 108,053
Demand deposits ................. 110,687 2,081 1.9 108,606 8,988 9.0 99,618
-------- -------- ---- -------- -------- ---- --------
Total core (transaction) accounts 437,005 (25,232) (5.5) 462,237 24,207 5.5 438,030
Time deposits ................... 382,682 32,955 9.4 349,727 (13,254) (3.7) 362,981
-------- -------- ---- -------- -------- ---- --------
Total deposits .................. $819,687 $ 7,723 1.0% $811,964 $ 10,953 1.4% $801,011
======== ======== ==== ======== ======== ==== ========
</TABLE>
OTHER INTEREST BEARING LIABILITIES
Other interest bearing liabilities on average increased $2,327,000, or 54.7%, as
compared to a decrease of $206,000, or less than 1%, in 1994. The increase in
1995 is a result of some long-term debt assumed at one of Omega's banks in 1995
(See Note 9 of Notes to Consolidated Financial Statements).
SHAREHOLDERS' EQUITY
Shareholders' equity was once again an important funding source during 1995,
providing an average funding source of $118,268,000, an increase of $9,480,000,
or 8.7%, from the $108,788,000 provided in 1994. In spite of increased
dividends, Omega continued a strong rate of internal capital generation. This
rate was 8.3% in 1995 and 1994. This internal capital generation is dependent on
high earnings performance which is reflected by a return on average assets of
1.47% in 1995 and 1.36% in 1994, in conjunction with a prudent dividend policy
that is represented by payout ratios on the common stock of 33.5% for 1995 and
30.8% for 1994. Capital has also increased as a result of employee stock option
and purchase plans. The adoption of FAS No. 115 in January of 1994 has had the
effect of increasing shareholders' equity for the amount of unrealized gains
(net of tax) on securities available for sale. In 1995, Omega instituted a
Board-approved common stock buy-back plan allowing up to $1,000,000 for
purchasing treasury stock. As a result, at December 31, 1995, Omega owned 26,000
shares of stock in treasury at a cost of $822,000. In January of 1996, the Board
approved an additional $2,000,000 to be available for use in the buy-back
program.
Omega increased the return to shareholders this year by increasing its dividend
9.1% to $.72 per share. Cash dividends per share in prior years were $.66 and
$.60 in 1994 and 1993, respectively. Omega paid a dividend of $1.80 per
preferred share in each of the years 1995, 1994 and 1993. See Note 18 of Notes
to Consolidated Financial Statements regarding restrictions on dividends from
subsidiary banks to the holding company.
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Equity to Asset Ratio
at Year End
1991 9.29%
1992 10.05%
1993 10.95%
1994 12.03%
1995 12.48%
Federal banking regulators have established capital adequacy requirements for
banks based on risk factors. All banks and bank holding companies are required
to have a minimum of 4% of risk adjusted assets in Tier I capital and 8% of risk
adjusted assets in total capital (Tier I and Tier II capital). As of December
31, 1995 and 1994, Omega's Tier I capital ratio was 17.2% and 17.6%,
respectively, and its total capital ratio was 18.5% and 18.8%, respectively.
Additionally, banking organizations must maintain a minimum Tier I capital to
total asset (leverage) ratio of 3%. This 3% leverage ratio is a minimum for the
top-rated banking organizations without any supervisory, financial or
operational weaknesses or deficiencies. Other banking organizations are required
to maintain leverage capital ratios 100
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Book Value per Share
1991 $14.22
1992 $15.71
1993 $17.25
1994 $18.90
1995 $20.62
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
to 200 basis points above the minimum depending on their financial condition. At
December 31, 1995 and 1994, Omega's leverage ratio was 11.9% and 11.8%,
respectively, against a required leverage ratio of 4%.
ASSET/LIABILITY MANAGEMENT
The process by which financial institutions manage their assets and liabilities
is called asset/liability management. This has become very important in an
industry undergoing an ever changing interest rate environment. The goals of
Omega's asset/liability management are increasing net interest income without
taking undue interest rate risk or material loss of net market value of its
equity, and maintaining adequate liquidity. Net interest income is increased by
widening the interest spread and increasing earning assets.
Liquidity is measured by the ability to meet both depositors' and credit
customers' requirements.
NET INTEREST INCOME AND INTEREST RATE RISK
Omega has experienced an increase in net interest income in each of the last
five years. Omega believes that it has prudently managed interest rate
sensitivity in achieving these levels of net interest income. Management
utilizes two methodologies to aid in the management of interest rate risk: gap
analysis and economic simulation.
GAP ANALYSIS
Gap is defined as the volume difference between interest rate sensitive assets
and liabilities. By managing gap, fluctuations in net interest income can be
minimized, thereby achieving consistent growth in net interest income during
periods of changing interest rates. Table 4 (located on page 20) shows the
period and cumulative static gaps for various time intervals as of December 31,
1995. The data in this table is based upon the earliest possible repricing dates
or maturity, whichever comes first. Core deposit accounts, defined as interest
bearing demand deposits, certain savings accounts and checking accounts with
interest, are considered to have repricing implications of various intervals
between one month and five years. The gap analysis is used as an indicator of
what may happen to net interest income if interest rates rise or fall. On a
cumulative basis over the next twelve months, Omega is in a positive gap
position of $14,299,000 at December 31, 1995, indicating more interest earning
assets than interest bearing liabilities will reprice during that period. Should
rates rise, Omega's net interest income should be favorably impacted.
Conversely, if rates should fall, Omega would experience a decline in its net
interest income.
ECONOMIC SIMULATION
Management also simulates possible economic conditions and interest rate
scenarios in order to quantify the impact on net interest income. The effect
that changing interest rates has on Omega's net interest income is simulated by
moving interest rates up and down at 100 basis point increments. This simulation
is known as rate shocks. For example, at December 31, 1995, should interest
rates rise by 100 basis points immediately and Omega's balances did not grow and
the mix did not change, net interest income would increase over the next twelve
months by $1,348,000, and conversely, decrease if interest rates declined, as
shown in the table that follows.
Omega's management cannot predict the direction of interest rates nor will the
mix remain unchanged, yet, management uses this information to help formulate
strategies to minimize any unfavorable effect on net interest income as a result
of interest rate changes. As an example, since 1990, Omega has executed a number
of interest rate swap agreements (notional balance of $20,000,000 as of December
31, 1995, see Note 13 of Notes to the Consolidated Financial Statements) in
order to hedge certain prime interest rate loans against declining rates. Omega
is receiving a fixed rate on the national balance with a weighted average
maturity of 14 months at a weighted rate of 8.65% and is paying the U.S. prime
rate. Therefore, if the prime rate falls, Omega will see an increase to the
margin as a result of these contracts. At the same time, the prime based loans
that Omega owns will drop, offsetting the increase from the interest rate swaps.
This will maintain the margin on $20,000,000 of prime-related loans that was in
place at the time of entering into the swap agreements. If prime were to rise,
the opposite would be true, maintaining the margin in place before the rate
movement.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
To determine the need for these hedges, simulated rate shocks were run as
previously described. For example, if the simulated rate shocks were run against
Omega's balance sheet at December 31, 1995, with and without the $20,000,000 of
interest rate swap agreements, the following results would occur over the next
twelve months (in thousands):
----------------------------------------------------------------------
Change in Change in Net Interest Income
Interest Rates Interest Rate Swap
-----------------------------------
(Basis Points) With Without
----------------------------------------------------------------------
400 $5,368 $6,168
300 4,067 4,667
200 2,705 3,105
100 1,348 1,548
0 0 0
(100) (1,325) (1,525)
(200) (2,636) (3,036)
(300) (3,947) (4,547)
(400) (5,255) (6,055)
----------------------------------------------------------------------
Omega is exposed to a loss of income if interest rates fall. Management felt
that the Corporation was exposed to higher than acceptable rate risk and decided
to enter into the hedging agreements in order to mitigate the risk. Of even
greater importance is that the dispersion in the margin movement was reduced by
$200,000 for a 100 basis point decline in rates and by $400,000 for a 200 basis
point drop, thus reducing Omega's risk to interest rate movements.
The same effects could be obtained in the cash market by investing funds for a
longer term. However, this would reduce liquidity and require more capital.
In addition to determining the impact on net interest income from various
interest rate changes, the same analysis is applied to determine the change
interest rate movements would have on Omega's market value of equity (MVE). The
MVE provides an indicator of economic value and is computed by discounting all
contractual future cash flows at current market rates. The effect that changing
interest rates has on Omega's MVE is simulated by moving interest rates up and
down at 100 basis point increments. This provides management with information
necessary to analyze long-term interest rate risk. Management can limit
long-term interest rate risk, but it is generally at the expense of short-term
earnings which can cause more volatility in the short term.
At December 31, 1995, Omega's net interest income and MVE were within the
guidelines established by management. However, during 1993, management was faced
with Omega's MVE becoming too volatile to rate movements. In order to reduce
this volatility, management decided to sell approximately $14,000,000 of fixed
rate mortgages and reinvest the funds into shorter term securities at much lower
rates. This had the effect of reducing the volatility in the MVE to rising
rates, but at the same time reduced net interest income.
The gap analysis and rate shock simulation described above are performed in a
static environment. In reality Omega's balance sheet is dynamic and in constant
change as are interest rates. Management applies the same techniques to
projected future volumes and various interest rate scenarios prior to making any
hedging decision or decisions that involve the acquiring or investing of funds.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
LIQUIDITY
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Average Loan to Deposit Ratio
1991 76.8%
1992 78.4%
1993 78.9%
1994 77.9%
1995 82.2%
There is no standardized formula for measuring liquidity. Past methods do not
apply because of the complexity of today's balance sheet. Omega's management has
adopted a liquidity measurement that answers the following three questions:
1. How much cash is on hand and can be raised over the next thirty days
without any principal loss on the assets?
2. If adverse publicity was released about the industry or the Corporation,
what is the ability of Omega to meet depositor needs? This would be the
run on the bank or worst case scenario.
3. What are the funding requirements through the next ninety days?
First, total liquid assets are determined. This includes cash on hand, federal
funds sold, market value of U.S. Treasury and agency securities not pledged,
loans that could be sold within thirty days, cash from maturities within thirty
days and any other readily marketable asset.
Second, total short-term liabilities are determined. This includes federal funds
purchased, repurchase agreements, certificates of deposit over $100,000
scheduled to mature within thirty days, and an estimated amount of the retail
deposits.
The short-term liabilities are deducted from the liquid assets to determine a
surplus or deficit and a percentage of total assets is determined. At December
31, 1995, total liquid assets were $162,133,000 while the short-term liabilities
were $36,252,000. This left a surplus of liquid assets of $125,881,000, or 12.7%
of total assets. Management believes that a surplus of not less than 5% to 7% is
adequate.
Another measure of liquidity is the average loan to deposit ratio. This ratio
was 82.2% and 77.9% at December 31, 1995 and 1994, respectively. Management's
target range for this ratio is 70% to 85%.
If required due to unforeseen circumstances, Omega has the ability to increase
its liquidity through the sale of assets, primarily financial instruments. As
disclosed in Note 2 of Notes to the Consolidated Financial Statements, most of
Omega's financial assets have a fair value in excess of their aggregate book
value, therefore some of these instruments could be sold if needed for liquidity
purposes, and their sale would not negatively affect current earnings and
capital.
As to off-balance sheet liquidity, Omega has federal funds lines totaling
$20,000,000 at December 31, 1995. At December 31, 1995, Omega had no amount
outstanding against these federal funds lines. Omega's banks are members of the
Federal Home Loan Bank of Pittsburgh which provides overnight and term funding
to the banks in the amounts of $93,000,000 and $40,000,000, respectively, as of
December 31, 1995. At December 31, 1995, Omega had $6,125,000 outstanding
against the term line and no overnight advances (See Note 8 of Notes to the
Consolidated Financial Statements).
ECONOMIC, REGULATORY AND FINANCIAL REPORTING ENVIRONMENT
Omega's market is generally in central Pennsylvania and primarily in the
counties of Centre, Mifflin, Blair, Huntingdon, Bedford, Juniata and Montour.
The economy in this market experienced growth during 1995 as did all of
Pennsylvania, as evidenced by Omega's banks' increase in demand for consumer and
commercial loans in the latter part of 1994 and all of 1995.
The FDIC, Federal Reserve Board and the Office of the Comptroller have issued
their final rule on revising risk-based capital for exposure to interest rate
risk as directed under the Federal Deposit Insurance Corporation Improvement Act
(FDICIA) - Section 305. This rule was effective September 1, 1995. This action
by the regulators is basically a two step process, with the first step being
implemented currently and the second step still being in the proposal process.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
When assessing the adequacy of a banks capital, regulators are now required to
explicitly include a bank's exposure to declines in the market value of equity
as a result of changes in interest rates. The final rule does not include a
measurement framework for assessing the level of a banks interest rate risk
exposure nor does it specify a level of exposure above which a bank will be
required to hold more capital. The rule does indicate that a bank may be
required to hold additional capital if it has a significant exposure (again not
defined) or a weak interest rate risk management process. Management believes
that this new requirement will not have a material impact on Omega's risk based
capital adequacy.
Still to be finalized is the proposal which establishes a uniform framework for
measuring and monitoring a banks' interest rate risk exposure. The measurement
of rate risk will be only one factor used by regulators to measure capital
adequacy. Other factors include: the bank's interest rate risk management
process, the overall financial condition of the bank, and the level of other
risks at the bank for which capital is needed. Based on our current
understanding, management believes that this new requirement will not have a
material impact on Omega's risk based capital adequacy.
