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, 1996
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
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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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 6,025,348
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(Title of Class) (Number of shares outstanding
as of February 26, 1997)
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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of February 26, 1997 was $224,271,221.(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, 1996 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, 1996 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 1997 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
February 26, 1997. The information provided shall in no way be construed as an
admission that any officer, director or 10% shareholder of the Company, or any
employee benefit plan, may be deemed an affiliate of the Company or that such
person or entity is the beneficial owner of the shares reported as being held by
such person or entity, 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"). On
December 31, 1996, Montour was merged into Omega Bank. 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 25 full service
banking offices in Centre, Clinton, Montour, 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.
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, 1996, 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.
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 $8,918,000 for Omega Bank, $3,189,000 for
Penn Central Bank, and $3,699,000 for Hollidaysburg Trust Company, as of
December 31, 1996) 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,
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, 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").
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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.
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.
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
personal lending, mortgage lending, and reserve requirements. Representatives of
the Pennsylvania Department of Banking and the FDIC regularly conduct
examinations of Hollidaysburg, and Hollidaysburg must furnish quarterly reports
to the Pennsylvania Department of Banking and the FDIC.
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The operations of each of the Banks 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. The Banks also 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, contained in Exhibit 13.1.
Capital Regulation. The Company and each of 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 and
other banking organizations are expected to maintain leverage capital ratios 100
to 200 basis points above the minimum depending on their financial condition.
See Note 21 of Notes to the Company's Consolidated Financial
Statements, contained in the Company's Annual Report, for a table that provides
a comparison of Omega's and each of the Bank's risk based capital ratios and the
leverage ratio to minimum regulatory requirements.
Federal Banking Agencies have 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," "under capitalized", "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 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 have issued final rules that amend
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. These final
rules do 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.
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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 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 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 has
passed such a law.
The foregoing necessarily is a summary and general description of
certain provisions of the Interstate Act and does not purport to be complete.
Many of the provisions 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, 1996, the Company had a total of 459 full-time
employees and 101 part-time employees.
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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, 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, 1996, total interest earning assets
maturing or repricing within one year exceeded total interest bearing
liabilities maturing or repricing during the same time period by $2.380 million,
representing a positive cumulative one year sensitivity ratio of 1.01. 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."
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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 "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 arms-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.
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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
400 East Boal Avenue, Boalsburg, PA (ATM)
100 High Street, Port Matilda, PA (ATM)
Main and Mill Streets, Loganton, PA
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)
1519 Bloom Road, Danville, PA
Hollidaysburg Trust Company
218 - 224 Allegheny Street, Hollidaysburg, PA (Main Office)
113 West Allegheny Street, Martinsburg, PA (ATM)
215 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)
16-20 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)
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 1997 to 2011.
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)
building owned, land leased.
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
10
<PAGE>
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
I-80 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, 300 High Street, Williamsburg, PA
11
<PAGE>
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.
<TABLE>
<CAPTION>
Name Age Position
---- --- ---------
<S> <C> <C>
Daniel L. Warfel 50 Executive Vice President and Chief Financial Officer of the
Company since 1987; Executive Vice President and Director of
Omega Bank since 1983.
David N. Thiel 53 Senior Vice President and Secretary of the Company since
1987; Vice President, Secretary and Cashier of Omega Bank
since 1973.
JoAnn N. McMinn 44 Senior Vice President and Controller of
the Company since 1988; Vice President and
Controller of Omega Bank since 1976.
</TABLE>
12
<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, 1996. As of February 26, 1997, the number of
shareholders of the Company's common stock was 2,877.
The company did not sell any equity securities during 1996 which were
not registered under the Securities Act.
On March 25, 1997 the Company declared a 3 for 2 stock split to be
issued in the form of a stock dividend for shareholders of record April 18,
1997, to be distributed on April 30, 1997.
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, 1996.
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,
1996.
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,
1996.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
13
<PAGE>
PART III
Item 10: Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's Proxy Statement relating
to the 1997 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 1997 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 1997 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 1997 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
14
<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, 1996,
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, 1996 and 1995
Consolidated Statements of Income
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
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
<TABLE>
<CAPTION>
Number Title
------ -----
<S> <C>
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
15
<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 Intentionally omitted.
10.19 Intentionally omitted.
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.
16
<PAGE>
Number Title
------ -----
*10.24(10) Severance Agreement, as amended, with D. Stephen Martz.
*10.25(10) Severance Agreement, as amended, with Robert T. Gentry.
*10.26(11) 1994 Stock Option Plan for Non-Employee Directors
10.27 Intentionally omitted.
*10.28(13) Directors Deferred Compensation Agreements for Peoples National Bank and Omega
Financial Corporation
*10.29(14) 1996 Employee Stock Option Plan
10.30 Second Amendment to Omega Amended and Restated Employee Stock Ownership Plan
(filed herewith)
13.1 Annual Report to Shareholders for the year ended December 31, 1996 (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.
27.1 Financial Data Schedule
</TABLE>
(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.
17
<PAGE>
(11) Incorporated by reference from Omega's Registration Statement on Form S-8
(Registration No. 33-82214).
(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.
(14) Incorporated by reference from Omega's Annual Report on Form 10-K
for the year ended December 31, 1995.
18
<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 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.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- -----
<S> <C> <C>
______________________ 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.
19
<PAGE>
_______________________ Director __________________
George R. Lovette
_______________________ Director __________________
Robert N. Oliver
_______________________ Director __________________
James W. Powers, Sr.
_______________________ Director __________________
Stanton R. Sheetz
_______________________ Director __________________
Robert A. Szeyller
</TABLE>
20
<PAGE>
Exhibit 10.30
Second Amendment to Omega Amended and Restated Employee Stock Ownership Plan
21
<PAGE>
SECOND
AMENDMENT TO
OMEGA FINANCIAL CORPORATION
AMENDED AND RESTATED EMPLOYEE STOCK OWNERSHIP PLAN
Pursuant to Article XI of the Omega Financial Corporation Amended and
Restated Employee Stock Ownership Plan effective January 1, 1989, said Plan is
amended, effective January 1, 1996, as follows:
FIRST: Article I of the Plan is deleted and restated in its entirety
as attached hereto.
SECOND: The above-named Plan is ratified and approved in all other
respects.
INTENDING TO BE LEGALLY BOUND, the Employer has executed this amendment
on December 17, 1996.
ATTEST: OMEGA FINANCIAL CORPORATION
David N. Thiel By: David B. Lee
- ----------------------- ------------------------
Secretary Chairman and CEO
22
<PAGE>
ARTICLE I - DEFINITIONS
As used in this Plan and the Trust Agreement adopted in connection
therewith, the following words and phrases shall have the meanings set forth in
this Article I, unless the context clearly indicates otherwise. Whenever
appropriate, words used in the singular shall include the plural, words used in
the plural shall include the singular, and the masculine shall include the
feminine.
1.01 Acquisition Loan shall mean a loan or other extension of credit
which is used by the Trust to finance the purchase of Employer Stock.
1.02 Beneficiary shall mean any person or persons other than the
Participant, entitled to receive benefits under this Plan by designation, under
law, or in accordance with the provisions of this Plan.
1.03 Code shall mean the Internal Revenue Code of 1986, as the same may
be amended from time to time.
1.04 Compensation shall mean a Participant's basic salary or hourly
wage, plus overtime, bonuses and commissions, but excluding amounts realized
from the exercise of a stock option or disposition of stock acquired upon
exercise of a stock option, which is received from the Employer during the Plan
Year and which is determined before reduction for any contribution to a
qualified cash or deferred arrangement under Code Section 401(K) or a cafeteria
plan under Code Section 125; provided, however, that for any Self-Employed
Individual Compensation shall mean his Earned Income.
For Plan Years beginning on or after January 1, 1994, the annual
compensation of each Employee taken into account under the Plan shall not exceed
the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit
is $150,000, as adjusted by the Commissioner for increases in the cost of living
in accordance with Code section 401(a)(17)(B). The cost-of-living adjustment
in effect for a calendar year applies to any period, not exceeding 12 months,
over which compensation is determined (a determination period) beginning in such
calendar year.
If a determination period consists of fewer than 12 months, the OBRA
`93 annual compensation limit will be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the denominator
of which is 12.
If compensation for any prior determination period is taken into
account in determining an employee's benefits accruing in the current plan year,
the compensation for that prior determination period is subject to the OBRA `93
annual compensation limit in effect for that prior determination period.
For Plan Years beginning on or after January 1, 1994, any reference in
this plan to the limitation under Code Section 401(a)(17) shall mean the OBRA
`93 annual compensation limit as set forth in this definition.
1.05 Date of Participation shall mean the date on which an Employee
becomes a Participant in the Plan in accordance with the provisions of Section
2.01.
1.06 Earned Income shall mean net earnings from self-employment in the
trade or business with respect to which the Employer has established the Plan,
provided that personal services of the individual are a material
income-producing factor. Such net earnings shall be determined without regard to
items not included in gross income and deductions allocable to those items,
after reduction for the Employer's deductible contribution made on behalf of
such individual for such year, and with regard to the deduction allowed to the
Employer by Code Section 164(f) for taxable years beginning after December 31,
1989. In addition, any distribution from an S Corporation, as defined in Code
Section 1361, which is treated as income from self-employment shall be counted
as Compensation under the Plan.
23
<PAGE>
1.07 Employee shall mean any person who is employed by the Employer or
any other employer required to be aggregated with the Employer under Code
Section 414(b), (m) or (o), any Self-Employed Individual, any Owner-Employee
and any Leased Employee, as defined in Section 1.14. Notwithstanding the
foregoing, if the Leased Employees of the Employer do not constitute more than
twenty percent (20%) of the Employer's Non-Highly Compensated Employees the term
"Employee" shall not include those Leased Employees covered by a money purchase
pension plan which provides for a non-integrated employer contribution rate of
at least 10% of compensation {as defined in Code Section 415(c)(3), but
including amounts contributed pursuant to a salary reduction agreement which are
excludable from the employee's gross income under Code Section 125, 402(a)(8),
402(h) or 403(b)}, immediate participation and immediate vesting.