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Net Income
(in thousands)
1991 $8,304
1992 $11,907
1993 *$11,932
1994 $12,785
1995 $14,069
*(1993 net income shown before favorable effect of accounting charge of $747)
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
TABLE 4
MATURITY DISTRIBUTION
AS OF DECEMBER 31, 1995
(In thousands)
Remaining Maturity/Earliest Possible Repricing
<TABLE>
<CAPTION>
Over Three Over Six Over One
Three Months But Months But Year But Over
Months Within Six Within One Within Five Five
or Less Months Year Years Years Total
--------- ---------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Interest bearing deposits ........... $ 843 $ -- $ -- $ -- $ -- $ 843
Federal funds sold .................. 12,460 -- -- -- -- 12,460
Investment securities:
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations ..................... 17,231 9,031 8,794 40,652 633 76,341
Corporate and other securities ... 1,848 2,730 9,006 26,457 5,039 45,080
Obligations of state and political
subdivisions ..................... 5,619 2,945 6,065 10,382 150 25,161
Mortgage backed securities ....... 3,419 3,562 7,950 41,283 5,289 61,503
Stocks ........................... -- -- -- -- 8,236 8,236
Loans:
Commercial, financial and
agricultural ................... 101,147 2,572 1,971 10,572 20,275 136,537
Interest rate swap agreements
(notional amount) .............. (20,000) -- 10,000 10,000 -- --
Real estate - commercial ......... 63,141 4,712 5,275 22,423 31,911 127,462
Real estate - construction ....... 13,677 417 306 1,576 2,370 18,346
Real estate - mortgage ........... 40,726 16,678 32,507 73,301 64,825 228,037
Personal (net of unearned
interest) ...................... 40,274 11,916 23,034 98,349 15,235 188,808
Lease financing (net of
unearned interest) ............. 211 191 392 3,141 -- 3,935
--------- --------- --------- --------- --------- ---------
Total Interest Earning Assets .......... 280,596 54,754 105,300 338,136 153,963 932,749
--------- --------- --------- --------- --------- ---------
Interest Bearing Liabilities
Demand deposits ..................... 22,821 -- -- 129,312 -- 152,133
Savings deposits .................... 110,036 -- 20,968 40,339 -- 171,343
Certificates of deposits
over $100,000 ....................... 15,848 8,517 7,177 11,426 326 43,294
Time deposits ....................... 105,156 69,950 58,165 132,206 1,205 366,682
Short-term borrowings ............... 1,545 -- -- -- -- 1,545
Long-term debt ...................... 5,350 350 -- -- -- 5,700
Other interest bearing liabilities .. 468 -- -- -- 4,435 4,903
--------- --------- --------- --------- --------- ---------
Total Interest Bearing Liabilities ..... 261,224 78,817 86,310 313,283 5,966 745,600
--------- --------- --------- --------- --------- ---------
Gap .................................... $ 19,372 $ (24,063) $ 18,990 $ 24,853 $ 147,997 $ 187,149
========= ========= ========= ========= ========= =========
Cumulative Gap ......................... $ 19,372 $ (4,691) $ 14,299 $ 39,152 $ 187,149 $ 187,149
========= ========= ========= ========= ========= =========
Cumulative sensitivity ratio ........... 1.07 0.99 1.03 1.05 1.25
Commercial, financial and agricultural
loans maturing after one year with:
Fixed interest rates ................ $ 10,572 $ 20,275 $ 30,847
Variable interest rates ............. 22,174 24,795 46,969
--------- --------- ---------
Total ............................... $ 32,746 $ 45,070 $ 77,816
========= ========= =========
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
RESULTS OF OPERATIONS
OVERVIEW
1995
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Return on Average Assets
1991 0.94%
1992 1.32%
1993 1.30%
1994 1.36%
1995 1.47%
Omega again reports record earnings in 1995 of $14,069,000, an increase of 10.0%
over 1994. On a fully diluted basis, net income per share continues to improve,
reaching $2.21 in 1995, an increase of 9.4%, or $.19, over 1994. Several
important occurrences took place in 1995 which helped to define the operating
results and in management's opinion, positioned the Corporation for potential
future earnings improvement. They are as follows:
o increased net interest margin
o increased fee income on traditional services
o significant reduction in FDIC insurance premiums
o staffing reductions
o increase in certain depreciation and amortization
o acquisition of Montour Bank
Assets were $994,840,000 at December 31, 1995, representing a $54,887,000, or
5.8%, increase over year end 1994. Loans (net of unearned discount) were
$703,125,000 compared to $647,933,000 at December 31, 1994, an increase of 8.5%,
or $55,192,000. Deposits increased by $48,446,000, or 6.0%, at December 31,1995
when compared to December 31, 1994.
Return on average equity increased from 11.75% to 11.90% in 1995, while return
on average assets increased to 1.47% from 1.36% in 1995. Omega's performance can
be compared to its national peers with consolidated assets of $500 million to $1
billion (using the most current data for September 30, 1995).
Omega Peers
------ ------
Return on average assets....... 1.47% 1.13%
Return on average equity....... 11.94 13.15
1994
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Return on Average Equity
1991 10.07%
1992 13.55%
1993 12.15%
1994 11.75%
1995 11.90%
Omega reported earnings of $12,785,000 in 1994, an increase of 0.8% over 1993
which included a $747,000 cumulative effect of change in accounting principle.
On a truly comparative basis, (ignoring the one time cumulative change) net
income improved by $853,000, or 7.1%. For the remainder of this management
discussion and analysis, all references made to net income in 1993 will
represent income before the change in accounting principle.
Net income per share on a fully diluted basis in 1994 was $2.02 as compared to
$1.89 in 1993, an increase of 6.9%. All historical financial data have been
restated to reflect the merger of Penn Central Bancorp, Inc. into Omega, as
discussed above.
The 1994 earnings improvement resulted from:
o reduction of loan loss provision
o securities gains
o overhead expense cost containment through efficiencies of consolidation
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Factors that had a negative effect on Omega's earnings were:
o slow loan growth
o increase in corporate income tax rate
Assets were $939,953,000 at December 31, 1994, representing a $5,834,000, or
0.6%, increase over year end 1993. Loans (net of unearned discount) were
$647,933,000 compared to $635,961,000 at December 31, 1993, an increase of 1.9%,
or $11,972,000. Deposits decreased by $8,042,000, or 1.0%, at December 31,1994
when compared to December 31, 1993.
Return on average equity decreased from 12.15% to 11.75% in 1994, while return
on average assets increased to 1.36% from 1.30% in 1993. Omega's performance can
be compared to its national peers with consolidated assets of $500 million to $1
billion, as of December 31, 1994.
Omega Peers
----- -----
Return on average assets........ 1.36% 1.12%
Return on average equity........ 11.75 12.96
NET INTEREST INCOME
Net interest income is the amount by which interest income on earning assets
exceeds interest paid on interest bearing liabilities. Since some interest
earning assets are tax exempt, an adjustment is made for analytical purposes to
place all assets on a fully tax equivalent basis.
Table 5 (located on page 24) shows average asset and liability balances, average
interest rates and interest income and expense for the period 1993-1995. In
addition, it shows the changes attributable to the volume and rate components of
net interest income.
1995
Total average loans were $673,812,000 in 1995 at a yield of 8.99% that produced
$60,605,000 in interest income. This represented a $41,391,000, or 6.5%,
increase in average volumes from 1994. The yield increased 69 basis points from
8.30% in 1994 causing an increase of $4,481,000 in interest income, adding to an
increase of $3,611,000 of favorable mix and volume changes for a total increase
of $8,092,000, or 15.4%, when compared to 1994. In addition to a higher rate
environment in 1995 than in 1994, another key factor that contributed to the
increase in income from loans in 1995 was the addition of Montour's loan
portfolio consisting mainly of consumer loans.
Investment securities averaged $214,832,000 for a decrease of $19,908,000, or
8.5%. The yield increased to 5.37% from 5.07% in 1994. Interest income from
securities decreased a total of $365,000, with $980,000 attributable to lower
volumes, partially offset by an increase of $615,000 due to higher yields.
Interest bearing deposits decreased $1,467,000, or 46.7%, and federal funds sold
decreased 3.0%, or $388,000. The net decrease in average volumes of $21,763,000
on the above three assets was a result of increased funding needs of the loan
demand.
Total interest earning assets averaged $902,807,000 at a yield of 8.08% and
produced total interest income of $72,973,000 for 1995. Compared to 1994, the
average volumes increased $19,628,000, or 2.2%. The yield increased 71 basis
points from 7.37% during a higher rate environment in 1995, where prime averaged
8.75% as compared to 7.14% in 1994 as the mix of earning assets shifted from
67.5% loans in 1994 to 70.3% loans in 1995 (See Average Asset Mix Change chart
on page 10). Interest income increased $2,540,000 from volume and mix changes
and $5,343,000 from generally higher yields producing a net increase of 12.1%,
or $7,883,000.
Total interest bearing liabilities averaged $715,585,000 at a cost of
$29,017,000 for a composite rate of 4.06%. This represented an increase in
interest bearing liabilities of 1.1%, or $7,969,000, over 1994. The composite
rate increased from 3.34% in 1994, or 72 basis points. Interest expense
increased $4,219,000 due to higher rates and $1,151,000 due to favorable volume
and mix changes as discussed in the Financial Condition section. These changes
resulted in a total increase of $5,370,000, or 22.7%, in interest expense.
Non-interest bearing liabilities averaged $242,230,000 in 1995, compared to
$229,224,000 in 1994, for an increase of $13,006,000, or 5.7%. This resulted in
an increase of 53 basis points in the rate to fund interest earning assets
(computed by dividing the total interest expense by the total average earning
assets) from 2.68% in 1994 to 3.21% in 1995.
Net interest income was $43,956,000 for 1995, an increase of $2,513,000, or
6.1%, from 1994. This increase was the result of an increase of $1,389,000 in
favorable volume and mix changes and $1,124,000 as a result of interest rate
effects. Net yield increased 18 basis points to 4.87% from 4.69% in 1994. On a
fully tax equivalent basis, the net yield increased from 4.90% to 5.05% in 1995.
Following is a schedule comparing Omega's margin performance to the average of
its national peers as of September 30, 1995:
Percent of average earning assets Omega Peers
--------------------------------- ----- -----
Interest income-tax equivalent.......... 8.21% 8.34%
Interest expense........................ 3.16 3.64
Net interest income - tax equivalent.... 5.05 4.70
1994
Total average loans were $632,421,000 in 1994 at a yield of 8.30% that produced
$52,513,000 in interest income. This represented a $646,000, or 0.1%, increase
in average volumes from 1993. The yield dropped 31 basis points from 8.61% in
1993 causing a decrease of $2,064,000 in interest income, offset partially by an
increase of $161,000 of favorable mix and volume changes for a net decrease of
$1,903,000, or 3.5%, when compared to 1993. In addition to a lower rate
environment in 1994 than in 1993, two other key factors that contributed to the
decrease in income from loans in 1994 were the sale of long-term fixed rate
residential mortgage loans in 1993 and decreased interest income from interest
rate hedge maturities.
Investment securities averaged $234,740,000 for an increase of $25,417,000, or
12.1%. The yield decreased to 5.07% from 5.53% in 1993. Interest income from
securities increased a total of $329,000, with $1,370,000 attributable to higher
volumes, partially offset by a reduction of $1,041,000 due to lower yields.
Interest bearing deposits decreased $3,010,000, or 48.9%, and federal funds sold
decreased 26.8%, or $4,726,000. The net increase in average volumes of
$17,681,000 on the above three assets was a result of funding available in
excess of the loan demand in 1994.
Total interest earning assets averaged $883,179,000 at a yield of 7.37% and
produced total interest income of $65,090,000 for 1994. Compared to 1993, the
average volumes increased $18,327,000, or 2.1%. The yield decreased 35 basis
points from 7.72% in spite of a higher rate environment in 1994, where prime
averaged 7.14% as compared to 6.00% in 1993 as the mix of earning assets shifted
from 68.9% loans in 1993 to 67.5% loans in 1994 (See Average Asset Mix Change
chart on page 11). Interest income increased $1,242,000 from volume and mix
changes while decreasing $2,893,000 from generally lower yields producing a net
decrease of 2.5%, or $1,651,000.
Total interest bearing liabilities averaged $707,616,000 at a cost of
$23,647,000 for a composite rate of 3.34%. This represented an increase in
interest bearing liabilities of 0.2%, or $1,759,000, over 1993. The composite
rate dropped from 3.70% in 1993, or 36 basis points. Interest expense decreased
$2,244,000 due to lower rates and $236,000 due to favorable volume and mix
changes as discussed in the Financial Condition section. These changes resulted
in a net decrease of $2,480,000, or 9.5%, in interest expense.
Non-interest bearing liabilities averaged $229,224,000 in 1994, compared to
$210,963,000 in 1993, for an increase of $18,261,000, or 8.7%. This resulted in
a reduction of 34 basis points in the rate to fund interest earning assets
(computed by dividing the total interest expense by the total average earning
assets) from 3.02% in 1993 to 2.68% in 1994. Net interest income was $41,443,000
for 1994, an increase of $829,000, or 2.0% from 1993. This increase was the
result of an increase of $1,478,000 in favorable volume and mix changes and a
decrease of $649,000 as a result of interest rate effects. Net yield decreased 1
basis point to 4.69% from 4.70% in 1993. On a fully tax equivalent basis, the
net yield decreased from 4.93% to 4.90% in 1994.