1.08 Employer shall mean the employer named in the Introduction to this
Plan, any other employer adopting this Plan by resolution or other appropriate
action, and any successor or predecessor of such employer. In the event the
Employer is a member of commonly controlled group of business organizations,
within the definitions of Code Section 414(b) or 414(c), or an affiliated
service group, as defined in Code Section 414(m), or is otherwise subject to
aggregation under Code Section 414(n) or 414(o), the term "Employer" shall
also mean the other members of
24
<PAGE>
OMEGA FINANCIAL CORPORATION
AGREEMENT AND CONSENT IN WRITING
BY
BOARD OF DIRECTORS
We, the undersigned, being all of the Directors of this Corporation, in
lieu of and to the same effect as a special meeting of such Directors, do hereby
severally and collectively consent and agree as follows:
The following are hereby unanimously adopted or ratified as actions of
the Board of Directors of this Corporation:
RESOLVED, that the Second Amendment to the Omega Financial
Corporation Amended and Restated employee Stock Ownership Plan
submitted to the Directors by counsel for the Corporation, be, and the
same hereby is, authorized and approved substantially in the form in
which it was presented to the Directors; and
RESOLVED FURTHER, that the proper officers of the Corporation
be, and the same hereby are, authorized and directed to execute the
same on the Corporation's behalf.
We do further direct that this Agreement and Consent in Writing be duly
filed with this Corporation's Secretary and entered in the minute book of this
Corporation.
Robert N. Oliver
James W. Powers, Sr.
Merle K. Evey
George R. Lovette
Robert Szeyller
D. Stephen Martz
David B. Lee
Ray Agostinelli
David K. Goodman
Stanton R. Sheetz
Philip E. Gingerich
Date: December 17, 1996
25
<PAGE>
TO OUR SHAREHOLDERS AND FRIENDS,
We are pleased to report that 1996 was Omega Financial Corporation's best
year ever. We finished 1996 with a 15.3% growth in net income over 1995, and we
announced a share repurchase program to buy back up to $10 million of our common
stock.
Our goal has always been to provide increased shareholder value through
improved performance. Our continued strong earnings growth makes this the right
time for the stock repurchase program. Additionally, the stock we purchase will
fund employee stock options and stock purchase plans, incentive programs that
have and will continue to contribute to our success.
In financial highlights, the year's net income figure was $16.2 million.
Primary earnings per common share for the year were $2.61, up 14.5% from $2.28
in 1995. The corporation's Return on Average Assets (ROA) was 1.61%, an increase
of 9.5%, while the Return on Average Equity (ROE) was 12.51%, up 5.1%. Income
from credit activities was $45.4 million, up 5% versus last year.
Our interest rate spread was favorable throughout the year, our banks
delivered further growth in credit activities, and we continued our cost-control
efforts. The consolidation of our banks' credit administration functions,
completed in 1996, allows us to retrieve loan documents and files more quickly
and efficiently for our customers. At the same time, this move, teamed with new
imaging technology, means savings in storage costs throughout our banking
system.
The standardization of pricing among Omega's affiliate banks and common
product marketing are two other ongoing initiatives that generate savings. We
further developed common marketing of products in 1996, with projects such as
the promotion of the advantages of The Club and Golden Choice across all of our
banks' market areas. In 1997, we will complete standardization of products in
all of our banks so that our customer service staff will not only be more
efficient, dealing with the same product features at each of our banks, but also
will be able to offer better prices than most of our competitors.
[GRAPHIC]
Picture of David B. Lee
- --------------------------------------------------------------------------------
2
<PAGE>
In other moves that will save costs and serve customers better, final
merger approvals were received during the fourth quarter and, as of the close of
business December 31, 1996, Montour Bank merged into Omega Bank and became Omega
Bank's twenty-fifth office and its first in Montour County. Also during the
quarter, Omega Bank began renovations of its Bellefonte office, and the
corporation opened its World Wide Web site.
We care about the towns we serve and how these communities view our
offices. An important goal of the Bellefonte renovations is to more closely
match the office's design with the town's historic architecture. Like the
Williamsburg office of Hollidaysburg Trust, which was completely rebuilt in
1996, the renovated Bellefonte office will symbolize our commitment to serve our
customers where they live and work.
Establishing our new Web site, http://www.yourhometownbank.com, is just
another aspect of this service strategy. As well as maintaining a competitive
edge, offering the latest technology is another way to make sure that we can
deliver service at the times and in the places best suited to our customers'
needs. Whether at noon in a bank lobby with a teller's help, in the evening at a
Mac location, or at mid-night on a computer screen, our goal is to be there.
Many other initiatives to improve customer service are under way. You will
hear about 24-hour on-line banking, computer and telephone bill paying services,
and Omega's VISA(R) check card. These are just a few of the new ways we will
speed customer transactions in 1997.
We believe that our customer service strategy drives our earnings. As a
result of our record year and our commitment to provide shareholder value, we
have increased our stock dividends by 16.7% over the prior year.
In addition, our book value per share is up 9.2% over last year. This
improved performance appears to be fueling our stock's market value.
Through the dedicated efforts of our staff and good management, we plan to
continue to deliver these results for 1997 and into the future.
[GRAPHIC]
Picture of D. Stephen Martz
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, 1996.
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
President of Penn Central National Bank
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.
Retired 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.
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
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
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
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
<PAGE>
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 Jonas B. Kauffman, Jr.
J. Harold Boyer Nathan H. Krauss
Ned C. Cummings John R. Miller, Jr., Esq.
John L. Dillon George R. Smith
H. Richard Ishler, M.D.
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
Ann K. Guss..................................Vice President,
Mortgage Lending
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 C. Guy Rudy
Charles L. Frazier Daniel C. Schrack
Jay R. Montgomery William E. Young, D.O.
Mifflin/Juniata Region
Thomas G. Clark Roy A. Leister
Jeffrey K. Creighton Steven L. Palm
C. Richard Dimm Kenneth O. Stuck, D. Ed.
Ralph A. Germak William S. Taylor, III
Jerry Leach Mervin R. Zendt
Montour Region
James P. Garman Thomas N. Mertz
Carol Houk George A. Park
Charles I. Keiter Hasu P. Shah
Directors Emeriti
- -----------------
William Bamat E. J. Straley, V.M.D.
Miles X. Clevenstine Jay Struble
James G. Corman Peter Swistock, Sr.
Robert L. Homan Elwood A. Way
Lawrence L. Hoverter R. Lee Ziegler, Esq.
Garver McNitt Warren K. Zook
Lee E. Sausman
- --------------------------------------------------------------------------------
5
<PAGE>
BANK DIRECTORS AND OFFICERS
---------------------------
HOLLIDAYSBURG TRUST COMPANY
- --------------------------------------------------------------------------------
Board of Directors
- ------------------
Ralph W. Arthur, Jr. Charles I. Kreider
Merle K. Evey, Esq. D. Stephen Martz
Rex W. Hershberger Stanton R. Sheetz
David C. Hileman Joseph Tanner, Jr.
John P. Kinney Vincent C. Turiano
Directors Emeriti
- -----------------
John S. Clapper Dorothea D. Nelson
Joseph R. Good Lester E. Plank
James J. Madden Roy F. Rumbaugh
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'Connor.......Vice President, Commercial Services
Roger W. Oswald.........Vice President, Agricultural Manager
Advisory Committee
- ------------------
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
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.....................Executive 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 PRICES AND DIVIDENDS
----------------------------------------
The common stock of Omega Financial Corporation is traded on the Nasdaq Stock
Market under the symbol OMEF. As of December 31, 1996, the number of
shareholders of record of the Corporation's common stock was 2,854.
The following table sets forth, for the periods indicated (1) the high and low
sale prices and (2) cash dividends:
1996 1995
------------------------------- ---------------------------
Cash Cash
Dividends Dividends
Quarter Ended High Low Paid High Low Paid
---- --- ---- ---- --- ----
March 31 ....... $ 33.75 $ 31.50 $ 0.19 $ 27.00 $ 24.50 $ 0.17
June 30 ........ 33.75 31.00 0.21 27.00 25.50 0.18
September 30 ... 33.25 31.00 0.21 30.00 25.75 0.18
December 31 .... 36.50 31.75 0.23 33.50 29.00 0.19
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 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. Ryan Beck & Co.
141 West Beaver Avenue 80 Main Street
State College, PA 16801 West Orange, NJ 07052
(814-234-7300) (800-342-2325)
F. J. Morrissey & Co. ABN AMRO Chicago Corporation
1700 Market St. Suite 1420 208 S. LaSalle Street
Philadelphia, PA 19103-3913 Chicago, IL 60604
(800-842-8928) (800-621-0686)
Herzog, Heine, & Geduld, Inc. Ferris, Baker Watts, Inc.
26 Broadway 6 Bird Cage Walk
New York, NY 10004 Hollidaysburg, PA 16648
(212-908-4000) (800-343-5149)
Janney Montgomery Scott, Inc.
1801 Market Street
Philadelphia, PA 19103
(800-526-6397)
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, 1996 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 Financial
Corporation, 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, 1996, 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 29, 1997 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)
INFORMATION AVAILABILITY
Omega Financial Corporation news releases are available by fax 24 hours a day
from Company News On-Call at (800) 758-5804, extension 653250. Quarterly and
annual reports, a corporate profile, stock quotes and other financial data can
be accessed via PR Newswire on the World Wide Web, http://www.prnewswire.com, or
through the new Omega Financial Corporation web site at
http://yourhometownbank.com.