Following is a schedule comparing Omega's margin performance to the average of
its national peers as of December 31, 1994:
Percent of average earning assets Omega Peers
--------------------------------- ----- -----
Interest income - tax equivalent......... 7.58% 7.65%
Interest expense......................... 2.68 2.90
Net interest income - tax equivalent..... 4.90 4.75
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
PROVISION FOR LOAN LOSSES
Omega's provision for loan losses was $713,000 in 1995 and $623,000 in 1994 for
an increase of $90,000 that was precipitated by the increase in the loan
portfolio. The provision for loan losses exceeded net charge-offs by $195,000 in
1995 and was $111,000 less than net charge-offs in 1994. Net charge-offs in 1995
and 1994 were .08% and .12%, respectively, of average loans outstanding, the
lowest levels since 1990. In addition, non-performing loans as a ratio to the
allowance for loan losses was 39.7% at year end 1995 and 26.7% at the end of
1994. The allowance for loan losses as a ratio to net loans was 1.65% and 1.70%
for December 31, 1995 and 1994, respectively. The ratio of net charge-offs to
average loans compared to our national peers is as follows:
Omega Peers
----- -----
September 30, 1995.............. .07% .21%
December 31, 1994............... .12 .25
Management believes that the allowance for loan losses at December 31, 1995 is
adequate based on its analysis of the loan portfolio. Such analysis considers
factors that include historical and anticipated losses, the status of
non-performing delinquent loans, prevailing and anticipated economic conditions
and industry standards.
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Net Interest Yield
Yield on Cost to Fund Net Interest
Earning Assets Earning Assets Yield
1991 9.51% 5.16% 4.35%
1992 8.54% 3.78% 4.76%
1993 7.72% 3.02% 4.70%
1994 7.37% 2.68% 4.69%
1995 8.08% 3.21% 4.87%
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
NON-INTEREST INCOME
1995
Non-interest income grew to $8,021,000 during 1995 for a 2.8%, or $219,000,
increase when compared to $7,802,000 for 1994. Substantial improvement in the
traditional revenue generation areas of trust fees and service fees on deposit
accounts were primarily responsible for the increase. As compared to 1994, trust
fees increased by $277,000, or 13.3%, while fees relating to deposit accounts
grew $244,000, or 10.1%, in 1995. This was offset by a decrease of $166,000 in
net gains from investment and loan transactions, and a $136,000 reduction in
other income. In 1994, other income included a one-time $211,000 gain recorded
from the disposition of an asset carried as other real estate, explaining the
reduction in 1995.
As a percentage of average assets, non-interest income (excluding securities
gains) was .77% for 1995, as compared to .75% in 1994. When compared to our
national peers (most current data of September 30, 1995), Omega's ratio was .78%
and the peer average was 1.10%.
1994
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Non-Interest Income to Average Assets
(excluding security gains)
1991 0.71%
1992 0.81%
1993 0.77%
1994 0.75%
1995 0.77%
Non-interest income grew to $7,802,000 during 1994 for a 2.8%, or $212,000,
increase when compared to $7,590,000 for 1993. The primary reason for the growth
in this area is income recorded from the disposition of an asset carried as
other real estate of $211,000. Investment securities net gains were $284,000, or
56.8%, greater in 1994 than 1993, but this was offset by a reduction in net
gains from loan sales of $415,000, or 92.6%. Otherwise, non-interest income
remained at generally the same levels in 1994 as in 1993, with trust fees and
service fees on deposit accounts increasing modestly at 2.2% and 3.5%,
respectively.
As a percentage of average assets, non-interest income (excluding securities
gains) was .75% for 1994, as compared to .77% in 1993. When compared to our
national peers, Omega's ratio was .72% and the peer average was 1.13%.
NON-INTEREST EXPENSE
1995
Omega's operating expenses were $31,462,000 for 1995 as compared to $30,960,000
for 1994, representing an increase of $502,000, or 1.6%. Salaries and employee
benefits were held to a 1.8% increase over 1994. This was achieved by
management's efforts to reduce staffing through attrition. Equipment expense and
data processing service costs were both successfully reduced in 1995 by a total
of $192,000. The most significant decrease in expenses in 1995 came in the
reduction of deposit insurance premiums. The FDIC reduced the base rate on
insurance premiums from 23 cents per hundred dollars of deposits to 4 cents
effective April 1995. This resulted in a reduction in expense of $917,000. Going
forward, Omega believes that these reduced premiums will continue until the Bank
Insurance Fund drops to levels deemed appropriate by the FDIC. Net occupancy and
other expense increased in 1995 by $287,000 and $1,037,000, respectively,
primarily as a result of increased depreciation and amortization, respectively.
[Graphic Omitted. In the printed document there is a bar graph depicting the
following:]
Non-Interest Expense to Average Assets
1991 3.10%
1992 3.25%
1993 3.37%
1994 3.30%
1995 3.28%
At September 30, 1995, Omega's ratio of non-interest expense to average assets
was 3.30%, compared to a national peer average of 3.45%.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
1994
Omega's operating expenses were $30,960,000 for 1994 as compared to $30,899,000
for 1993 representing an increase of 0.2%, or $61,000. Salaries and employee
benefits were held to a 3.0% increase over 1993, while net occupancy expense
increased by 5.7%. Occupancy expense increased as a result of
consolidation-related office space and equipment needs at the corporate
administrative center. With a new contract with our data processing service
provider, consolidation-related reductions were negotiated, resulting in a 5.2%
decrease in these costs in 1994. Other operating expense was reduced by 5.6%
from $8,191,000 to $7,733,000 in 1994, a decrease of $458,000. Merger related
legal and accounting expenses of $324,000 were included in the 1993 total. When
excluding these non-recurring costs, other operating expense was reduced by
$134,000, or 1.7%. This reduction took place through management's efforts at
efficiencies through consolidations of operating functions.
At December 31, 1994, Omega's ratio of non-interest expense to average assets
was 3.30%, compared to a national peer average of 3.59%.
INCOME TAXES
Income taxes for 1995 amounted to $5,733,000 compared to $4,877,000 in 1994. The
effective tax rate increased from 27.6% in 1994 to 29.0% in 1995, due mostly to
a change in the mix of tax-exempt investments and loans. Omega's mix of average
tax-exempt investments and average tax-exempt loans decreased $14,262,000 in
1995. Average tax-exempt investments and loans were 5.9% of total average assets
for 1995 and 7.6% for 1994. Tax-exempt income as a percentage of income before
income tax decreased to 15.1% from 19.8%. In 1993 the effective income tax rate
was 26.2% and the increase in 1994 was due to the same trend as experienced in
1995. See Note 11 of Notes to Consolidated Financial Statements for further
information on income taxes. Additionally, Omega's corporate tax rate has
increased in the last two years. In 1994, a phase-in period began, which raised
the rate from 34% to 34.3%. In 1995 Omega was fully phased in to the 35%
corporate tax rate. This rate is based on levels of pre-tax income.
The Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes", was adopted in 1993 resulting in a $747,000 gain from the
cumulative effect of a change in accounting method.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
The Financial Accounting Standards Board ("FASB") has issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", which is required to be adopted as of January 1, 1996. This
statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. Management has reviewed its assets and believes
that the adoption of this standard will not have a material effect on the
Corporation's financial condition or results of operations.
The FASB issued Statement No. 122, "Accounting for Mortgage Servicing Rights",
requiring its adoption as of January 1, 1996. This statement prescribes a single
procedure for the capitalization of mortgage servicing rights acquired either
through loan origination or through purchase transactions. Based upon current
and predicted levels of mortgage loan sales, management believes that adoption
of this statement will not materially affect the Corporation's financial
condition or results of operations.
The FASB has also issued Statement No. 123, "Accounting for Stock-Based
Compensation", which is required to be adopted as of January 1, 1996. This
standard establishes a fair value-based method of accounting for stock options.
It requires the use of that method for transactions with non-employees and
encourages its use for transactions with employees. Upon adoption on January 1,
1996, management plans to adopt this method of accounting for only its Director
Stock Option Plan, which is not expected to have a material effect on the
Corporation's financial condition or results of operations.
29
<PAGE>
CONSOLIDATED BALANCE SHEETS
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
ASSETS 1995 1994
--------- ---------
<S> <C> <C>
Cash and due from banks (Notes 1 and 3) ........................ $ 38,796 $ 42,151
Interest bearing deposits with other financial institutions .... 843 4,182
Federal funds sold ............................................. 12,460 350
Investment securities held to maturity
(market value-$98,207 and $195,107 respectively) (Notes 1 and 4) 97,863 202,212
Investment securities available for sale (Notes 1 and 4) ....... 121,845 25,610
Total loans (Notes 1, 5, 6 and 17) ............................. 706,640 648,711
Less: Unearned discount ....................................... (3,515) (778)
Allowance for loan losses ............................... (11,668) (11,057)
--------- ---------
691,457 636,876
Premises and equipment, net (Notes 1 and 7) .................... 17,153 16,520
Other assets (Note 1) .......................................... 14,423 12,052
--------- ---------
TOTAL ASSETS ................................................... $ 994,840 $ 939,953
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing ........................................ $ 116,729 $ 118,439
Interest bearing ............................................ 733,453 683,297
--------- ---------
850,182 801,736
Short-term borrowings (Note 8) ................................. 1,545 11,868
Other liabilities .............................................. 8,339 7,204
ESOP debt (Note 12) ............................................ 4,373 4,518
Long-term debt (Note 9) ........................................ 5,700 1,050
Other interest bearing liabilities ............................. 530 468
--------- ---------
TOTAL LIABILITIES .............................................. 870,669 826,844
Commitments and Contingent Liabilities (Notes 10, 13 and 14)
Shareholders' Equity (Note 15)
Preferred stock, par value $5.00 per share:
Authorized - 5,000,000 shares;
Issued and outstanding -
219,781 shares Series A Convertible ....................... 5,000 5,000
Unearned compensation related to ESOP debt ..................... (4,373) (4,518)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares;
Issued -
6,048,966 shares at December 31, 1995;
5,985,735 shares at December 31, 1994
Outstanding -
6,022,966 shares at December 31, 1995;
5,985,735 shares at December 31, 1994 ..................... 30,245 29,929
Capital surplus ................................................ 5,134 4,211
Retained earnings .............................................. 86,778 77,263
Cost of common stock in treasury:
26,000 shares at December 31, 1995 .......................... (822) --
Net unrealized gain on securities available for sale ........... 2,209 1,224
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ..................................... 124,171 113,109
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $ 994,840 $ 939,953
========= =========
The accompanying notes are an integral part of these statements
</TABLE>
30
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans ...................................... $ 60,605 $ 52,513 $ 54,416
Interest and dividends on investment securities:
Taxable interest income ...................................... 9,054 8,911 8,457
Tax-exempt interest income ................................... 2,035 2,583 2,723
Dividend income .............................................. 444 404 389
Other interest income ........................................... 835 679 756
-------- -------- --------
TOTAL INTEREST INCOME ........................................... 72,973 65,090 66,741
INTEREST EXPENSE:
Interest on deposits ............................................ 28,610 23,466 25,963
Interest on short-term borrowings ............................... 243 120 89
Interest on long-term debt and
other interest bearing liabilities ........................... 164 61 75
-------- -------- --------
TOTAL INTEREST EXPENSE .......................................... 29,017 23,647 26,127
-------- -------- --------
NET INTEREST INCOME ............................................. 43,956 41,443 40,614
Provision for loan losses (Note 6) .............................. 713 623 1,133
-------- -------- --------
INCOME FROM CREDIT ACTIVITIES ................................... 43,243 40,820 39,481
OTHER INCOME:
Trust fees ...................................................... 2,355 2,078 2,034
Service fees on deposit accounts ................................ 2,668 2,424 2,341
Investment securities gains and (losses), net: (Note 4)
Investment securities held to maturity ....................... (85) 4 81
Investment securities available for sale ..................... 695 780 419
Gain on sale of loans ........................................... 41 33 448
Other ........................................................... 2,347 2,483 2,267
-------- -------- --------
TOTAL OTHER INCOME .............................................. 8,021 7,802 7,590
OTHER EXPENSE:
Salaries and employee benefits (Note 12) ........................ 16,134 15,847 15,389
Net occupancy expense ........................................... 2,374 2,087 1,974
Equipment expense ............................................... 1,805 1,865 1,844
Data processing service ......................................... 1,446 1,578 1,664
FDIC insurance premiums ......................................... 933 1,850 1,837
Other ........................................................... 8,770 7,733 8,191
-------- -------- --------
TOTAL OTHER EXPENSE ............................................. 31,462 30,960 30,899
-------- -------- --------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ............................... 19,802 17,662 16,172
Income tax expense (Notes 1 and 11) ............................. 5,733 4,877 4,240
Income before cumulative effect of change in accounting principle 14,069 12,785 11,932
-------- -------- --------
Cumulative effect of change in accounting principle (Note 11) ... -- -- 747
NET INCOME ...................................................... $ 14,069 $ 12,785 $ 12,679
======== ======== ========
EARNINGS PER SHARE (Notes 1 and 19)
Primary:
Income before cumulative effect of change in accounting principle $ 2.28 $ 2.08 $ 1.95
Cumulative effect of change in accounting principle ............. -- -- .12
-------- -------- --------
Net income ...................................................... $ 2.28 $ 2.08 $ 2.07
======== ======== ========
Fully diluted:
Income before cumulative effect of change in accounting principle $ 2.21 $ 2.02 $ 1.89
Cumulative effect of change in accounting principle ............. -- -- 12
-------- -------- --------
Net income ...................................................... $ 2.21 $ 2.02 $ 2.01
======== ======== ========
Weighted average shares and equivalents:
Primary ......................................................... 6,049 6,015 5,977
Fully diluted ................................................... 6,296 6,246 6,211
The accompanying notes are an integral part of these statements.
</TABLE>
31
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Years Ended December 31, 1993, 1994 and 1995
--------------------------------------------------------------------------------------
Cost of Net
Unearned Common Unrealized
Preferred Comp- Common Capital Retained Stock Securities
Stock ensation Stock Surplus Earnings In Treasury Gains Total
-------- -------- ------- -------- -------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993....... $ 5,000 $ (4,770) $29,304 $ 2,823 $ 59,699 $ (38) $ -- $92,018
Net income....................... 12,679 12,679
Cash dividends, common-
$.60 per share................ (3,550) (3,550)
Cash dividends, preferred-
$1.80 per share............... (396) (396)
Principal payment by ESOP
under guaranteed loan......... 121 121
Tax benefit from employee
stock options................. 124 124
Tax benefit from preferred
stock dividends paid to ESOP.. 117 117
Common stock issued - 73,216 shares 366 833 1,199
-------- -------- ------- -------- -------- ----------- ---------- -------
Balance at December 31, 1993..... 5,000 (4,649) 29,670 3,656 68,673 (38) -- 102,312
Net income....................... 12,785 12,785
Cash dividends, common -
$.66 per share................ (3,938) (3,938)
Cash dividends, preferred -
$1.80 per share............... (396) (396)
Principal payment by ESOP
under guaranteed loan......... 131 131
Cumulative effect of change in
accounting principle.......... 2,061 2,061
Net unrealized losses on securities (837) (837)
Tax benefit from employee
stock options................. 27 27
Tax benefit from preferred stock
dividends paid to ESOP........ 112 112
Exercised employee stock options -
63,099 shares................. 259 555 38 852
-------- -------- ------- -------- -------- ----------- ---------- -------
Balance at December 31, 1994..... 5,000 (4,518) 29,929 4,211 77,263 -- 1,224 113,109
Net income....................... 14,069 14,069
Cash dividends, common -
$.72 per share................ (4,312) (4,312)
Cash dividends, preferred -
$1.80 per share............... (396) (396)
Principal payment by ESOP
under guaranteed loan......... 145 145
Net unrealized gains on securities 985 985
Tax benefit from employee
stock options................. 47 47
Tax benefit from preferred stock
dividends paid to ESOP........ 107 107
Purchase of treasury stock -
143,393 shares................ (3,925) (3,925)
Montour acquisition - retirement of
Omega stock - 3,000 shares.. (15) (46) (61)
Montour acquisition - 14,038 shares
issued, 109,919 from treasury 70 337 2,878 3,285
Exercised employee stock options -
59,667 shares............... 261 632 225 1,118
-------- -------- ------- -------- -------- --------- -------- --------
Balance at December 31, 1995..... $ 5,000 $ (4,373) $30,245 $ 5,134 $ 86,778 $ (822) $ 2,209 $124,171
======== ======== ======= ======== ======== ========= ======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
32
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 14,069 $ 12,785 $ 12,679
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................................... 3,416 3,190 2,709
Provision for loan losses ............................................. 713 623 1,133
Effect of change in accounting principle .............................. -- -- (747)
Gain on sale of investment securities ................................. (610) (784) (500)
Gain on sale of fixed assets and other property owned ................. (13) (187) (44)
Gain on sale of loans ................................................. (41) (33) (448)
Increase in tax asset ................................................. (175) (418) (532)
Decrease in interest receivable and other assets ..................... 2,334 368 300
Increase (decrease) in interest payable ............................... 332 (1,557) (357)
Decrease in taxes payable ............................................. (134) (101) (341)
Amortization of deferred net loan fees ................................ (362) (345) (77)
Deferral of net loan fees ............................................. 180 123 61
Increase (decrease) in accounts payable and accrued expenses .......... 36 561 (94)
--------- --------- ---------
Total adjustments ................................................... 5,676 1,440 1,063
--------- --------- ---------
Net cash provided by operating activities .................................. 19,745 14,225 13,742
Cash flows from investing activities: Proceeds from the sale or maturity of:
Interest bearing deposits with other financial institutions ........... 5,755 1,306 4,480
Investment securities available for sale - sales and maturities* ..... 11,189 26,235 3,206
Investment securities held to maturity - maturities ................... 64,931 47,170 87,904
Purchase of:
Interest bearing deposits with other financial institutions ........... (1,515) (1,888) (2,861)
Investment securities available for sale .............................. (11,986) (20,501) --
Investment securities held to maturity ................................ (54,293) (42,593) (137,884)
Increase in loans ....................................................... (27,714) (14,117) (16,959)
Gross proceeds from sale of loans ....................................... 8,175 1,666 15,369
Capital expenditures .................................................... (1,546) (1,495) (1,805)
Sale of fixed assets and other property owned ........................... 237 1,036 497
Decrease (increase) in federal funds sold ............................... (12,051) 3,954 20,358
Acquisition of bank, net of cash acquired of $562 ....................... (1,880) -- --
Acquisition of branches, net of cash acquired ........................... -- -- 7,269
--------- --------- ---------
Net cash provided by (used in) investing activities ........................ (20,698) 773 (20,426)
Cash flows from financing activities:
Increase (decrease) in deposits, net .................................... 13,520 (8,042) (2,875)
Increase (decrease) in short-term borrowings, net ....................... (13,273) 4,317 4,393
Principal payment on long-term debt ..................................... (350) -- (1,430)
Proceeds from long-term debt ............................................ 5,000 -- 1,050
Net change in other interest bearing liabilities ........................ 62 53 22
Dividends paid .......................................................... (4,708) (4,334) (3,927)
Tax benefit from preferred stock dividend and stock option activity ..... 154 139 242
Issuance of common stock ................................................ 893 814 1,199
Acquisition of treasury stock ........................................... (3,925) -- --
Proceeds from sale of treasury stock .................................... 225 38 --
--------- --------- ---------
Net cash used in financing activities ...................................... (2,402) (7,015) (1,326)
--------- --------- ---------
Net increase (decrease) in cash and due from banks ......................... $ (3,355) $ 7,983 $ (8,010)
========= ========= =========
Cash and due from banks at beginning of period ............................. $ 42,151 $ 34,168 $ 42,178
Cash and due from banks at end of period ................................... 38,796 42,151 34,168
--------- --------- ---------
Net increase (decrease) in cash and due from banks ......................... $ (3,355) $ 7,983 $ (8,010)
========= ========= =========
Interest paid .............................................................. $ 28,685 $ 25,204 $ 25,162
Income taxes paid .......................................................... 5,927 5,108 5,201
* Prior to the adoption of SFAS No. 115, no securities were classified as
available for sale. However, for comparative purposes, the amounts shown in 1993
as sales and maturities of securities available for sale represent sales of
equity securities.
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NATURE OF OPERATIONS
Omega Financial Corporation is a bank holding company operating primarily in
Central Pennsylvania, for the purpose of delivering financial services within
its local market. Consisting of four banks and two non-bank subsidiaries, Omega
Financial Corporation provides retail and commercial banking services through 41
offices in Centre, Clinton, Mifflin, Juniata, Blair, Huntingdon, Bedford and
Montour counties. Its banks provide a full range of banking services including
an automatic teller machine network, checking accounts, NOW accounts, savings
accounts, money market accounts, investment certificates, fixed rate
certificates of deposit, club accounts, secured and unsecured commercial and
consumer loans, construction and mortgage loans, safe deposit facilities, credit
loans with overdraft checking protection, credit cards and student loans. The
bank subsidiaries also provide a variety of trust services. Omega Financial
Corporation has a relatively stable deposit base with no major seasonal
depositor or group of depositors. Most of Omega's commercial customers are small
and mid-sized businesses in Central Pennsylvania.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Omega Financial Corporation and its wholly owned
subsidiaries conform to generally accepted accounting principles and to general
industry practices. A summary of the more significant accounting policies
applied in the preparation of the accompanying consolidated financial statements
follows.
Principles of consolidation
The consolidated financial statements include the accounts of Omega Financial
Corporation and its wholly owned subsidiaries (hereafter collectively referred
to as "Omega" or the "Corporation"): Omega Bank, N.A. ("Omega Bank"),
Hollidaysburg Trust Company ("Hollidaysburg"), Penn Central National Bank ("Penn
Central"), Montour Bank ("Montour"), Central Pennsylvania Investment Co.,
Central Pennsylvania Life Insurance Co., Central Pennsylvania Leasing, Inc. and
Central Pennsylvania Real Estate, Inc. All significant intercompany transactions
and accounts have been eliminated.
In the first quarter of 1995, four of Omega's banking subsidiaries were
consolidated into two, as Peoples National Bank of Central Pennsylvania and The
Russell National Bank were merged and named Omega Bank, N.A., and the First
National Bank of Saxton was merged into Penn Central National Bank.
Investment securities
Omega adopted Statement of Financial Accounting Standard ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", as of
January 1, 1994, which required segregation of certain types of securities
within the Corporation's investment portfolio. As a result, all securities were
classified as available for sale or held to maturity. The determination as to
which portfolio to hold each security is made at the time of purchase, based on
management's intent. All equity investments are classified as available for
sale. Debt securities are classified as available for sale when the intent is
for the security to be available to be used for strategic asset/liability
management purposes such as to manage interest rate risk, prepayment risk, or
liquidity needs. Securities are classified as investment securities held to
maturity when it is management's intent to hold such securities until maturity.
Securities available for sale are stated at market value, with the unrealized
gains and losses, net of tax, reported in a separate component of shareholders'
equity, until realized. The effect of adoption of SFAS No. 115 resulted in an
increase to shareholders' equity of $2,061,000 on January 1, 1994. Investment
securities held to maturity are stated at cost, adjusted for amortization of
premium and accretion of discount on a level-yield basis. Interest and dividends
on investment securities held to maturity are recognized as income when earned.
Gains or losses on the disposition of securities are based on the net proceeds
and the adjusted carrying amount of the specific securities sold (See Note 4).
Derivative financial instruments
Omega uses interest rate swaps to achieve interest rate risk management
objectives. These contracts are accounted for on an accrual basis and the net
interest differential is recognized as an adjustment to interest income (See
Note 2). The market value of these financial instruments represents the amount
Omega would receive or pay to terminate the agreements and is determined through
dealer quotes.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Loans
Interest on all loans is accrued over the term of the loans based on the amount
of principal outstanding, except on certain installment loans granted at Omega
Bank and Montour, on which interest is recognized as income under a method that
approximates the interest method.
Loans on which the accrual of interest has been discontinued are designated as
non-accrual loans. Accrual of interest on loans is discontinued when reasonable
doubt exists as to the full, timely collection of principal or interest. When a
loan is placed on non-accrual status, all interest previously accrued but not
collected is reversed against current period income. Income on such loans is
then recognized only to the extent that cash is received and where the future
collection of principal is probable. Accruals are resumed on loans only when
they are brought fully current with respect to interest and principal, and when,
in the judgment of management, the loan is estimated to be fully collectible as
to both principal and interest.
Loan origination fees and costs
Loan origination fees and related direct origination costs for a given loan are
offset and the net amount is deferred and amortized over the life of the loan as
an adjustment to interest income.
Statements of cash flows
For the purposes of the Statements of Cash Flows, the Corporation considers Cash
and due from banks as "Cash and Cash Equivalents".
Allowance for loan losses
For financial reporting purposes, the provision for loan losses charged to
current operating income is based on management's estimates, and ultimate losses
may vary from the current estimates. These estimates are reviewed periodically
and as adjustments become necessary, they are reported in earnings in the
periods in which they become known. The adequacy of the level of the reserve is
determined by a continuing review of the composition and growth of the loan
portfolio, overall portfolio quality, specific problem loans, prior loan loss
experience and current and prospective economic conditions that may affect a
borrower's ability to pay. The loan loss provision for federal income tax
purposes is based on current income tax regulations, which allow for deductions
equal to net charge-offs.
On January 1, 1995 the Corporation adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended by SFAS No. 118. This statement addresses the accounting by creditors
for impairment of certain loans, and generally requires that impaired loans that
are within the scope of the statement be measured on either (a) the present
value of expected future cash flows discounted at the loans' effective interest
rates or (b) the fair value of the collateral if the loan is collateral
dependent. A loan is considered to be impaired when, based upon current
information and events, it is probable that the Corporation will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Prior to adoption of SFAS No. 114, the allowance for loan losses
related to impaired loans was based on undiscounted cash flows or the fair value
of the collateral for collateral-dependent loans. There was no material effect
on the Corporation's financial condition or results of operations upon adoption
of this pronouncement.
Other real estate owned and held for investment
Assets acquired in settlement of mortgage loan indebtedness are recorded as a
part of other real estate owned and held for investment and are included in
other assets at the lower of the estimated value of the asset (fair value minus
estimated costs to sell) or the carrying amount of the loan. Costs to maintain
the assets and subsequent gains and losses attributable to their disposal are
included in other income and other expenses as appropriate. No depreciation or
amortization expense is recognized. At December 31, 1995 and 1994, the carrying
value of other real estate owned and held for investment was $552,000 and
$354,000, respectively.
Bank premises and equipment and depreciation
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using both the straight-line and declining-balance
methods, over the estimated useful lives of the assets (See Note 7).