- --------------------------------------------------------------------------------
7
<PAGE>
SELECTED FINANCIAL DATA
-----------------------
The following selected financial data of Omega Financial Corporation and
subsidiaries for the five years ended December 31, 1996 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>
BALANCE SHEET INFORMATION 1996 1995 1994 1993 1992
at December 31 ----------------------------------------------------------------------
(In thousands of dollars, except share and per share data)
<S> <C> <C> <C> <C> <C>
Assets .................................................. $1,007,345 $ 994,840 $ 939,953 $ 934,119 $ 915,749
Deposits .............................................. 846,030 850,182 801,736 809,778 805,065
Loans, net ............................................ 696,597 703,125 647,933 635,961 622,803
Investment securities ................................. 241,846 219,708 227,822 236,750 190,081
Long term debt (including ESOP debt) .................. 9,213 10,073 5,568 5,699 6,200
Shareholders' equity .................................. 135,885 124,171 113,109 102,312 92,018
Number of shares outstanding - common ................. 6,033,926 6,022,966 5,985,735 5,931,165 5,857,949
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 ................................. $ 76,720 $ 72,973 $ 65,090 $ 66,741 $ 72,286
Net interest income ................................... 46,400 43,956 41,443 40,614 40,268
Provision for loan losses ............................. 979 713 623 1,133 4,634
Income before income taxes and cumulative
effect of change in accounting principle ............ 23,354 19,802 17,662 16,172 15,452
Income tax expense .................................... 7,127 5,733 4,877 4,240 3,545
Net income* ........................................... 16,227 14,069 12,785 12,679 11,907
PER COMMON SHARE DATA
Net income - primary** ................................ $ 2.61 $ 2.28 $ 2.08 $ 2.07 $ 1.98
Net income - fully diluted** .......................... 2.53 2.21 2.02 2.01 1.92
Cash dividends - common ............................... 0.84 0.72 0.66 0.60 0.53
Book value ............................................ 22.52 20.62 18.90 17.25 15.71
</TABLE>
FINANCIAL RATIOS
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average equity*** ........................ 12.51% 11.90% 11.75% 12.91% 13.55%
Return on average assets*** ........................ 1.61 1.47 1.36 1.38 1.32
Dividend payout - common ........................... 31.26 30.65 30.80 28.00 25.44
Average equity to average assets ................... 12.85 12.35 11.61 10.71 9.77
</TABLE>
* 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 five active subsidiaries ("Omega" or the "Corporation"), Omega
Bank, N.A. ("Omega Bank"), Hollidaysburg Trust Company ("Hollidaysburg"), Penn
Central National Bank ("Penn Central"), 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, 1996, 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 three banks and two active 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. Management believes the Corporation has a relatively stable deposit
base with no major seasonal depositor or group of depositors. Most of the
Corporation's 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 Bank ("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 $44,641,000. On December 31, 1996, Montour was merged into
Omega Bank.
On January 28, 1994, Penn Central Bancorp was merged with and into Omega. This
transaction was accounted for as a pooling of interests for financial reporting
purposes, and as a result, all prior period financial information in this Annual
Report has been restated to reflect the combination.
- --------------------------------------------------------------------------------
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Omega functions as a financial intermediary and therefore its financial
condition should be viewed in terms of changes in its uses and sources of funds.
Table 1 depicts average daily balances, the dollar change and percentage change
for the past two years. This table is referenced for the discussion in this
section.
TABLE 1
Changes in Uses and Sources of Fund
($ in thousands)
<TABLE>
<CAPTION>
1996 Increase(Decrease) 1995 Increase(Decrease) 1994
--------------------- Average --------------------- Average
Balance Amount % Balance Amount % Balance
----------- ----------- ---- ----------- ----------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------
Funding Uses:
- ----------------------------------------
Loans ................................ $ 704,259 $ 30,447 4.5% $ 673,812 $ 41,391 6.5% $ 632,421
Investment securities ................ 192,489 21,203 12.4 171,286 (7,214) (4.0) 178,500
Tax-exempt investment securities ..... 34,613 (8,933) (20.5) 43,546 (12,694) (22.6) 56,240
Interest bearing deposits ............ 657 (1,016) (60.7) 1,673 (1,467) (46.7) 3,140
Federal funds sold ................... 21,492 9,002 72.1 12,490 (388) (3.0) 12,878
----------- ----------- ---- ----------- ----------- ---- -----------
Total interest earning assets .... 953,510 50,703 5.6 902,807 19,628 2.2 883,179
Non-interest earning assets .......... 67,928 1,552 2.3 66,376 1,486 2.3 64,890
Less: Allowance for loan losses ..... (11,795) (427) 3.8 (11,368) (139) 1.2 (11,229)
----------- ----------- ---- ----------- ----------- ---- -----------
Total uses ....................... $ 1,009,643 $ 51,828 5.4% $ 957,815 $ 20,975 2.2% $ 936,840
----------- ----------- ---- ----------- ----------- ---- -----------
----------- ----------- ---- ----------- ----------- ---- -----------
- ----------------------------------------
Funding Sources:
- ----------------------------------------
Interest bearing demand deposits ..... $ 221,904 $ 1,444 0.7% $ 220,460 $ (17,860) (7.5)% $ 238,320
Savings deposits ..................... 104,257 (1,601) (1.5) 105,858 (9,453) (8.2) 115,311
Time deposits ........................ 418,006 35,324 9.2 382,682 32,955 9.4 349,727
Other ................................ 8,727 2,142 32.5 6,585 2,327 54.7 4,258
----------- ----------- ---- ----------- ----------- ---- -----------
Total interest bearing liabilities 752,894 37,309 5.2 715,585 7,969 1.1 707,616
Demand deposits ...................... 113,046 2,359 2.1 110,687 2,081 1.9 108,606
Other liabilities .................... 14,011 736 5.5 13,275 1,445 12.2 11,830
Shareholders' equity ................. 129,692 11,424 9.7 118,268 9,480 8.7 108,788
----------- ----------- ---- ----------- ----------- ---- -----------
Total sources .................... $ 1,009,643 $ 51,828 5.4% $ 957,815 $ 20,975 2.2% $ 936,840
----------- ----------- ---- ----------- ----------- ---- -----------
----------- ----------- ---- ----------- ----------- ---- -----------
</TABLE>
Omega's funding sources have increased over the last two years at rates of 2.2%
and 5.4% in 1995 and 1996, respectively. Market expansion, through the
acquisition of Montour Bank in 1995, accounts for most of the growth in 1995,
but only about half of the growth in 1996. While transaction type deposits
(demand, interest bearing demand and savings) maintained similar balances in
1996 as in 1995, increases in time deposits were largely responsible for the
growth in deposits used as funding sources.
Available funds were utilized primarily for funding loans and investment
securities, while 15% of the 1996 increase was kept in short term, more liquid
vehicles (interest bearing deposits and federal funds sold).
- --------------------------------------------------------------------------------
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Average Balances
(in millions)
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Investments 225.4 233.1 250.8 231.2 252.2
Loans 621.3 631.8 632.4 673.8 704.3
Deposits 792.4 801.0 812.0 819.7 857.2
Assets 899.1 916.8 936.8 957.8 1009.6
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 average assets in 1996 exceeding the one billion dollar mark for the first
time.
Total deposits continued to grow in modest proportions each of the previous five
years, but it should be noted that the 4.6% increase in average deposits in 1996
over 1995 was the largest year on year increase in the last five years. Excess
funds not required for loans are 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 and 1996 were the strongest of
the last five years in terms of average loan volumes, with increases of 6.5% and
4.5%, respectively, 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.
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Average Asset Mix Change
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Average Investments 25.1% 25.4% 26.8% 23.9% 24.7%
Average Loans 69.1% 68.9% 67.5% 70.3% 69.8%
LOANS
In 1996, total average loans were $704.3 million as compared to $673.8 million
in 1995, an increase of $30.5 million, or 4.5%. Despite the growth in total
average balances, Omega experienced a decline in each of the broad consumer loan
products; from December 31, 1995 to December 31, 1996. 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 believes that this slowed down some of the consumer lending activity
in 1996. Within the commercial loan portfolio, commercial mortgages outstanding
dropped by $9.1 million from December 31, 1995 to December 31, 1996 due to
several large sched-
- --------------------------------------------------------------------------------
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
uled payoffs and competitive pressure. The only area to experience significant
increases was the commercial, financial and agricultural category of loans,
which increased steadily throughout 1996 in all of the banks. Average loans in
1995 were $673.8 million, compared to $632.4 million in 1994. 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.
The loan portfolio as of December 31, 1996 was comprised of 59% consumer loans
and 41% commercial loans (including construction), as compared to 60% and 40%,
respectively, at December 31, 1995.
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.
Management has been monitoring the activity within the loan portfolio very
carefully and intends to agressively pursue growth in each of the loan
categories during 1997. A competitive pricing environment may force Omega to
lower its pricing structure in order to maintain and build loan volumes.
The loan portfolio carries the potential risk of past due, non-performing or,
ultimately, charged-off loans. Omega attempts to manage 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, 1996
was 1.70% of total loans, net of unearned discount, as compared to 1.66% of
total loans at the end of 1995. The allowance increased $152,000 from 1995 as
the provision of $979,000 exceeded net charge-offs of $827,000. Net charge-offs
for 1996 were 0.12% of average loans as compared to 0.08% in 1995. 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 and the slight increase
in net charge-offs in 1996, management likewise increased the provision for loan
losses in both years. Non-performing loans have decreased to 0.48% of loans, as
compared to 0.66% at December 31, 1995. Accruing loans past due 90 days or more
were significantly decreased in 1996 from the unusually high level in 1995 (See
Table 2), while non-accrual loans were near the same level in 1996 as in 1995.
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Allowance for Losses to Loans
at Year End
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
1.82% 1.76% 1.71% 1.66% 1.70%
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, 1996, non-performing loans (as defined in Table 2) as a
percentage of the allowance for loan losses were 28.2% as compared to 39.7% at
December 31, 1995. Of the $3,334,000 of non-performing loans at December 31,
1996, $2,413,000 were collateralized with real estate, $888,000 with other
assets, and $33,000 were unsecured.