Income taxes
Omega and its subsidiaries, except for Central Pennsylvania Life Insurance
Company, file a consolidated federal income tax return. The provision for income
taxes is based upon the results of operations, adjusted principally for
tax-exempt income. Certain items of income or expense are reported in different
periods for financial reporting and tax return purposes. The tax effects of
these temporary differences are recognized currently in the deferred income tax
provision or benefit.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Under this
accounting standard, deferred tax assets or liabilities are computed based on
the difference between the financial statement and income tax bases of assets
and liabilities using the applicable enacted marginal tax rate(s). Deferred
income tax expenses or benefits are based on the changes in the deferred tax
asset or liability from period to period.
The Corporation chose not to restate prior periods in its adoption of this
statement but rather to record the cumulative effect of this adoption on its
financial position at January 1, 1993, as a change in accounting principle. The
recognition of this cumulative effect resulted in an increase in earnings of
$747,000, or $.12 per share, during the year ended December 31, 1993. The
adoption of SFAS 109 (exclusive of the cumulative effect adjustment) did not
have a material effect on the earnings of Omega during 1995, 1994 or 1993.
Earnings per share
Primary earnings per share is computed based on the weighted average number of
common shares and common share equivalents outstanding during each year. Primary
earnings per share is computed by dividing net earnings after preferred stock
dividends by the weighted average number of common shares and dilutive common
share equivalents outstanding. The outstanding preferred stock is not a common
share equivalent. On a fully diluted basis, both earnings and shares outstanding
are adjusted to assume the conversion of convertible preferred stock as of the
beginning of the year (See Note 19).
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Accounting pronouncements not yet adopted
The Financial Accounting Standards Board ("FASB") has issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", which is required to be adopted as of January 1, 1996. This
statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. Management has reviewed its assets and believes
that the adoption of this standard will not have a material effect on the
Corporation's financial condition or results of operations.
The FASB issued Statement No. 122, "Accounting for Mortgage Servicing Rights"
amending SFAS 65, "Accounting for Certain Banking Activities", requiring its
adoption as of January 1, 1996. This statement prescribes a single procedure for
the capitalization of mortgage servicing rights acquired either through loan
origination or through purchase transactions. Based upon current and predicted
level of mortgage loan sales, management believes that adoption of this
statement will not materially affect the Corporation's financial condition or
results of operations.
The FASB has also issued Statement No. 123, "Accounting for Stock-Based
Compensation", which is required to be adopted as of January 1, 1996. This
standard establishes a fair value based method of accounting for stock-based
compensation plans. It requires the use of that method for transactions with
non-employees and encourages entities to adopt that method in place of the
provisions of Accounting Practice Bulletin Opinion No. 25, "Accounting for Stock
Issued to Employees". Upon adoption on January 1, 1996, management plans to
adopt this method of accounting for only its Director Stock Option Plan, which
is not expected to have a material effect on the Corporation's financial
condition or results of operations.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments", requires disclosure of estimated fair values of
Omega's financial instruments. The following describes the estimated fair value
of the Corporation's financial instruments as well as the significant methods
and assumptions used to determine these estimated fair values.
The fair value disclosures are made based on relevant market information for
similar credit risk and management assumptions. The estimated values do not
reflect any premium or discount that may be realized from offering for sale at
one time Omega's entire holdings of a particular financial instrument. In
addition, the fair value estimates do not consider the potential income taxes or
other expenses that would be incurred in the actual sale of an asset or
settlement of a liability.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Cash and due from banks, Interest bearing deposits with other financial
institutions and Federal funds sold - The carrying amounts approximate fair
value due to the short maturity of these instruments.
Investment securities - The fair value of investment securities is determined by
reference to quoted market prices or dealer quotes (See Note 4).
Commercial, financial and agricultural loans - These loans are made on either a
floating or fixed rate basis. The estimated fair value of these loans is
determined by discounting the future contractual cash flows using rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturity. The discount rate utilized at December 31, 1995 and
1994 would approximate prime plus 100 - 200 basis points. Estimated fair value
for commercial real estate and construction loans is determined on the same
basis as the above commercial loans.
Real estate mortgage loans - This category is comprised primarily of residential
mortgages that are adjustable rate (ARMs) or fixed. The estimated fair value of
these loans is arrived at by discounting the future contractual cash flows at
the current market rate for these loans. No prepayment or acceleration of the
cash flows is assumed. The rates utilized for adjustable rate mortgages are
equivalent to the U.S. Treasury rate for the same term with a spread of
approximately 125 - 150 basis points at December 31, 1995 and a spread of 200 -
250 basis points at December 31, 1994. The current market rate for the fixed
rate mortgages ranged from 7.50% to 8.00% at December 31, 1995 and from 9.00% to
9.50% at December 31, 1994.
Personal loans and lease financing - All loans are of a fixed rate nature. The
fair value is estimated by discounting the future contractual cash flows. The
discount factor is a 48 month auto loan as published by the Board of Governors
of the Federal Reserve System Banking Section, Statistical Release G.19. This
rate was 9.05% and 9.23% on December 31, 1995 and 1994, respectively.
Demand and savings accounts - The fair value of these deposits is the amount
payable on demand.
Time deposits - The estimated fair value is determined by discounting the
contractual cash flows, using the rates currently offered for deposits of
similar remaining maturities. These rates are generally equivalent to the U.S.
Treasury rate for the same term.
All other interest bearing liabilities' carrying values approximate fair value.
Short-term borrowings are on a floating basis and approximate current market
rates. Long-term debt consists of fixed rate loans. The estimated fair value is
determined by discounting the contractual cash flows, using rates currently
offered by the FHLB. Other interest bearing liabilities are at fixed rates that
approximate current market rates.
At December 31, 1995, Omega had existing interest rate swap agreements with a
total notional balance of $20,000,000. These agreements had a favorable fair
value of $150,000 based on dealer quotes on that date. At December 31, 1994,
existing interest rate swap agreements had a total notional balance of
$15,000,000 and an unfavorable fair value of $(293,000) (See Note 13).
Commitments to extend credit and standby letters of credit - The fair value of
loan commitments and standby letters of credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreement and the present credit worthiness of the
counter parties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rate. As
of December 31, 1995 and 1994, the carrying amount approximated fair value for
these financial instruments.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>
(in thousands)
December 31, 1995 December 31, 1994
---------------------- ----------------------
Book Fair Book Fair
Value Value Value Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest bearing deposits ............... $ 843 $ 843 $ 4,182 $ 4,182
Federal funds sold ...................... 12,460 12,460 350 350
Investment securities held to maturity .. 97,863 98,207 202,212 195,107
Investment securities available for sale 121,845 121,845 25,610 25,610
Loans (net of unearned interest):
Commercial, financial and agricultural 136,537 133,618 138,256 135,764
Real estate - commercial ............. 127,462 127,637 103,892 101,000
Real estate - construction ........... 18,346 18,417 12,252 12,180
Real estate - mortgage ............... 228,037 236,585 225,179 220,304
Personal ............................. 188,808 190,994 164,821 164,864
Lease financing ...................... 3,935 3,826 3,533 3,457
Allowance for loan losses ............ (11,668) -- (11,057) --
--------- --------- --------- ---------
Total loans ............................. 691,457 711,077 636,876 637,569
Interest receivable ..................... 7,747 7,747 7,061 7,061
--------- --------- --------- ---------
Total financial assets .................. $ 932,215 $ 952,179 $ 876,291 $ 869,879
========= ========= ========= =========
Demand deposits ......................... $ 268,861 $ 268,861 $ 268,389 $ 268,389
Savings deposits ........................ 171,343 171,373 186,674 186,674
Time deposits ........................... 409,978 414,213 346,673 325,576
Short-term borrowings ................... 1,545 1,545 11,868 11,868
Long-term debt .......................... 5,700 5,700 1,050 1,026
Other interest bearing liabilities ...... 4,903 4,903 4,986 4,986
Interest payable ........................ 2,929 2,929 2,361 2,361
--------- --------- --------- ---------
Total financial liabilities ............. $ 865,259 $ 869,524 $ 822,001 $ 800,880
========= ========= ========= =========
</TABLE>
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
Omega's banking subsidiaries are required to maintain cash reserve balances with
the Federal Reserve Bank. The total required reserve balances were $5,281,000
and $4,739,000, as of December 31, 1995 and 1994, respectively.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
4. INVESTMENT SECURITIES (in thousands)
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------------
Securities classified as Held to Maturity Gross Gross
Amortized Market Weighted Unrealized Unrealized
Type and maturity Cost Value Avg. Yield Gains Losses
- ----------------------------------------------------------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- -----------------------------------------------------------
Within one year ........................................ $ 235 $ 235 4.28% $ -- $ --
After one year but within five years ................... 75 76 6.50 1 --
After five years but within ten years .................. -- -- -- -- --
After ten years ........................................ -- -- -- -- --
Obligations of state and political subdivisions
- -----------------------------------------------------------
Within one year ........................................ 790 789 5.14 1 (2)
After one year but within five years ................... 2,929 2,970 6.67 42 (1)
After five years but within ten years .................. 966 981 6.35 15 --
After ten years ........................................ 2,076 2,068 6.31 -- (8)
Corporate and other securities
- -----------------------------------------------------------
Within one year ........................................ 6,525 6,529 5.57 16 (12)
After one year but within five years ................... 18,281 18,297 5.61 152 (136)
After five years but within ten years .................. 205 205 6.51 -- --
After ten years ........................................ 150 152 8.03 2 --
Mortgage-backed securities
- -----------------------------------------------------------
Within one year ........................................ -- -- -- -- --
After one year but within five years ................... 22,091 22,200 6.06 193 (84)
After five years but within ten years .................. 17,419 17,641 6.19 223 (1)
After ten years ........................................ 21,993 21,936 5.57 112 (169)
Investment in low-income housing .......................... 387 387 N/M -- --
Common stock .............................................. 3,741 3,741 N/M -- --
-------- -------- ---- -------- --------
Total ..................................................... $ 97,863 $ 98,207 5.87% $ 757 $ (413)
======== ======== ==== ======== ========
December 31, 1995
------------------------------------------------------------------
Securities classified as Available for Sale Gross Gross
Amortized Market Weighted Unrealized Unrealized
Type and maturity Cost Value Avg. Yield Gains Losses
- ----------------------------------------------------------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- -----------------------------------------------------------
Within one year ........................................ $ 25,833 $ 25,878 5.25% $ 80 $ (35)
After one year but within five years ................... 50,198 50,277 5.56 322 (243)
After five years but within ten years .................. -- -- -- -- --
After ten years ........................................ -- -- -- -- --
Obligations of state and political subdivisions
- -----------------------------------------------------------
Within one year ........................................ 7,529 7,564 7.57 46 (11)
After one year but within five years ................... 15,791 15,916 7.24 184 (59)
After five years but within ten years .................. 4,954 4,920 7.13 40 (74)
After ten years ........................................ 10,045 9,899 7.06 58 (204)
Common stock .............................................. 4,108 7,391 N/M 3,322 (39)
-------- -------- ---- -------- --------
Total ..................................................... $118,458 $121,845 6.03% $ 4,052 $ (665)
======== ======== ==== ======== ========
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>
December 31, 1994
------------------------------------------------------------------
Securities classified as Held to Maturity Gross Gross
Amortized Market Weighted Unrealized Unrealized
Type and maturity Cost Value Avg. Yield Gains Losses
- ----------------------------------------------------------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- -----------------------------------------------------------
Within one year ........................................ $ 21,359 $ 21,130 5.38% $ 8 $ (237)
After one year but within five years ................... 50,600 47,686 5.40 7 (2,921)
After five years but within ten years .................. 7,777 7,648 7.99 10 (139)
After ten years ........................................ -- -- -- -- --
Obligations of state and political subdivisions
- -----------------------------------------------------------
Within one year ........................................ 10,122 10,103 7.91 40 (59)
After one year but within five years ................... 33,859 33,138 8.56 197 (918)
After five years but within ten years .................. 3,985 3,741 7.54 4 (248)
After ten years ........................................ 6,822 6,689 8.63 46 (179)
Corporate and other securities
- -----------------------------------------------------------
Within one year ........................................ 7,257 7,206 7.01 17 (68)
After one year but within five years ................... 23,420 22,388 5.76 11 (1,043)
After five years but within ten years .................. 3,311 3,247 5.76 -- (64)
After ten years ........................................ 150 145 4.51 1 (6)
Mortgage-backed securities
- -----------------------------------------------------------
Within one year ........................................ -- -- -- -- --
After one year but within five years ................... 8,906 8,417 5.66 -- (489)
After five years but within ten years .................. 8,831 8,598 5.38 1 (234)
After ten years ........................................ 11,766 10,924 5.41 8 (850)
Investment in low-income housing .......................... 313 313 N/M -- --
Common stock .............................................. 3,734 3,734 N/M -- --
-------- -------- ---- -------- --------
Total ..................................................... $202,212 $195,107 6.44% $ 350 $ (7,455)
======== ======== ==== ======== ========
December 31, 1994
------------------------------------------------------------------
Securities classified as Available for Sale Gross Gross
Amortized Market Weighted Unrealized Unrealized
Type and maturity Cost Value Avg. Yield Gains Losses
- ----------------------------------------------------------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- -----------------------------------------------------------
Within one year ........................................ $ 9,004 $ 8,924 5.13% $ -- $ (80)
After one year but within five years ................... 10,310 10,064 6.13 -- (246)
After five years but within ten years .................. -- -- -- -- --
After ten years ........................................ -- -- -- -- --
Obligations of state and political subdivisions
- -----------------------------------------------------------
Within one year ........................................ -- -- -- -- --
After one year but within five years ................... 5 5 6.17 -- --
After five years but within ten years .................. 182 143 6.60 -- (39)
After ten years ........................................ 82 69 6.41 -- (13)
Common stock .............................................. 4,150 6,405 N/M 2,333 (78)
-------- -------- ---- -------- --------
Total ..................................................... $ 23,733 $ 25,610 5.68% $ 2,333 $ (456)
======== ======== ==== ======== ========
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1993
------------------------------------------------------------------
Securities classified as Held to Maturity Gross Gross
Amortized Market Weighted Unrealized Unrealized
Type and maturity Cost Value Avg. Yield Gains Losses
- ----------------------------------------------------------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- -----------------------------------------------------------
Within one year ........................................ $ 25,252 $ 25,496 6.01% $ 251 $ (7)
After one year but within five years ................... 62,136 62,231 5.13 435 (340)
After five years but within ten years .................. 5,091 5,233 7.43 153 (11)
After ten years ........................................ -- -- -- -- --
Obligations of state and political subdivisions
- -----------------------------------------------------------
Within one year ........................................ 13,680 13,753 8.53 84 (11)
After one year but within five years ................... 41,061 41,819 8.45 940 (182)
After five years but within ten years .................. 8,010 7,990 8.33 94 (114)
After ten years ........................................ 6,057 6,163 10.24 157 (51)
Corporate and other securities
- -----------------------------------------------------------
Within one year ........................................ 1,808 1,833 7.56 25 --
After one year but within five years ................... 27,408 27,505 5.61 224 (127)
After five years but within ten years .................. 6,521 6,538 4.68 54 (37)
After ten years ........................................ 1,607 1,629 5.50 22 --
Mortgage-backed securities
- -----------------------------------------------------------
Within one year ........................................ 12 12 6.26 -- --
After one year but within five years ................... 8,993 8,956 5.60 28 (65)
After five years but within ten years .................. 8,584 8,660 5.78 89 (13)
After ten years ........................................ 13,870 13,940 5.62 138 (68)
Investment in low-income housing .......................... 95 95 N/M -- --
Common stock .............................................. 6,565 9,413 N/M 2,884 (36)
-------- -------- ---- -------- --------
Total ..................................................... $236,750 $241,266 6.45% $ 5,578 $ (1,062)
======== ======== ==== ======== ========
N/M = Not meaningful
</TABLE>
Investment yields were computed on a tax equivalent basis (using a 35% tax rate
for 1995 and a 34% tax rate for 1994 and 1993) for obligations of state and
political subdivisions. Total weighted average yield does not include the common
stock holdings.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
In December of 1995, the Corporation reclassified approximately $93 million of
investment securities from held to maturity to available for sale. In order to
provide management with additional liquidity and flexibility for funding loan
growth, certain U.S. Treasury and Agency securities were reclassified. Also,
certain tax exempt state and municipal securities were reclassified in order to
provide management with the ability to respond to implications of possible tax
law changes. This reclassification was allowed under Financial Accounting
Standards Board guidance which permitted institutions to make a one-time
reassessment of the appropriateness of investment security classifications. As a
result of this reclassification, the unrealized gain on securities recorded as a
component of shareholders' equity decreased approximately $59,000, net of tax.