- --------------------------------------------------------------------------------
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2
Non-Performing Loans
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans ..................... $2,079 $1,932 $1,596 $1,849 $4,542
Accruing loans past due 90 days or more 1,241 2,697 1,317 952 1,009
Restructured loans .................... 14 -- 44 -- 152
------ ------ ------ ------ ------
Total non-performing loans ............ $3,334 $4,629 $2,957 $2,801 $5,703
====== ====== ====== ====== ======
</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 1997 follows (in thousands):
Commercial, financial and agricultural.............. $ 308
Real estate - commercial............................ --
Real estate - mortgage.............................. 49
Personal............................................ 673
--------
Total............................................... $ 1,030
========
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Non-Performing Loans to Loans
at Year End
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
0.92% 0.45% 0.43% 0.66% 0.48%
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Net Charge-Offs to Average Loans
at Year End
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
0.22% 0.21% 0.12% 0.08% 0.12%
INVESTMENTS
Average investments (as defined above) increased by $21.0 million, or 9.1%,
during 1996, after decreasing by $19.6 million, or 7.8% during 1995. Funds
gathered through deposits exceeded the loan demand in 1996, resulting in the
excess being used to invest in both short and medium term investments, thus
explaining the increase in 1996. This followed a year where the new loan funding
needs were greater than the modest deposit growth. Funds from maturing
investments in 1995 were used to fund loans rather than re-investing in other
investment securities. 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
instruments are generally short term, low yielding, liquid investments.
The investment area is managed according to internally established guidelines
and quality standards. Omega segregates 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 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
- --------------------------------------------------------------------------------
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 1996, the market value of the entire
securities portfolio exceeded amortized cost by $3,978,000 as compared to
December 31, 1995 when market value exceeded amortized cost by $3,731,000. The
weighted average maturity of the investment portfolio is 1 year and 10 months as
of December 31, 1996 as compared to 2 years and 4 months at the end of 1995. 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 $1,125,000, or 2.0% on average in 1996 as
compared to $1,486,000, or 2.3% in 1995. These modest increases were the result
of normal operating activities.
During 1996, management invested $2.4 million in capital expenditures, as
compared to $1.5 million in 1995. Approximately 50% of the investment was used
for land, building and renovations of existing buildings. In order to enhance
back-room operations, document imaging was added in 1996 and the item processing
system was upgraded. These and other technological needs were filled by
purchasing new computer software and equipment, which accounts for most of the
remaining half of the 1996 capital expenditures.
Additionally, a strategy was designed to systematically replace aging computer
equipment throughout the organization, as well as to increase branch office
automation through computer access in 1997. It is estimated that these
technological advancements will require funds totaling nearly $1.0 million.
DEPOSITS
For the four years prior to 1996, Omega had seen limited growth in the deposit
area. As reflected in Table 3, average total deposits rose by 4.6%, or
$36,719,000, in 1996. This followed a year where average deposits increased by
only 1.0%. 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 shift 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 effect, as
time deposits increased on average by $33.0 million, or 9.4% (partly due to the
acquisition of Montour), and core transaction accounts averaged $25.2 million,
or 5.5% less than in 1994. Continuing in the same direction as 1995, time
deposits grew on average by $35.3 million, or 9.2% in 1996, while core
transaction accounts grew by only $2.2 million, year on year. Management
anticipates that its customers' will continue to drift toward time deposits, as
opposed to core accounts in 1997 as well. During 1996, Omega's larger commercial
customers needed to better manage their cash, thus prompting Omega to implement
a cash management account that sweeps overnight monies into repurchase
agreements. This has caused the flow of core account funds into retail
repurchase agreements (see Other Interest Bearing Liabilities). This is expected
to continue, having the impact of reducing deposit growth and increasing Omega's
funding costs.
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Average Deposit Mix Change
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Average Core Deposits 50.1% 54.7% 56.9% 53.5% 51.2%
Average Time Deposits 49.9% 45.3% 43.1% 46.7% 48.8%
- --------------------------------------------------------------------------------
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 3
Changes in Deposits
($ in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
Average Increase(Decrease) Average Increase(Decrease) Average
Balance Amount % Balance Amount % Balance
-------- -------- --- -------- -------- --- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest bearing demand deposits ................... $221,904 $ 1,444 0.7% $220,460 $(17,860) (7.5)% $238,320
Savings deposits ................................... 104,257 (1,601) (1.5) 105,858 (9,453) (8.2) 115,311
Demand deposits .................................... 113,046 2,359 2.1 110,687 2,081 1.9 108,606
-------- -------- --- -------- -------- --- --------
Total core (transaction) accounts .............. 439,207 2,202 0.5 437,005 (25,232)
(5.5) 462,237
Time deposits ...................................... 418,006 35,324 9.2 382,682 32,955 9.4 349,727
-------- -------- --- -------- -------- --- --------
Total deposits ................................. $857,213 $ 37,526 4.6% $819,687 $ 7,723 1.0% $811,964
======== ======== === ======== ======== === ========
</TABLE>
OTHER INTEREST BEARING LIABILITIES
Other interest bearing liabilities on average increased $2,142,000, or 32.5%, as
compared to an increase of $2,327,000, or 54.7% in 1995. The increase in 1996 is
due to the addition of $1,813,000 on average of retail repurchase agreements.
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 1996,
providing an average of $129,692,000, an increase of $11,424,000 or 9.7% from
the $118,268,000 provided in 1995. In spite of increased dividends, Omega
continued a strong rate of internal capital generation. This rate was 8.7% in
1996 and 8.3% in 1995. This internal capital generation is dependent on high
earnings performance which is reflected by a return on average assets of 1.61%
in 1996 and 1.47% in 1995, in conjunction with a prudent dividend policy that is
represented by payout ratios on the common stock of 31.3% for 1996 and 30.7% for
1995. Capital has also been 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. Over the previous two years,
Omega instituted a Board-approved common stock repurchase plan allowing up to
$3,000,000 for purchasing treasury stock in order to fund the Corporation's
stock option and stock purchase plans. As a result, at December 31, 1996, Omega
owned 70,320 shares of stock in treasury at a cost of $2,266,000. In January of
1997, the Board approved an additional $10,000,000 to be available for use in
the repurchase program.
Omega increased the return to shareholders this year by increasing its dividend
16.7% to $.84 per share. Cash dividends per share in prior years were $.72 and
$.66 in 1995 and 1994, respectively. Omega paid a dividend of $1.80 per
preferred share in each of the years 1996, 1995 and 1994. See Note 18 of Notes
to Consolidated Financial Statements regarding restrictions on dividends from
subsidiary banks to the holding company.
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Equity to Asset Ratio
at Year End
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
10.05% 10.95% 12.03% 12.48% 13.49%
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Book Value per Share
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$15.71 $17.25 $18.90 $20.62 $22.52
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, 1996 and 1995, Omega's Tier I capital ratio was 19.1% and 17.2%,
respectively, and its total capital ratio was 20.3% and 18.5%, 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 to 200 basis points above the minimum
depending on their financial condition. At December 31, 1996 and 1995, Omega's
- --------------------------------------------------------------------------------
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
leverage ratio was 13.0% and 12.4%, respectively, against a required leverage
ratio of 4%. See Note 21 of Notes to the Consolidated Financial Statements.
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,
1996. 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 $2,380,000 at December 31, 1996, 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, 1996, 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 $1,151,000. If interest rates would decline by 100 basis points
immediately, net interest income would decrease by $1,043,000 over the next
twelve months. There is not a converse relationship between the 100 basis point
movement up and 100 basis point movement down because Omega has entered into an
interest rate contract which provides a floor of 8.25% on a notional balance of
$10,000,000. See Note 13 to the Consolidated Financial Statements. A summary of
the rate shocks is 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 contracts, including interest rate swaps and floors (notional
balance of $50,000,000 as of December 31, 1996, see Note 13 of Notes to the
Consolidated Financial Statements) in order to hedge certain prime interest rate
loans against declining rates. Omega has a $40,000,000 notional balance in
interest rate swap agreements. As part of these agreements, Omega is receiving a
fixed rate on the notional balance with a weighted average maturity of 22 months
at a weighted rate of 8.47% 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 yield on prime based loans that Omega owns will
drop, offsetting the increase from the interest rate swaps. This will maintain
the margin on $40,000,000 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. In addition
to the interest rate swaps, Omega also has an interest rate floor with a
notional balance of $10,000,000. Under this contract, a premium is paid to a
third party for protection against the effect of interest rates falling below
the floor level of 8.25%. This contract has a remaining maturity of 17 months.
- --------------------------------------------------------------------------------
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 1996, with and without the $50,000,000 of
interest rate contracts, the following results would occur over the next twelve
months (in thousands):
Change in Net Interest Income
Change in Interest Rate Contracts
Interest Rates -----------------------------
(Basis Points) With Without
-------------- ---------- ---------
400 $4,192 $5,792
300 3,257 4,457
200 2,288 3,088
100 1,151 1,551
0 0 0
(100) (1,043) (1,543)
(200) (2,069) (3,069)
(300) (3,032) (4,532)
(400) (3,911) (5,911)
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
$500,000 for a 100 basis point decline in rates and by $1,000,000 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,
1996, Omega's net interest income and MVE were within the guidelines established
by management.
Another source of interest rate risk is known as basis risk. This arises from
the difference in movements of interest rates earned as assets and the interest
rates paid on liabilities with otherwise similar repricing characteristics. The
Corporation analyzed the effects of basis risk on both earnings and capital.