The following details the types and balances transferred (in thousands):
Amortized Market
Cost Value
-------- -------
U.S. Treasury securities and obligations of other U.S
Government agencies and corporations ................. $54,985 $54,921
Obligations of state and political subdivisions .......... 38,231 38,204
------- -------
$93,216 $93,125
======= =======
Certain obligations of the U.S. Government and state and political subdivisions
are pledged to secure public monies as required by law and for other purposes.
The carrying value of the pledged assets amounted to $68,225,000, $65,500,000
and $74,657,000 at December 31, 1995, 1994 and 1993, respectively.
In addition to cash received from the scheduled maturities of securities, some
investment securities are sold at current market values during the course of
normal operations. Following is a summary of proceeds received from all
investment securities transactions, and the resulting realized gains and losses
(in thousands):
Years Ended December 31,
--------------------------
1995 1994 1993
------- ------- -------
Gross proceeds from securities transactions ...... $76,120 $73,405 $91,110
Securities available for sale:
Realized gains ................................. 700 810 --
Realized losses ................................ 5 -- --
Securities held to maturity:
Realized gains ................................. 35 8 584
Realized losses ................................ 120 34 84
5. LOANS
Loans outstanding at the end of each year consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $136,537 $138,267 $147,600 $159,624 $174,880
Real estate - commercial ............. 127,462 103,892 110,895 97,519 105,524
Real estate - construction ........... 18,346 12,252 12,394 16,284 17,277
Real estate - mortgage ............... 228,037 225,179 215,389 222,253 162,596
Personal ............................. 191,772 165,050 147,484 137,750 150,841
Lease financing ...................... 4,486 4,071 2,932 2,677 4,110
-------- -------- -------- -------- --------
Total ............................. $706,640 $648,711 $636,694 $636,107 $615,228
======== ======== ======== ======== ========
</TABLE>
Non-accrual loans at December 31, 1995 and 1994 were $1,932,000 and $1,596,000,
respectively, representing .27% and .25% of loans. Interest income not recorded
on non-accrual loans in 1995, 1994 and 1993 was $110,000, $100,000 and $165,000,
respectively. Gross interest income that would have been recorded on non-accrual
loans had these loans been in a performing status was $208,000 in 1995, of which
$98,000 was included in interest income for the year ended December 31, 1995.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
6. ALLOWANCE FOR LOAN LOSSES
A summary of the transactions in the allowance for loan losses for the last five
years follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance of allowance - beginning of period .......... $11,057 $11,168 $11,338 $ 8,100 $ 6,213
Loans charged off:
Commercial, financial and agricultural ........... 149 480 674 927 876
Real estate -
Commercial .................................... -- 5 148 144 392
Mortgage ...................................... 119 130 62 39 117
Personal ......................................... 585 485 807 815 1,951
------- ------- ------- ------- -------
Total charge-offs ............................. 853 1,100 1,691 1,925 3,336
Recoveries of loans previously charged off:
Commercial, financial and agricultural ........... 101 160 73 238 49
Real estate -
Commercial .................................... -- 17 21 -- 141
Mortgage ...................................... 87 45 19 28 169
Personal ......................................... 147 144 275 263 146
------- ------- ------- ------- -------
Total recoveries ............................ 335 366 388 529 505
------- ------- ------- ------- -------
Net charge-offs ..................................... 518 734 1,303 1,396 2,831
Provision for loan losses ........................... 713 623 1,133 4,634 4,718
Allowance acquired through bank purchase............. 416 -- -- -- --
------- ------- ------- ------- -------
Balance of allowance - end of period ................ $11,668 $11,057 $11,168 $11,338 $ 8,100
======= ======= ======= ======= =======
Ratio of net charge-offs during period to
average loans outstanding ........................... 0.08% 0.12% 0.21% 0.22% 0.47%
======= ======= ======= ======= =======
</TABLE>
As of December 31, 1995, the recorded investment in the loans for which
impairment has been recognized in accordance with SFAS No. 114 is $849,000. The
total allowance for loan losses related to those impaired loans is $419,000. It
is the policy of the corporation to recognize income on impaired loans on a cash
basis, only to the extent that it exceeds principal balance recovery.
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following (in thousands):
Estimated December 31,
Useful Life 1995 1994
---------- -------- --------
Land ...................................... -- $ 2,192 $ 2,061
Premises and leasehold improvements ....... 5-40 years 18,901 17,540
Furniture, computer software
and equipment .......................... 3-20 years 14,514 13,504
Construction in progress .................. -- 339 281
-------- --------
35,946 33,386
Less accumulated depreciation ............. (18,793) (16,866)
-------- --------
$ 17,153 $ 16,520
======== ========
Depreciation expense on premises and equipment charged to operations was
$1,987,000 in 1995, $1,798,000 in 1994 and $1,762,000 in 1993.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
8. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following (in thousands):
December 31,
-----------------
1995 1994
------- -------
Notes payable to the U.S. Treasury Department, interest pay-
able at 1/4 to 1% less than the average federal funds rate $ 1,120 $ 1,568
Federal funds purchased from Federal Reserve Bank
at daily federal funds rate ............................... -- 900
Federal funds purchased from correspondent financial
institutions at daily federal funds rate .................. -- 5,400
Federal Home Loan Bank advances, interest payable at
5.22% on December 31, 1995, and at daily federal funds
rate on December 31, 1994 ................................. 425 4,000
------- -------
$ 1,545 $11,868
======= =======
Omega has lines of credit established with various financial institutions for
overnight funding needs. These lines provided a total of $20,000,000 and
$23,000,000 in 1995 and 1994, respectively, with interest payable at the daily
federal funds rate. There were borrowings of $5,400,000 on December 31, 1994
under these credit facilities. Additionally, Omega has a $92,964,000 line of
credit with the Federal Home Loan Bank of Pittsburgh for overnight funding
needs.
Omega also has a term line of credit with the Federal Home Loan Bank of
Pittsburgh with a borrowing capacity of $40,469,000. Long-term debt outstanding
against this line was $5,700,000 and $1,050,000 as of December 31, 1995 and
1994, respectively (See Note 9). The Corporation must maintain sufficient
qualifying collateral, as defined, to secure all outstanding advances.
9. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
December 31,
---------------
1995 1994
------ ------
Notes payable to Federal Home Loan Bank, with fixed rates
payable between 4.10% and 5.13% ............................. $ 700 $1,050
Note payable to Federal Home Loan Bank, with variable rate
payable at Libor plus 2 basis points ........................ 5,000 --
------ ------
$5,700 $1,050
====== ======
The notes payable in the amount of $5,700,000 at December 31, 1995 with the
Federal Home Loan Bank have staggered maturities over the next three years as
shown below. Omega must maintain sufficient qualifying collateral, as defined,
to secure all outstanding advances.
The outstanding long-term debt matures as follows (in thousands):
1996.............................. $ 700
1997.............................. --
1998.............................. 5,000
------
$5,700
======
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
10. OPERATING LEASE OBLIGATIONS
The Corporation has entered into a number of leasing arrangements which are
classified as operating leases. The operating leases are for several branch
locations, automatic teller machines (ATM), computer equipment and automobiles.
The majority of the branch location and ATM leases are renewable at the
Corporation's option. In addition, future rental payments on many of the branch
and ATM leases are subject to change in relation to fluctuations in the Consumer
Price Index. Future minimum lease commitments are based on current rental
payments.
The following is a summary of future minimum rental payments for the next five
years required under operating leases that have initial or remaining
noncancellable lease terms in excess of one year as of December 31, 1995 (in
thousands):
Years ending December 31,
1996....................................... $ 290
1997....................................... 261
1998....................................... 234
1999....................................... 174
2000....................................... 124
Later years................................ 1,203
-----------
Total minimum payments required............ $ 2,286
===========
Rental expense charged to operations, net of sublease income, was $60,000,
$44,000 and $85,000 in 1995, 1994 and 1993, respectively, which includes
short-term cancellable leases.
11. INCOME TAXES
The components of income tax expense for the three years ended December 31, 1995
were (in thousands):
1995 1994 1993
------- ------- -------
Current tax expense ............... $ 5,947 $ 5,123 $ 4,464
Deferred tax expense .............. (214) (246) (224)
------- ------- -------
Total tax expense ................. $ 5,733 $ 4,877 $ 4,240
======= ======= =======
Income tax expense related to realized securities gains was $213,000 in 1995,
$269,000 in 1994 and $170,000 in 1993.
The reasons for the differences between the income tax expense and the amount
computed by applying the statutory federal income tax rate to pre-tax earnings
are as follows:
Years Ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
Federal tax at statutory rate ........... 35.0% 34.3% 34.0%
Tax-exempt income ....................... (4.6) (6.1) (7.7)
Low income housing credits .............. (0.8) (0.1) --
Other, net .............................. (0.6) (0.5) (0.1)
----- ----- -----
Effective rate .......................... 29.0% 27.6% 26.2%
===== ===== =====
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Deductible temporary differences and taxable temporary differences gave rise to
a net deferred tax asset for Omega as of December 31, 1995 and 1994. The
components giving rise to the net deferred tax assets are detailed below (in
thousands):
December 31,
1995 1994
------- -------
Deferred Tax Assets
Loan loss reserve ............................. $ 3,774 $ 3,490
Deferred compensation ......................... 530 474
Net deferred loan costs and fees .............. -- 89
Employee benefits ............................. 23 19
Other ......................................... 69 102
------- -------
Total ....................................... 4,396 4,174
Deferred Tax Liabilities
Depreciation .................................. (347) (356)
Unrealized net gains on securities ............ (1,177) (649)
Intangibles ................................... (570) --
Auto leases, net .............................. (439) (233)
Other ......................................... (340) (419)
------- -------
Total ....................................... (2,873) (1,657)
Net deferred tax asset ------- -------
included in other assets ...................... $ 1,523 $ 2,517
======= =======
Omega has concluded that the deferred tax assets are realizable (on a more
likely than not basis) through the combination of future reversals of existing
taxable temporary differences, carryback availability, certain tax planning
strategies and through expected future taxable income.
12. EMPLOYEE BENEFIT PLANS
Omega Retirement Plan - Defined Benefit
Omega has a defined benefit retirement plan covering substantially all its
employees at Omega Bank, Penn Central and the parent company. Formerly, Omega
and Penn Central Bancorp had separate defined benefit plans. During 1994, the
plans were merged.