This was done through interest rate shocks, which isolate the movements of the
treasury rate and prime rate. The following shows the results of these rate
shocks:
Change in Change in Change in
Basis Interest Rates Net Interest Income Market Value of Equity
----- -------------- ------------------- ----------------------
Prime Risk -100 $(1,387) $ 5,177
Treasury Risk +100 $(1,039) $11,371
The table above indicates the results of a 100 basis point decrease in the prime
rate with all other interest rates unchanged. In this scenario, the
Corporation's net interest income would decrease by $1,387,000 and market value
of equity would increase by $5,177,000. These results support the Corporation's
actions in using interest rate swaps and floors to hedge its exposure to a
decline in net interest income when the interest rates on prime-based loans
decrease. The treasury risk noted above shows that if the treasury curve
increased 100 basis points with no other interest rate changes, the
Corporation's net interest income would decrease $1,039,000 and market value of
equity would increase $11,371,000. In both the prime risk and treasury risk
results, only the direction of change in which interest rates would adversely
affect earnings is shown. If interest rates were to change in the opposite
direction from that indicated, Omega would experience a similar increase in net
interest income.
The gap analysis, rate shock simulation and basic risk analysis 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 acquisition
or investment of funds.
- --------------------------------------------------------------------------------
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Average Loan to Deposit Ratio
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
78.4% 78.9% 77.9% 82.2% 82.2%
LIQUIDITY
There is no standardized formula for measuring liquidity. Past methods do not
apply due to 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, 1996, total liquid assets were $170,388,000 while the short-term liabilities
were $41,559,000. This left a surplus of liquid assets of $128,829,000, or 12.8%
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% at both December 31, 1996 and 1995. 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, 1996. At December 31, 1996, 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 or term funding to
the banks in the amounts of $46,721,000 as of December 31, 1996. At December 31,
1996, Omega had $5,000,000 outstanding against the term line and no overnight
advances (See Note 8 of Notes to the Consolidated Financial Statements).
- --------------------------------------------------------------------------------
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARKET ENVIRONMENT
Omega's market is generally in central Pennsylvania and primarily in the
counties of Centre, Clinton, Mifflin, Blair, Huntingdon, Bedford, Juniata and
Montour.
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Net Income
(in thousands)
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
$11,907 $11,932 $12,785 %14,069 $16,227
* (1993 net income shown before favorable effect of accounting change of $747)
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19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 4
MATURITY DISTRIBUTION
AS OF DECEMBER 31, 1996
(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 ..................... $ 512 $-- $-- $-- $-- $ 512
Federal funds sold ............................ 18,075 -- -- -- -- 18,075
Investment securities:
U.S. Treasury securities
and obligations of other
U.S. Government agencies
and corporations .................... 14,291 9,832 14,114 55,173 -- 93,410
Corporate and other securities ........... 2,155 2,252 7,151 21,609 5,891 39,058
Obligations of state and political
subdivisions ........................ 3,739 4,688 6,403 11,050 2,000 27,880
Mortgage backed securities ............... 8,187 7,965 16,286 34,844 639 67,921
Stocks ................................... -- -- -- -- 9,578 9,578
Loans:
Commercial, financial, and
agricultural ............................. 101,361 2,742 3,849 14,898 26,166 149,016
Interest rate swap agreements
(notional amount) ................... (40,000) -- 10,000 30,000 -- --
Real estate - commercial ................. 61,797 940 2,967 20,274 32,403 118,381
Real estate - construction ............... 12,504 747 204 861 5,364 19,680
Real estate - mortgage ................... 29,578 17,944 30,007 77,666 69,179 224,374
Personal (net of unearned
interest) ........................... 37,883 11,353 21,892 92,592 17,182 180,902
Lease financing (net of
unearned interest) .................. 217 283 796 2,939 9 4,244
--------- --------- --------- --------- --------- ---------
Total Interest Earning Assets ...................... 250,299 58,746 113,669 361,906 168,411 953,031
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Interest Bearing Liabilities
Demand deposits ............................... 22,958 -- -- 130,104 -- 153,062
Savings deposits .............................. 98,802 -- 20,556 39,521 -- 158,879
Certificates of deposit
over $100,000 ................................. 15,323 5,822 9,445 15,394 334 46,318
Time deposits ................................. 98,304 62,757 75,578 135,347 914 372,900
Short-term borrowings ......................... 5,292 -- -- -- 5,292
Long-term debt ................................ 5,000 -- -- -- -- 5,000
Other interest bearing liabilities ............ 497 -- -- -- 4,309 4,806
--------- --------- --------- --------- --------- ---------
Total Interest Bearing Liabilities ................. 246,176 68,579 105,579 320,366 5,557 746,257
--------- --------- --------- --------- --------- ---------
Gap ................................................ $ 4,123 $ (9,833) $ 8,090 $ 41,540 $ 162,854 $ 206,774
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Cumulative Gap ..................................... $ 4,123 $ (5,710) $ 2,380 $ 43,920 $ 206,774 $ 413,548
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Cumulative sensitivity ratio ....................... 1.02 0.98 1.01 1.06 1.28
Commercial, financial and agricultural
loans maturing after one year with:
Fixed interest rates .......................... $ 13,717 $ 25,495 $ 39,212
Variable interest rates ....................... 9,990 29,873 39,863
--------- --------- ---------
Total ......................................... $ 23,707 $ 55,368 $ 79,075
--------- --------- ---------
--------- --------- ---------
</TABLE>
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20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
1996
Omega reported earnings in 1996 of $16,227,000, an increase of 15.3% over 1995.
On a fully diluted basis, net income per common share continues to improve,
reaching $2.53 in 1996, an increase of 14.5%, or $.32, over 1995. Several
important occurrences took place in 1996 which, in management's belief helped to
create these record financial results. They are as follows:
o strong net interest margin
o increased fee income on traditional banking services
o significant reduction in FDIC insurance premiums
o termination of defined benefit plan
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Return on Average Assets
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
1.32% 1.30% 1.36% 1.47% 1.61%
Assets were $1,007,345,000 at December 31, 1996, representing a $12,505,000, or
1.3%, increase over year end 1995. Loans (net of unearned discount) were
$696,597,000 compared to $703,125,000 at December 31, 1995, a decrease of 0.9%,
or $6,528,000. Deposits decreased by $4,152,000, or 0.5%, at December 31,1996
when compared to December 31, 1995.
Return on average equity increased from 11.90% to 12.51% in 1996, while return
on average assets increased to 1.61% from 1.47% in 1995. Omega's performance can
be compared to its national peers with consolidated assets of $1 billion to $3
billion (using the most current data for September 30, 1996).
Omega Peers
----- -----
Return on average assets ........ 1.57% 1.18%
Return on average equity ........ 12.42% 13.55%
The inclusion of Montour Bank for the first full year since its acquisition in
the third quarter of 1995 added $246,000 to net income in 1996. This equates to
11.4% of the $2,158,000 increase in net income in 1996 as compared to 1995.
1995
Omega reported earnings in 1995 of $14,069,000, an increase of 10.0% over 1994.
On a fully diluted basis, net income per common share continued 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
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Return on Average Equity
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
13.55% 12.15% 11.75% 11.90% 12.51%
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.
- --------------------------------------------------------------------------------
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, as of December 31, 1995.
Omega Peers
----- -----
Return on average assets ............................. 1.47% 1.14%
Return on average equity ............................. 11.90% 12.93%
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 1994-1996. In
addition, it shows the changes attributable to the volume and rate components of
net interest income.
1996
Total average loans were $704,259,000 in 1996 at a yield of 8.91% that produced
$62,740,000 in interest income. This represented a $30,447,000, or 4.5%,
increase in average volumes from 1995. The yield decreased 8 basis points from
8.99% in 1995 causing a decrease of $492,000 in interest income, partially
offsetting an increase of $2,627,000 of favorable mix and volume changes for a
net increase of $2,135,000, or 3.5%, when compared to 1995. The yield decrease
was a direct response to the lower rate environment in 1996 than in 1995.
Investment securities averaged $227,102,000 for an increase of $12,270,000, or
5.7%. The yield increased to 5.64% from 5.37% in 1995. Interest income from
securities increased a total of $1,268,000, with $816,000 attributable to higher
volumes, and $452,000 due to higher yields. Interest bearing deposits decreased
$1,016,000, or 60.7%, and federal funds sold increased 72.1%, or $9,002,000. The
net increase in average volumes of $20,256,000 on the above three assets was a
result of funds supplied by deposits.
Total interest earning assets averaged $953,510,000 at a yield of 8.05% and
produced total interest income of $76,720,000 for 1996. Compared to 1995, the
average volumes increased $50,703,000, or 5.6%. The yield decreased 3 basis
points from 8.08% during a lower rate environment in 1996, where prime averaged
8.25% as compared to 8.75% in 1995 as the mix of earning assets shifted from
70.3% loans in 1995 to 69.8% loans in 1996 (See Average Asset Mix Change chart
on page 11). Interest income increased $3,876,000 from volume and mix changes
and decreased $129,000 from generally lower yields producing a net increase of
5.1%, or $3,747,000.
Total interest bearing liabilities averaged $752,894,000 at a cost of
$30,320,000 for a composite rate of 4.03%. This represented an increase in
interest bearing liabilities of 5.2%, or $37,309,000, over 1995. The composite
rate decreased from 4.06% in 1995, or 3 basis points. Interest expense decreased
$760,000 due to lower rates and increased $2,063,000 due to favorable volume and
mix changes as discussed in the Financial Condition section. These changes
resulted in a net increase of $1,303,000, or 4.5%, in interest expense.
Non-interest bearing funding sources, including equity, averaged $256,749,000 in
1996, compared to $242,230,000 in 1995, for an increase of $14,519,000, or 6.0%.
This resulted in a decrease of 3 basis points in the rate to fund interest
earning assets (computed by dividing the total interest expense by the total
average earning assets) from 3.21% in 1995 to 3.18% in 1996.
Net interest income was $46,400,000 for 1996, an increase of $2,444,000, or
5.6%, from 1995. This was the result of an increase of $1,813,000 in favorable
volume and mix changes and $631,000 as a result of interest rate effects. Net
yield was 4.87% in 1996 and 1995. On a fully tax equivalent basis, the net yield
decreased from 5.05% to 5.03% in 1996.