During 1994, management developed a plan to terminate the combined defined
benefit plan and transfer the plan's assets and obligations at the settlement
date to a defined contribution plan. In anticipation of the execution of
management's plan, Omega froze the accrual of benefits under the Omega defined
benefit plan effective April 15, 1994. Effective December 31, 1993, the accrual
of benefits under the Penn Central Bancorp plan was frozen. No pension expense
or income was recognized in 1995 or 1994 as a result of this planned
termination.
The freezing of benefit accrual reduced the projected benefit obligation under
Omega's defined benefit plan. This reduction was offset by a reduction in the
fair value of plan assets which occurred as a result of changes in the
prevailing interest rate environment. The termination was approved by Omega's
board of directors during 1995 and the Corporation is awaiting approval from the
IRS and ERISA. Omega has purchased an annuity contract which effectively settled
the Corporation's obligations to retired employees receiving benefits.
Management expects to complete the termination of the combined defined benefit
plan in 1996. In completing the remaining settlement of the defined benefit plan
and the transferring of assets and obligations to a defined contribution plan,
any shortfall between the then fair value of plan assets and the final
settlement amount of plan obligations will be charged against earnings. However,
management does not believe the net impact of the termination of Omega's defined
benefit plan will have a material effect on Omega's financial position or
results of operations.
The merged plan is noncontributory and benefits are based on years of service
and lifetime average level of compensation before retirement. The funding policy
of Omega is to contribute annually the maximum amount deductible for federal
income tax purposes.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Pension expense (income) for 1993 included the following components based on an
actuarial valuation as of January 1, 1993 (in thousands):
1993
-----
Service cost - benefits earned during the year .............. $ 340
Interest cost on projected benefit obligation ............... 515
Return on plan assets ....................................... (655)
Net amortization and deferral ............................... (94)
-----
$ 106
=====
The funded status of the plan at December 31, 1994 is set forth below (in
thousands). Plan assets consist primarily of liquid U.S. government
securities; at December 31, 1994, investments in common stock of Omega
represent 4.7% of plan assets.
1994
-------
Actuarial present value of vested benefit obligation ....... $ 5,656
=======
Accumulated benefit obligation ............................. $ 5,710
=======
Projected benefit obligation ............................... $ 5,710
Plan assets at fair value .................................. 7,383
-------
Excess of assets over projected benefit obligation ......... 1,673
Unrecognized net assets at January 1, 1994 ................. (2,592)
Unrecognized net 1994 loss ................................. 887
-------
Net pension liability at December 31, 1994 ................. $ (32)
=======
The discount rate, rate of compensation increase and rate of return on plan
asset assumptions used in the determination of the benefit obligations and
expenses depicted above are as follows:
1994 1993
----- -----
Discount rate .................................. 7.5% 7.3%
Long-term rate of compensation increase ........ N/A 4.7
Long-term rate of return on plan assets ........ N/A 8.0
Omega Retirement Plan - Defined Contribution
Omega maintains two defined contribution plans for eligible employees as
defined. Contributions to the plans totaled $135,000, $143,000 and $383,000, for
the years ended 1995, 1994 and 1993, respectively.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Omega Stock Plans
The activity in options under the stock purchase and stock option plans follow:
<TABLE>
<CAPTION>
Employee Employee Director
Stock Purchase Plan Stock Option Plan Stock Option Plan
------------------- ----------------- -----------------
Number Number Number
of Shares Price of Shares Price of Shares Price
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 ......... 135,521 148,517
Exercised 1993 .................... (62,307) (10,853)
Expired 1993 ...................... (15,922)
Granted in 1993 ................... 33,862 22.05 30,000 18.50
------- -------
Balance December 31, 1993 ......... 91,154 167,664
Exercised 1994 .................... (24,391) (38,764)
Expired 1994 ...................... (11,419) (4,000)
Granted in 1994 ................... 57,251 22.05 31,500 24.50 2,600 24.50
------- ------- ------
Balance December 31, 1994 ......... 112,595 156,400 2,600
Exercised 1995 .................... (37,435) (22,232)
Expired 1995 ...................... (11,493) --
Granted in 1995 ................... 56,572 28.35 44,700 24.50 2,600 25.75
------- ------- ------
Balance December 31, 1995 ......... 120,239 178,868 5,200
Exercisable as of December 31, 1995 120,239 134,168 2,600
======= ======= ======
Available for Grant as of
December 31, 1995 ................. 467,027 495,865 14,800
======= ======= ======
</TABLE>
The Employee Stock Purchase Plan ("Plan") is administered by the Compensation
Committee ("Committee") of the Omega Board of Directors ("Board"), consisting of
members who are not eligible to receive options under the Plan. The Committee is
authorized to grant options to purchase common stock of Omega to all employees
of Omega and its subsidiaries who meet certain service requirements. For 27
months following the date of the grant, options are exercisable at the lesser of
90% of the fair market value of the shares on the date of grant or 90% of the
fair market value on the date of exercise. After 27 months, the options are
exercisable at 90% of the fair market value on the exercise date. These options
are scheduled to expire through December 31, 2000. The aggregate number of
shares which may be issued upon the exercise of options under this plan is
750,000 shares. Options exercised in 1995 ranged in price from $16.65 to $23.85.
The Stock Option Plan ("SOP") is administered by the Committee, whose members
are not eligible to receive options under the SOP. The Committee determines,
among other things, which officers and key employees will receive options, the
number of shares to be subject to each option, the option price and the duration
of the option. Options are exercisable at the fair market value of the shares at
date of grant. These options are scheduled to expire through January 1, 2005.
The aggregate number of shares which may be issued upon the exercise of options
under this plan is 750,000 shares. Options exercised in 1995 ranged in price
from $15.00 to $16.50.
The Non-Employee Director Stock Option Plan ("DSOP") is administered by the
Board. Options are granted at the discretion of the Board to non-employee
directors of Omega. Options are exercisable at the fair market value of the
shares at the date of grant. These options are scheduled to expire through May
1, 2005. The aggregate number of shares which may be issued upon the exercise of
options under this plan is 20,000.
Omega Employee Stock Ownership Plan
Omega has an employee stock ownership plan ("ESOP") for the benefit of employees
that meet certain age and service requirements. For the years ended December 31,
1995, 1994 and 1993, expenses incurred under this plan were $1,250,000,
$1,173,000 and $527,000, respectively. Of the expense incurred in 1995, the
amount attributable to the leveraged ESOP transaction corresponds to the
proportion of the number of preferred shares allocated to participants annually.
The majority of the funds obtained through these contributions were used to
purchase Omega stock or meet debt service on the ESOP debt (see comment below);
in 1995, 37,534 shares of Omega common stock were acquired (none from Omega
treasury) at a cost of $1,072,000, and $141,000 was applied to debt service. In
1994, 45,841 shares of Omega common stock were acquired (none from Omega
treasury) at a cost of $1,159,000, and $141,000 was applied to debt service. At
December 31, 1995 the ESOP holds 237,117 shares of Omega common stock
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
and 219,781 shares of preferred stock. The ESOP is administered by a Board of
Trustees and an Administrative Committee appointed by the Board. All of the
Trustees are officers, employees, or directors of Omega.
On July 1, 1990, the ESOP entered into a $5,000,000 leveraged transaction for
the purpose of acquiring 219,781 shares of convertible preferred stock from the
Corporation for $22.75 per share. The original term of the loan was for twenty
years and carried a fixed interest rate of 10.65% for the first ten years.
Thereafter, the ESOP had the option to take a fixed rate or various variable
rate options for the remaining term of the loan. On July 1, 1992, this loan was
refinanced at a fixed rate of 8.80%, with all other terms remaining the same.
The loan is collateralized by the Corporation's administration center and
guarantee.
In order to meet the future annual debt service of $537,000, which includes
principal and interest, the ESOP will receive $396,000 in dividends from the
preferred stock and the remainder in contributions from the Corporation. In
1995, the debt service required $537,000, of which $393,000 represented interest
expense incurred by the ESOP. In 1994, the ESOP paid $537,000 in debt service,
of which $405,000 represented interest. Outstanding ESOP debt as of December 31,
1995 was $4,373,000. Scheduled principal repayments on the ESOP debt are as
follows:
1996......................... $ 157,000
1997......................... 171,000
1998......................... 187,000
1999......................... 204,000
2000......................... 222,000
Later years.................. 3,433,000
Executive Supplemental Income Plan
The executive supplemental income benefit plan ("ESI") provides executive life
insurance and supplemental retirement benefits for certain officers of Omega
Bank. The present value of the supplemental retirement benefits to be paid under
the ESI program is being accrued over the estimated remaining service period of
the officers designated to receive these benefits. At December 31, 1995, six
officers and former officers were designated to be paid these supplemental
retirement benefits. The liability for these future ESI obligations was $983,000
and $886,000 at December 31, 1995 and 1994, respectively. For the years ended
December 31, 1995, 1994 and 1993, $128,000, $128,000 and $97,000, respectively,
were charged to operations in connection with this program.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, financial
guarantees, financial options and interest exchange agreements. These
instruments involve, to varying degrees, elements of credit and interest rate
risk that are not recognized in the consolidated financial statements.
Exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit and financial
guarantees written is represented by the contractual notional amount of those
instruments. The Corporation uses the same credit policies in making these
commitments as it does for on-balance sheet instruments. The Corporation
controls the credit risk of its financial options and interest exchange
agreements through credit approvals, limits and monitoring procedures; however,
it does not generally require collateral for such financial instruments since
there is no principal credit risk.
The Corporation had outstanding loan origination commitments aggregating
$44,673,000 and $12,264,000 at December 31, 1995 and 1994, respectively. In
addition, the Corporation had $63,709,000 and $83,893,000 outstanding in unused
lines of credit commitments extended to its customers at December 31, 1995 and
1994, respectively.
There were no financial guarantees or options outstanding at December 31, 1995.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since a portion of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained by
the Corporation upon extension of credit is based on management's credit
evaluation of the counterparty.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Standby letters of credit are instruments issued by the Corporation which
guarantee the beneficiary payment by the bank in the event of default by the
Corporation's customer in the non-performance of an obligation or service. Most
standby letters of credit are extended for one year periods. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Corporation holds collateral
supporting those commitments for which collateral is deemed necessary. At
December 31, 1995 and 1994, standby letters of credit issued and outstanding
amounted to $15,770,000 and $10,327,000, respectively.
Omega enters into interest rate swap contracts in managing its interest rate
risk associated with its commercial loans whose rates float with the prime rate.
Under interest rate swaps, Omega agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and floating rate
interest amounts calculated by reference to an agreed notional principal amount.
At December 31, 1995 and 1994 the Corporation had the following interest rate
swap agreements in place:
Notional Amount
(in thousands)
--------------
Matures Fixed Rate 1995 1994
------- ---------- ---- ----
10/23/95 .................... 6.75 $ -- $ 5,000
8/01/96 .................... 8.52 10,000 10,000
8/15/97 .................... 8.78 10,000 --
On these agreements the Corporation pays the prime rate and receives the fixed
rate. The notional amounts of interest rate swap agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of Omega's
exposure through this use of derivatives. The amounts exchanged are determined
by reference to the notional amounts. Omega is exposed to credit-related losses
in the event of nonperformance by counterparties to financial instruments but
does not expect any counterparties to fail to meet their obligations, given
their high credit ratings. The fair value of these interest rate swap contracts
reflects the estimated amounts that Omega would receive or pay to terminate the
contracts at the reporting date and are based upon dealer quotes (See Note 2).
As of December 31, 1995, there were no concentrations of credit to any
particular industry equaling 10% or more of total outstanding loans. Omega's
business activities are geographically concentrated in Central Pennsylvania,
within Centre, Blair, Huntingdon, Mifflin, Juniata, Clinton, Montour and Bedford
counties. Omega has a diversified loan portfolio; however, a substantial portion
of its debtors' ability to honor their obligations is dependent upon the economy
in Central Pennsylvania.
14. COMMITMENTS AND CONTINGENT LIABILITIES
In 1994, the Corporation entered into a six year agreement to obtain data
processing services from an outside service bureau. The agreement provides for
termination penalties if it is canceled prior to the end of the commitment
period by the Corporation.
In 1995, the Corporation committed to various capital expenditures projected for
completion in 1996. They include certain information technology purchases which
in the aggregate total $521,000, and certain new facilities which total
$342,000.
The Corporation, from time to time, may be a defendant in legal proceedings
relating to the conduct of its banking business. Most of such legal proceedings
are a normal part of the banking business, and in management's opinion, the
financial position and results of operations of the Corporation would not be
materially affected by the outcome of such legal proceedings.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
15. SHAREHOLDERS' EQUITY
Five million shares of preferred stock with a par value of $5.00 per share are
authorized for issuance. The Board has the ability to fix the voting, dividend,
redemption and other rights of the preferred stock, which can be issued in one
or more series.
There are 219,781 shares of Class A cumulative convertible preferred stock
issued to Omega's Employee Stock Ownership Plan (ESOP) for a total of
$5,000,000. The preferred stock is convertible into Omega's common stock at the
current rate of 1.05 common shares for one preferred share in certain events.
The preferred stock is restricted to the ESOP and can be redeemed by the
Corporation at any time with a decreasing premium over the first ten years.
Dividends on the preferred stock are fixed at $1.80 per share per year, and are
required to be paid prior to any dividend payments on the common stock. The
preferred stock has preference in liquidation over the common stock in the
amount of $22.75 per share, plus all dividend arrearages, prior to payments to
common shareholders. Full voting rights are held by the preferred stock owner.