- --------------------------------------------------------------------------------
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Following is a schedule comparing Omega's margin performance to the average of
its national peers as of September 30, 1996:
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
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 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 December 31, 1995:
Percent of average earning assets Omega Peers
--------------------------------- ----- -----
Interest income - tax equivalent ........ 8.25% 8.48%
Interest expense ........................ 3.21 3.72
Net interest income - tax equivalent..... 5.05 4.73
- --------------------------------------------------------------------------------
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 5
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1996 1995
---------------------------------- ------------------------------
Average Yield/ Average Yield/
Balance(1) Interest Rate Balance(1) Interest Rate
---------- -------- ---- -------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (5),(7) ........................................ $ 686,541 $ 61,504 8.96% $660,560 $ 59,657 9.03%
Tax-exempt loans ..................................... 17,718 1,236 6.98 13,252 948 7.15
---------- -------- ---- -------- -------- ----
Total loans ........................................ 704,259 62,740 8.91 673,812 60,605 8.99
Investment securities ................................ 192,489 11,208 5.82 171,286 9,498 5.55
Tax-exempt investment securities ..................... 34,613 1,593 4.60 43,546 2,035 4.67
---------- -------- ---- -------- -------- ----
Total investment securities ........................ 227,102 12,801 5.64 214,832 11,533 5.37
Interest bearing deposits ............................ 657 35 5.33 1,673 92 5.50
Federal funds sold ................................... 21,492 1,144 5.32 12,490 743 5.95
---------- -------- ---- -------- -------- ----
Total interest earning assets .......................... 953,510 76,720 8.05 902,807 72,973 8.08
Non-interest earning assets:
Cash and due from banks .............................. 32,581 33,636
Allowance for loan losses ............................ (11,795) (11,368)
Premises and equipment ............................... 17,584 16,988
Other assets(8) ...................................... 17,763 15,752
---------- --------
Total .............................................. $1,009,643 $957,815
---------- --------
---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits(2) .................. $ 221,904 4,496 2.03 $220,460 4,603 2.09
Savings deposits ..................................... 104,257 2,407 2.31 105,858 2,451 2.32
Time deposits ........................................ 418,006 22,960 5.49 382,682 21,556 5.63
Other, including short-term borrowings, long-term debt
and other interest bearing liabilities ............. 8,727 457 5.24 6,585 407 6.18
---------- -------- ---- -------- -------- ----
Total interest bearing liabilities ..................... 752,894 30,320 4.03 715,585 29,017 4.06
-------- --------
Non-interest bearing liabilities:
Demand deposits ...................................... 113,046 110,687
Other ................................................ 14,011 13,275
Shareholders' equity ................................... 129,692 118,268
---------- --------
Total .............................................. $1,009,643 $957,815
---------- --------
---------- --------
Net interest income .................................... $ 46,400 $ 43,956
-------- --------
-------- --------
Net yield on interest earning assets(3) ................ 4.87% 4.87%
---- ----
---- ----
Net yield -- tax equivalent basis(4).................... 5.03% 5.05%
---- ----
---- ----
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 5
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(In thousands)
<TABLE>
<CAPTION>
1994 1996 Compared to 1995 1995 Compared to 1994
---------------------------- Increase (Decrease) Due To (6) Increase (Decrease) Due To (6)
Average Yield/ ------------------------------ ------------------------------
Balance(1) Interest Rate Volume Rate Total Volume Rate Total
---------- -------- ---- ------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (5),(7) ........................ $617,601 $51,594 8.35% $2,315 $(468) $1,847 $3,714 $4,349 $8,063
Tax-exempt loans ..................... 14,820 919 6.20 312 (24) 288 (103) 132 29
-------- ------- ---- ------ ----- ------ ------ ------ ------
Total loans ........................ 632,421 52,513 8.30 2,627 (492) 2,135 3,611 4,481 8,092
Investment securities ................ 178,500 9,315 5.22 1,228 482 1,710 (388) 571 183
Tax-exempt investment securities ..... 56,240 2,583 4.59 (412) (30) (442) (592) 44 (548)
-------- ------- ---- ------ ----- ------ ------ ------ ------
Total investment securities ........ 234,740 11,898 5.07 816 452 1,268 (980) 615 (365)
Interest bearing deposits ............ 3,140 135 4.30 (54) (3) (57) (74) 31 (43)
Federal funds sold ................... 12,878 544 4.22 487 (86) 401 (17) 216 199
-------- ------- ---- ------ ----- ------ ------ ------ ------
Total interest earning assets .......... 883,179 65,090 7.37 3,876 (129) 3,747 2,540 5,343 7,883
Non-interest earning assets:
Cash and due from banks .............. 33,919
Allowance for loan losses ............ (11,229)
Premises and equipment ............... 12,287
Other assets (8) ..................... 18,684
--------
Total .............................. $936,840
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2) . $238,320 4,740 1.99 29 (136) (107) (367) 230 (137)
Savings deposits ..................... 115,311 2,629 2.28 (34) (10) (44) (223) 45 (178)
Time deposits ........................ 349,727 16,097 4.60 1,950 (546) 1,404 1,617 3,842 5,459
Other, including short-term
borrowings, long-term debt and
other interest bearing liabilities . 4,258 181 4.25 118 (68) 50 124 102 226
-------- ------- ---- ------ ----- ------ ------ ------ ------
Total interest bearing liabilities ..... 707,616 23,647 3.34 2,063 (760) 1,303 1,151 4,219 5,370
------- ------ ----- ------ ------ ------ ------
Non-interest bearing liabilities:
Demand deposits ...................... 108,606
Other ................................ 11,830
Shareholders' equity ................... 108,788
--------
Total .............................. $936,840
========
Net interest income .................... $41,443 $1,813 $ 631 $2,444 $1,389 $1,124 $2,513
======= ====== ===== ====== ====== ====== ======
Net yield on interest earning
assets(3) ............................ 4.69%
====
Net yield -- tax equivalent basis(4) ... 4.90%
====
</TABLE>
1) Average balances were calculated using a daily average.
2) Includes NOW and money market accounts.
3) Net yield on interest earning assets is net interest income divided by
average interest earning assets.
4) Interest on obligations of states and municipalities is not subject to
federal income tax. In order to make the net yield comparable on a fully
taxable basis, a tax equivalent adjustment is applied against the
tax-exempt income utilizing a federal tax rate of 35% in 1996 and 1995 and
34% in 1994.
5) Non-accruing loans and investments are included in the above table until
they are charged off.
6) The change in interest due to rate and volume has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
7) Interest on loans includes income/(loss) of $72,000 in 1996, $(71,000) in
1995 and $(10,000) in 1994 from interest rate contracts used to hedge prime
interest rate loans.
8) Includes gross unrealized gains on securities available for sale.
- --------------------------------------------------------------------------------
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES
Omega's provision for loan losses was $979,000 in 1996 and $713,000 in 1995 for
an increase of $266,000 that was precipitated by the increase in the loan
portfolio. The provision for loan losses exceeded net charge-offs by $152,000 in
1996 and by $195,000 in 1995. Net charge-offs in 1996 and 1995 were .12% and
.08%, respectively, of average loans outstanding. In addition, non-performing
loans as a ratio to the allowance for loan losses was 28.2% at year end 1996 and
39.7% at the end of 1995. The allowance for loan losses as a ratio to net loans
was 1.70% and 1.66% for December 31, 1996 and 1995, respectively. The ratio of
net charge-offs to average loans compared to our national peers is as follows:
Omega Peers
----- -----
September 30, 1996 ...................... .11% .24%
December 31, 1995 ....................... .08 .26
Management believes that the allowance for loan losses at December 31, 1996 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]
The printed document contains a bar graph depicting the following plot points:
Net Interest Yield
Yield on Cost to Fund Net Interest
Earning Assets Earning Assets Yield
-------------- -------------- -----
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%
1996 8.05% 3.18% 4.87%
- --------------------------------------------------------------------------------
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NON-INTEREST INCOME
1996
Non-interest income grew to $9,020,000 during 1996 for a 12.5%, or $999,000,
increase when compared to $8,021,000 for 1995. All major categories of
non-interest income were improved in 1996, as compared to 1995. As the
Corporation continued to place emphasis on traditional banking services by
expanding product lines and services, trust fees increased by $155,000, or 6.6%,
and fees relating to deposit accounts grew $229,000, or 8.6%, in 1996. Net gains
from investment and loan transactions increased by $153,000, or 23.5%, and other
income was increased by $462,000, or 19.7%, primarily as a result of a gain on
the sale of a property owned by the Corporation as satisfaction of a previous
debt.
As a percentage of average assets, non-interest income (excluding securities
gains) was .82% for 1996, as compared to .77% in 1995. When compared to our
national peers (most current data of September 30, 1996), Omega's ratio was .77%
and the peer average was 1.06%.
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.
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Non-Interest Income to Average Assets
(excluding security gains)
1992 0.81%
1993 0.77%
1994 0.75%
1995 0.77%
1996 0.82%
As a percentage of average assets, non-interest income (excluding securities
gains) was .77% for 1995, as compared to .75% in 1994. The national peer average
for 1995 was 1.07%.
NON-INTEREST EXPENSE
1996
Omega's operating expenses were $31,087,000 for 1996 as compared to $31,462,000
for 1995, representing a decrease of $375,000, or 1.2%. Salaries and employee
benefits increased by only 1.7% over 1995. During 1996, Omega's defined benefit
retirement plan was terminated, which resulted in $284,000 being returned to the
Corporation and $107,000 being contributed directly to the Employee Stock
Ownership Plan, thereby reducing scheduled benefits expense by a total of
$391,000. See Note 12 of Notes to Consolidated Financial Statements. Occupancy
and equipment expenses were both successfully reduced in 1996 by a total of
$204,000. Data processing service costs were increased in 1996 by 6.0% due to
the addition of some new services being provided. It should be noted that the
total data processing service costs in 1996 are still lower than the actual
costs in 1994. For the second year in a row, the most significant decrease in
expenses 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 from 1994 to 1995. Then in 1996, Omega's FDIC insurance was
futher reduced, as Omega's banks were required to pay only the minimum amount of
$2,000 per year (per bank). This resulted in a reduction of expense of $925,000
from 1995 to 1996. It is likely that in the future these premiums may be raised,
as the level of the Bank Insurance Fund is maintained.
[GRAPHIC]
The printed document contains a bar graph depicting the following plot points:
Non-Interest Expense to Average Assets
1992 3.25%
1993 3.37%
1994 3.30%
1995 3.28%
1996 3.08%
As a percentage of average assets, non-interest expense was 3.08% for 1996 as
compared to 3.28% in 1995. At September 30, 1996, Omega's ratio of non-interest
expense to average assets was 3.10%, compared to a national peer average of
3.25%.
- --------------------------------------------------------------------------------
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. 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.
At December 31, 1995, Omega's ratio of non-interest expense to average assets
was 3.30%, compared to a national peer average of 3.45%.
INCOME TAXES
Income taxes for 1996 amounted to $7,127,000 compared to $5,733,000 in 1995. The
effective tax rate increased from 29.0% in 1995 to 30.5% in 1996, due mostly to
a change in the mix of tax-exempt investments and loans. Omega's level of
average tax-exempt investments and average tax-exempt loans decreased by 8.5%,
or $4,467,000 in 1996. Average tax-exempt investments and loans were 5.2% of
total average assets for 1996 and 5.9% for 1995. Tax-exempt income as a
percentage of income before income tax decreased to 12.1% from 15.1%. See Note
11 of Notes to Consolidated Financial Statements for further information on
income taxes.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
The Financial Accounting Standards Board ("FASB") has issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", which is required to be adopted as of January 1, 1997. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. These standards
are based on consistent application of a financial-components approach that
focuses on control. The FASB has also issued Statement No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125", which delays
adoption of certain components of Statement No. 125 until January 1, 1998.
Management believes that adoption of the statement will not materially affect
the Corporation's financial condition or results of operations.
- --------------------------------------------------------------------------------
28
<PAGE>
CONSOLIDATED BALANCE SHEETS
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks (Notes 1 and 3) .................................................. $ 30,380 $ 38,796
Interest bearing deposits with other financial institutions .............................. 512 843
Federal funds sold ....................................................................... 18,075 12,460
Investment securities held to maturity
(market value-$114,171 and $98,207 respectively) (Notes 1 and 4) ....................... 114,192 97,863
Investment securities available for sale (Notes 1 and 4) ................................. 127,654 121,845
Total loans (Notes 1, 5, 6 and 17) ....................................................... 698,323 706,640
Less: Unearned discount .................................................................. (1,726) (3,515)
Allowance for loan losses .............................................................. (11,820) (11,668)
----------- -----------
684,777 691,457
Premises and equipment, net (Notes 1 and 7) .............................................. 17,638 17,153
Other assets (Note 1) .................................................................... 14,117 14,423
----------- -----------
TOTAL ASSETS ............................................................................. $ 1,007,345 $ 994,840
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing ................................................................... $ 114,870 $ 116,729
Interest bearing ....................................................................... 731,160 733,453
----------- -----------
846,030 850,182
Short-term borrowings (Note 8) ........................................................... 5,292 1,545
Other liabilities ........................................................................ 10,332 8,339
ESOP debt (Note 12) ...................................................................... 4,213 4,373
Long-term debt (Note 9) .................................................................. 5,000 5,700
Other interest bearing liabilities ....................................................... 593 530
----------- -----------
TOTAL LIABILITIES ........................................................................ 871,460 870,669
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 ............................................... (3,375) (4,373)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares;
Issued -
6,104,246 shares at December 31, 1996;
6,048,966 shares at December 31, 1995
Outstanding -
6,033,926 shares at December 31, 1996;
6,022,966 shares at December 31, 1995 ................................................ 30,521 30,245
Capital surplus .......................................................................... 5,649 5,134
Retained earnings ........................................................................ 97,749 86,778
Cost of common stock in treasury:
70,320 shares at December 31, 1996;
26,000 shares at December 31, 1995 ..................................................... (2,266) (822)
Net unrealized gain on securities available for sale ..................................... 2,607 2,209
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............................................................... 135,885 124,171
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................................... $ 1,007,345 $ 994,840
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
29
<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,
-------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans ........................... $ 62,740 $ 60,605 $ 52,513
Interest and dividends on investment securities:
Taxable interest income ............................ 10,711 9,054 8,911
Tax-exempt interest income ......................... 1,593 2,035 2,583
Dividend income .................................... 497 444 404
Other interest income ................................ 1,179 835 679
-------- -------- --------
TOTAL INTEREST INCOME ................................ 76,720 72,973 65,090
INTEREST EXPENSE:
Interest on deposits ................................. 29,863 28,610 23,466
Interest on short-term borrowings .................... 134 243 120
Interest on long-term debt and
other interest bearing liabilities ................. 323 164 61
-------- -------- --------
TOTAL INTEREST EXPENSE ............................... 30,320 29,017 23,647
-------- -------- --------
NET INTEREST INCOME .................................. 46,400 43,956 41,443
Provision for loan losses (Note 6) ................... 979 713 623
-------- -------- --------
INCOME FROM CREDIT ACTIVITIES ........................ 45,421 43,243 40,820
OTHER INCOME:
Trust fees ........................................... 2,510 2,355 2,078
Service fees on deposit accounts ..................... 2,897 2,668 2,424
Investment securities gains and (losses), net (Note 4)
Investment securities held to maturity ............. 1 (85) 4
Investment securities available for sale ........... 788 695 780
Gain on sale of loans ................................ 15 41 33
Other ................................................ 2,809 2,347 2,483
-------- -------- --------
TOTAL OTHER INCOME ................................... 9,020 8,021 7,802
OTHER EXPENSE:
Salaries and employee benefits (Note 12) ............. 16,403 16,134 15,847
Net occupancy expense ................................ 2,189 2,374 2,087
Equipment expense .................................... 1,786 1,805 1,865
Data processing service .............................. 1,533 1,446 1,578
FDIC insurance premiums .............................. 8 933 1,850
Other ................................................ 9,168 8,770 7,733
-------- -------- --------
TOTAL OTHER EXPENSE .................................. 31,087 31,462 30,960
-------- -------- --------
INCOME BEFORE INCOME TAXES ........................... 23,354 19,802 17,662
Income tax expense (Notes 1 and 11) ................. 7,127 5,733 4,877
-------- -------- --------
NET INCOME ........................................... $ 16,227 $ 14,069 $ 12,785
-------- -------- --------
-------- -------- --------
EARNINGS PER SHARE (Notes 1 and 19)
Primary .............................................. $ 2.61 $ 2.28 $ 2.08
Fully diluted ........................................ $ 2.53 $ 2.21 $ 2.02
Weighted average shares and equivalents:
Primary .............................................. 6,106 6,049 6,015
Fully diluted ........................................ 6,346 6,296 6,246
The accompanying notes are an integral part of these statements.
</TABLE>
- --------------------------------------------------------------------------------
30
<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, 1994, 1995 and 1996
-----------------------------------------------------------------------------------------
Cost of Net
Unearned Common Unrealized
Preferred Com- Common Capital Retained Stock Securities
Stock pensation Stock Surplus Earnings In Treasury Gains Total
-------- --------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 ............. $ 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)
Amortization of unearned
compensation ......................... 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)
Amortization of unearned
compensation ......................... 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
Net income ............................. 16,227 16,227
Cash dividends, common -
$.84 per share ....................... (5,073) (5,073)
Cash dividends, preferred -
$1.80 per share ...................... (396) (396)
Amortization of unearned
compensation ......................... 998 998
Net unrealized gains on securities ..... 398 398
Tax benefit from employee stock
options .............................. 113 113
Tax benefit from preferred stock
dividends paid to ESOP ............... 100 100
Purchase of treasury stock -
73,241 shares ........................ (2,383) (2,383)
Exercised employee stock
options - 84,201 shares .............. 276 515 939 1,730
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1996 ........... $ 5,000 $ (3,375) $ 30,521 $ 5,649 $ 97,749 $ (2,266) $ 2,607 $135,885
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these statements.