16. ACQUISITION
On July 31, 1995, the Corporation completed the acquisition of Montour Bank, a
bank incorporated under the Pennsylvania Banking Code of 1965. The transaction
was accounted for under the purchase method. In accordance with the Agreement
and Plan of Reorganization, the Corporation purchased all of the outstanding
shares of Montour common stock. For each share of Montour common stock,
shareholders received, at their election and subject to certain adjustment,
one-half share of Omega common stock or $12.00 in cash, or a combination of
stock and cash, with 43.1% of the total outstanding shares being converted to
cash. Warrant holders received $2.00 per warrant. Total consideration for the
acquisition was $5.727 million in the aggregate, with 123,957 shares of Omega
stock issued and $2.442 million paid in cash. Montour's assets at July 31, 1995
were $44.641 million.
17. RELATED-PARTY TRANSACTIONS
Omega's banks have granted loans to certain officers and directors of Omega and
its subsidiaries and to their associates. These loans were made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with unrelated persons, and in the opinion
of management, do not involve more than normal risk of collection. The aggregate
dollar amount of these loans was $14,641,000, $13,428,000 and $17,843,000 at
December 31, 1995, 1994 and 1993, respectively. During 1995, $6,035,000 of new
loans were made and repayments totaled $4,822,000. None of these loans were past
due, in non-accrual status or restructured at December 31, 1995.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
18. OMEGA FINANCIAL CORPORATION (PARENT COMPANY ONLY)
Financial information (in thousands):
CONDENSED BALANCE SHEETS
(Unaudited)
December 31,
----------------------
1995 1994
-------- --------
ASSETS:
Cash ............................................ $ 921 $ 2,356
Investment in bank subsidiaries ................. 114,106 100,937
Investment in non-bank subsidiaries ............. 6,613 6,786
Premises and equipment, net ..................... 6,444 6,683
Other assets .................................... 1,317 1,695
-------- --------
TOTAL ASSETS ....................................... $129,401 $118,457
======== ========
LIABILITIES:
Accounts payable and other liabilities .......... $ 857 $ 830
ESOP debt ....................................... 4,373 4,518
-------- --------
TOTAL LIABILITIES .................................. 5,230 5,348
SHAREHOLDERS' EQUITY ............................... 124,171 113,109
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $129,401 $118,457
======== ========
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
INCOME:
Dividends from:
Bank subsidiaries ............................... $ 6,736 $ 4,252 $ 5,143
Non-bank subsidiaries ........................... 1,000 1,061 --
Management fees from subsidiaries ..................... 7,486 6,693 4,981
-------- -------- --------
TOTAL INCOME .......................................... 15,222 12,006 10,124
EXPENSE:
Interest expense ................................ 2 -- 25
Other ........................................... 7,486 6,693 5,471
-------- -------- --------
TOTAL EXPENSE ......................................... 7,488 6,693 5,496
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES ........... 7,734 5,313 4,628
Income tax benefit .................................... (27) (19) (68)
-------- -------- --------
7,761 5,332 4,696
Equity in undistributed net income of subsidiaries .... 6,308 7,453 8,215
-------- -------- --------
Income before cumulative change in accounting principle 14,069 12,785 12,911
Cumulative effect of change in accounting principle ... -- -- (232)
-------- -------- --------
NET INCOME ............................................ $ 14,069 $ 12,785 $ 12,679
======== ======== ========
</TABLE>
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 14,069 $ 12,785 $ 12,679
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ....................................... 652 615 564
Effect of change in accounting principle ........... -- -- 232
Decrease (increase) in tax receivable .............. (168) 13 (125)
(Increase) decrease in interest and other receivable 546 (574) (166)
Increase (decrease) in taxes payable ............... 18 (177) 29
Decrease in accounts payable and accrued expenses .. (23) (269) (184)
Undistributed earnings of subsidiaries ............. (6,284) (8,575) (8,295)
-------- -------- --------
Total adjustments .................................. (5,259) (8,967) (7,945)
-------- -------- --------
Net cash provided by operating activities ................ 8,810 3,818 4,734
Cash flows from investing activities:
Acquisition of bank ................................... (2,442) -- --
Capital expenditures .................................. (413) (432) (463)
Net cash used in investing activites ..................... (2,855) (432) (463)
-------- -------- --------
Cash flows from financing activities:
Principal payment on long-term debt ................... -- -- (1,400)
Dividends paid ........................................ (4,708) (4,334) (3,926)
Net change in interest bearing liabilities ............ 32 30 --
Tax benefit from preferred stock dividend
and stock option activity .......................... 154 139 241
Issuance of common stock, net of retirement
of common stock .................................... 832 814 1,199
Issuance, acquisition and sale of treasury stock, net . (3,700) 38 --
-------- -------- --------
Net cash used in financing activities .................... (7,390) (3,313) (3,886)
-------- -------- --------
Net increase (decrease) in cash and due from banks ....... $ (1,435) $ 73 $ 385
======== ======== ========
Cash and due from banks at beginning of period ........... $ 2,356 $ 2,283 $ 1,898
Cash and due from banks at end of period ................. 921 2,356 2,283
-------- -------- --------
Net increase (decrease) in cash and due from banks ....... $ (1,435) $ 73 $ 385
======== ======== ========
Interest paid ............................................ $ -- $ -- $ 25
Income taxes paid ........................................ 5,891 5,108 3,470
</TABLE>
REGULATORY MATTERS
Certain restrictions exist regarding the ability of Omega's banking subsidiaries
to transfer funds to Omega in the form of cash dividends, loans and advances.
The approval of the Comptroller of the Currency is required to pay dividends in
excess of earnings retained in the current year plus retained net profits for
the preceding two years. At December 31, 1995, the total dividends which could
be paid to Omega without permission from the Comptroller of the Currency was
$26,459,000.
Under Federal Reserve restrictions, the banking subsidiaries are limited to the
amount they may loan to their affiliates, including Omega. At December 31, 1995,
Omega's banks had an aggregate lending limit to affiliates of $14,913,000 and no
amount was outstanding with Omega.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
19. CALCULATION OF EARNINGS PER SHARE
The following table shows the calculation of earnings per share for the years
ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
(in thousands, except per share data)
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Primary earnings per share
Net income before effect of accounting change .. $ 14,069 $ 12,785 $ 11,932
Dividend requirements for preferred stock,
net of tax benefits ......................... (288) (285) (278)
-------- -------- --------
Net earnings applicable to common stock
before effect of accounting change .......... 13,781 12,500 11,654
Effect of accounting change .................... -- -- 747
-------- -------- --------
Net earnings applicable to common stock
after effect of accounting change ........... $ 13,781 $ 12,500 $ 12,401
======== ======== ========
Shares and equivalents outstanding:
Weighted average number of common
shares outstanding .......................... 5,989 5,957 5,905
Common stock equivalents - options ............. 60 58 72
-------- -------- --------
Weighted average of common shares
outstanding and equivalents ................. 6,049 6,015 5,977
======== ======== ========
Primary earnings per common share
before effect of accounting change .......... $ 2.28 $ 2.08 $ 1.95
Primary earnings per common share
applicable to effect of accounting change ... -- -- 12
-------- -------- --------
Primary earnings per common share
after effect of accounting change ........... $ 2.28 $ 2.08 $ 2.07
======== ======== ========
Fully diluted earnings per share
Net income before effect of accounting change .. $ 14,069 $ 12,785 $ 11,932
Additional cash contribution required to service
debt on assumed conversion of preferred
stock (tax effected) ........................ (180) (184) (171)
-------- -------- --------
Net earnings applicable to common stock
before effect of accounting change .......... 13,889 12,601 11,761
Effect of accounting change .................... -- -- 747
-------- -------- --------
Net earnings applicable to common stock
after effect of accounting change ........... $ 13,889 $ 12,601 $ 12,508
======== ======== ========
Shares and equivalents outstanding:
Weighted average number of common
shares outstanding .......................... 5,989 5,957 5,905
Common stock equivalents - options ............. 77 59 76
Assumed conversion of preferred stock
outstanding and equivalents ................. 230 230 230
-------- -------- --------
Weighted average of common shares
outstanding and equivalents ................. 6,296 6,246 6,211
======== ======== ========
Fully diluted earnings per common share
before effect of accounting change .......... $ 2.21 $ 2.02 $ 1.89
Fully diluted earnings per common share
applicable to effect of accounting change ... -- -- 12
-------- -------- --------
Fully diluted earnings per common share
after effect of accounting change ........... $ 2.21 $ 2.02 $ 2.01
======== ======== ========
</TABLE>
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the years ended December 31,
1995 and 1994 follow (in thousands, except per share data):
1995 Quarter ended
---------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Total interest income .......... $17,041 $17,761 $19,000 $19,171
Net interest income ............ 10,483 10,733 11,380 11,360
Provision for loan losses ...... 100 248 109 256
Income before income taxes ..... 4,406 5,048 5,292 5,056
Applicable income taxes ........ 1,271 1,514 1,532 1,416
Net income ..................... 3,135 3,534 3,760 3,640
Primary earnings per share ..... $ .51 $ .57 $ .61 $ .59
Fully diluted earnings per share .49 .56 .59 .57
1994 Quarter ended
---------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Total interest income .......... $15,875 $16,049 $16,500 $16,666
Net interest income ............ 10,077 10,256 10,574 10,536
Provision for loan losses ...... 262 137 75 149
Income before income taxes ..... 4,120 4,318 4,930 4,294
Applicable income taxes ........ 1,089 1,149 1,336 1,303
Net income ..................... 3,031 3,169 3,594 2,991
Primary earnings per share ..... $ .49 $ .52 $ .58 $ .49
Fully diluted earnings per share .48 .50 .57 .47
55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Omega Financial Corporation:
We have audited the accompanying consolidated balance sheets of Omega Financial
Corporation (a Pennsylvania corporation) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1993 financial statements
of Penn Central Bancorp, Inc., a company acquired during 1994 in a transaction
accounted for as a pooling of interests. Such statements are included in the
consolidated financial statements of Omega Financial Corporation and reflect
total interest income of 44 percent of the related consolidated total in 1993.
These statements were audited by other auditors whose report has been furnished
to us and our opinion, insofar as it relates to amounts included in 1993 for
Penn Central Bancorp, Inc., is based solely upon the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Omega Financial Corporation and
subsidiaries as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Corporation changed its method of accounting for income
taxes.
/s/Arthur Andersen LLP
Lancaster, Pa.
January 23, 1996
Exhibit 21.1
Subsidiaries of Omega Financial Corporation
Name of Subsidiary State or Jurisdiction Trade Name
of Incorporation (if any)
- ------------------------------------------------------------------------------
Omega Bank, N.A. United States -
P.O. Box 298
State College, PA 16804
Hollidaysburg Trust Company Pennsylvania -
224 Allegheny Street
Hollidaysburg, PA 16648
Penn Central National Bank United States -
431 Penn Street
Huntingdon, PA 16652
Montour Bank United States -
1519 Bloom Road
Danville, PA 17821
Central Pennsylvania Investment Company Delaware -
1105 N. Market Street
Wilmington, DE 19899
Central Pennsylvania Life Insurance Company Arizona -
1421 E. Thomas Road
Phoenix, AZ 85014
Central Pennsylvania Leasing, Inc. Pennsylvania -
Central Pennsylvania Real Estate, Inc. Pennsylvania -
Exhibit 23.1
Consent of Arthur Andersen L.L.P.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 23, 1996, incorporated by reference in this Form 10-K, into
the Company's previously filed Form S-8 Registration Statements File No.
33-15780 and 33-82214.
Arthur Andersen L.L.P.
Lancaster, PA.
March 28, 1996
Exhibit 23.2
Consent of Deloitte and Touche L.L.P.
[LOGO]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Omega Financial Corporation on Form S-8 (File No. 33-15780 and File No.
33-82214) of the report of Deloitte & Touche LLP dated January 28, 1994, on Penn
Central Bancorp, Inc. and subsidiaries appearing in thew Annual report on Form
10-K of Omega Financial Corporation for the year ended December 31, 1995.
Deloitte & Touche LLP
Pittsburgh, PA.
March 25, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 38,796
<INT-BEARING-DEPOSITS> 843
<FED-FUNDS-SOLD> 12,460
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 121,845
<INVESTMENTS-CARRYING> 97,863
<INVESTMENTS-MARKET> 98,207
<LOANS> 703,125
<ALLOWANCE> 11,668
<TOTAL-ASSETS> 994,840
<DEPOSITS> 850,182
<SHORT-TERM> 1,545
<LIABILITIES-OTHER> 8,339
<LONG-TERM> 10,603
<COMMON> 123,544
0
627
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 994,840
<INTEREST-LOAN> 60,605
<INTEREST-INVEST> 11,533
<INTEREST-OTHER> 835
<INTEREST-TOTAL> 72,973
<INTEREST-DEPOSIT> 28,610
<INTEREST-EXPENSE> 29,017
<INTEREST-INCOME-NET> 43,956
<LOAN-LOSSES> 713
<SECURITIES-GAINS> 610
<EXPENSE-OTHER> 31,462
<INCOME-PRETAX> 19,802
<INCOME-PRE-EXTRAORDINARY> 14,069
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,069
<EPS-PRIMARY> 2.28
<EPS-DILUTED> 2.21
<YIELD-ACTUAL> 4.87
<LOANS-NON> 1,932
<LOANS-PAST> 2,697
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,057
<CHARGE-OFFS> 853
<RECOVERIES> 335
<ALLOWANCE-CLOSE> 11,668
<ALLOWANCE-DOMESTIC> 11,668
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