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................................... $ 16,227 $ 14,069 $ 12,785
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................................... 3,349 3,416 3,190
Provision for loan losses .......................................... 979 713 623
Gain on sale of investment securities .............................. (789) (610) (784)
Gain on sale of fixed assets and other property owned .............. (304) (13) (187)
Gain on sale of loans .............................................. (15) (41) (33)
Increase in tax asset .............................................. (188) (175) (418)
Decrease in interest receivable and other assets ................... 45 2,334 368
Increase (decrease) in interest payable ............................ (570) 332 (1,557)
Increase (decrease) in taxes payable ............................... 338 (134) (101)
Amortization of deferred net loan fees ............................. (233) (362) (345)
Deferral of net loan fees .......................................... 237 180 123
Increase in accounts payable and accrued expenses .................. 836 36 561
-------- -------- --------
Total adjustments ................................................ 3,685 5,676 1,440
-------- -------- --------
Net cash provided by operating activities .............................. 19,912 19,745 14,225
Cash flows from investing activities:
Proceeds from the sale or maturity of:
Interest bearing deposits with other financial institutions ........ 3,471 5,755 1,306
Investment securities available for sale - sales and maturities ... 43,446 11,189 26,235
Investment securities held to maturity - maturities ............... 29,974 64,931 47,170
Purchase of:
Interest bearing deposits with other financial institutions ........ (3,140) (1,515) (1,888)
Investment securities available for sale ........................... (47,592) (11,986) (20,501)
Investment securities held to maturity ............................. (47,098) (54,293) (42,593)
Increase in loans .................................................... (5,207) (27,714) (14,117)
Gross proceeds from sale of loans .................................... 10,919 8,175 1,666
Capital expenditures ................................................. (2,448) (1,546) (1,495)
Sale of fixed assets and other property owned ........................ 524 237 1,036
Decrease (increase) in federal funds sold ............................ (5,615) (12,051) 3,954
Acquisition of bank, net of cash acquired of $562 .................... -- (1,880) --
-------- -------- --------
Net cash provided by (used in) investing activities .................... (22,766) (20,698) 773
Cash flows from financing activities:
Increase (decrease) in deposits, net ................................. (4,152) 13,520 (8,042)
Increase (decrease) in short-term borrowings, net .................... 3,747 (13,273) 4,317
Principal payment on long-term debt .................................. (700) (350) --
Proceeds from long-term debt ......................................... -- 5,000 --
Net change in other interest bearing liabilities ..................... 63 62 53
Dividends paid ....................................................... (4,080) (4,708) (4,334)
Tax benefit from preferred stock dividend and stock
option activity .................................................... 213 154 139
Issuance of common stock ............................................. 791 893 814
Acquisition of treasury stock ........................................ (2,383) (3,925) --
Proceeds from sale of treasury stock ................................. 939 225 38
-------- -------- --------
Net cash used in financing activities .................................. (5,562) (2,402) (7,015)
-------- -------- --------
Net increase (decrease) in cash and due from banks ..................... $ (8,416) $ (3,355) $ 7,983
-------- -------- --------
-------- -------- --------
Cash and due from banks at beginning of period ......................... $ 38,796 $ 42,151 $ 34,168
Cash and due from banks at end of period ............................... 30,380 38,796 42,151
-------- -------- --------
Net increase (decrease) in cash and due from banks ..................... $ (8,416) $ (3,355) $ 7,983
-------- -------- --------
-------- -------- --------
Interest paid .......................................................... $ 30,890 $ 28,685 $ 25,204
Income taxes paid ...................................................... 6,944 5,927 5,108
The accompanying notes are an integral part of these statements.
</TABLE>
- --------------------------------------------------------------------------------
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OMEGA FINANCIAL CORPORATION AND SUBSIDIARES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 three banks and four 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. Management believes
that Omega Financial Corporation has a relatively stable deposit base with no
major seasonal depositor or group of depositors. Most of Omega Financial
Corporation'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"), 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.
On December 31, 1996, two of Omega's banking subsidiaries were consolidated into
one, as Montour Bank was merged into Omega Bank.
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 to form 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 contracts 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.
- --------------------------------------------------------------------------------
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
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, 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.
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 the 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, 1996 and 1995, the carrying
value of other real estate owned and held for investment was $519,000 and
$552,000, 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.
- --------------------------------------------------------------------------------
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", which is required to be adopted as of January 1, 1997. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. These standards
are based on consistent application of a financial-components approach that
focuses on control. The FASB has also issued Statement No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125", which delays
adoption of certain components of Statement No. 125 until January 1, 1998.
Management believes that adoption of the statement will not materially affect
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.
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, 1996 and
1995 would approximate prime plus 100 - 150 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 mortgages (ARMs) or fixed rate mortgages. 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
- --------------------------------------------------------------------------------
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 150 - 200
basis points at December 31, 1996 and a spread of 125 - 150 basis points at
December 31, 1995. The current market rate for the fixed rate mortgages ranged
from 7.80% to 8.25% at December 31, 1996 and from 7.50% to 8.00% at December 31,
1995.
Personal loans and lease financing - This category is comprised primarily of
fixed rate loans, but does include personal lines of credit which have floating
rates. The fair value is estimated by discounting the future contractual cash
flows. The discount factor for these loans 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 9.36% and 9.05% on December 31, 1996 and
1995, 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 40 - 70 basis points
below the U.S. Treasury rate for the same term.
All other interest bearing liabilities' carrying values approximate fair value.
Short-term and long-term borrowings are on a floating basis and approximate
current market rates. Other interest bearing liabilities reprice annually at
current market rates.
At December 31, 1996, Omega had existing interest rate contracts with a total
notional balance of $50,000,000. These agreements had a negative fair value of
$99,000 based on dealer quotes on that date. At December 31, 1995, existing
interest rate swap agreements had a total notional balance of $20,000,000 and a
favorable fair value of $150,000. (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, 1996 and 1995, the commitment amount approximates fair value for
these financial instruments.
- --------------------------------------------------------------------------------
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(in thousands)
December 31, 1996 December 31, 1995
---------------------- ---------------------
Book Fair Book Fair
Value Value Value Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash and due from banks .................... $ 30,380 $ 30,380 $ 38,796 $ 38,796
Interest bearing deposits .................. 512 512 843 843
Federal funds sold ......................... 18,075 18,075 12,460 12,460
Investment securities held to maturity ..... 114,192 114,171 97,863 98,207
Investment securities available for sale ... 127,654 127,654 121,845 121,845
Loans (net of unearned interest):
Commercial, financial and agricultural .. 149,016 146,276 136,537 133,618
Real estate - commercial ................ 118,381 116,864 127,462 127,637
Real estate - construction .............. 19,680 19,597 18,346 18,417
Real estate - mortgage .................. 224,374 232,946 228,037 236,585
Personal ................................ 180,902 181,455 188,808 190,994
Lease financing ......................... 4,244 4,135 3,935 3,826
Allowance for loan losses ............... (11,820) -- (11,668) --
--------- --------- --------- ---------
Total loans ................................ 684,777 701,273 691,457 711,077
Interest receivable ........................ 7,549 7,549 7,747 7,747
--------- --------- --------- ---------
Total financial assets ..................... $ 983,139 $ 999,614 $ 971,011 $ 990,975
--------- --------- --------- ---------
--------- --------- --------- ---------
Demand deposits ............................ $ 267,933 $ 267,933 $ 268,861 $ 268,861
Savings deposits ........................... 158,878 158,878 171,343 171,373
Time deposits .............................. 419,219 422,061 409,978 414,213
Short-term borrowings ...................... 5,292 5,292 1,545 1,545
Long-term debt ............................. 5,000 5,000 5,700 5,700
Other interest bearing liabilities ......... 4,806 4,806 4,903 4,903
Interest payable ........................... 2,339 2,339 2,929 2,929
--------- --------- --------- ---------
Total financial liabilities ................ $ 863,467 $ 866,309 $ 865,259 $ 869,524
--------- --------- --------- ---------
--------- --------- --------- ---------
</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 $1,004,000
and $5,281,000 as of December 31, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT SECURITIES (IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------
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 .............................. $ 75 $ 75 6.50% $ -- $ --
After one year but within five years ......... 6,972 6,974 6.12 24 (22)
After five years but within ten years ........ -- -- -- -- --
After ten years .............................. -- -- -- -- --
Obligations of state and political subdivisions
Within one year .............................. 1,369 1,375 7.14 6 --
After one year but within five years ......... 3,002 3,001 6.06 6 (7)
After five years but within ten years ........ 524 517 6.10 -- (7)
After ten years .............................. 1,920 1,914 6.80 -- (6)
Corporate and other securities
Within one year .............................. 3,808 3,800 5.39 3 (11)
After one year but within five years ......... 16,330 16,289 6.04 57 (98)
After five years but within ten years ........ 7,582 7,616 6.13 35 (1)
After ten years .............................. 160 160 7.84 1 (1)
Mortgage-backed securities
Within one year .............................. 338 339 6.76 1 --
After one year but within five years ......... 24,063 24,008 6.17 61 (116)
After five years but within ten years ........ 17,381 17,491 6.26 124 (14)
After ten years .............................. 26,139 26,083 5.73 111 (167)
Investment in low income housing projects ...... 438 438 N/M -- --
Common stock ................................... 4,091 4,091 N/M -- --
-------- -------- ---- ----- ------
Total .......................................... $114,192 $114,171 6.05% $ 429 $ (450)
-------- -------- ---- ----- ------
-------- -------- ---- ----- ------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------
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 ............................... $ 26,774 $ 26,758 5.47% $ 20 $ (36)
After one year but within five years .......... 59,589 59,434 5.75 122 (277)
After five years but within ten years ......... -- -- -- -- --
After ten years ............................... -- -- -- -- --
Obligations of state and political subdivisions
Within one year ............................... 10,189 10,088 7.57 38 (139)
After one year but within five years .......... 18,607 18,684 6.89 126 (49)
After five years but within ten years ......... 1,708 1,716 7.48 8 --
After ten years ............................... 1,739 1,741 6.79 20 (18)
Common stock .................................... 5,049 9,233 N/M 4,231 (47)
-------- -------- ---- -------- --------
Total ........................................... $123,655 $127,654 6.06% $ 4,565 $ (566)
-------- -------- ---- -------- --------
-------- -------- ---- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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 projects ...... 387 387 N/M -- --
Common stock ................................... 3,741 3,741 N/M -- --
------- ------- ---- ------- -------
Total .......................................... $97,863 $98,207 5.87% $ 757 $ (413)
------- ------- ---- ------- -------
------- ------- ---- ------- -------
</TABLE>
<TABLE>
<CAPTION>
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
<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 projects ........ 313 313 N/M -- --
Common stock ..................................... 3,734 3,734 N/M -- --
-------- -------- ----- -------- --------
Total ............................................ $202,212 $195,107 6.44% $ 350 $ (7,455)
======== ======== ===== ======== ========
</TABLE>
<TABLE>
<CAPTION>
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)
======= ======= ===== ======= =======
</TABLE>
N/M = Not meaningful
- --------------------------------------------------------------------------------
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment yields were computed on a tax equivalent basis (using a 35% tax rate
for 1996 and 1995 and a 34% tax rate for 1994) for obligations of state and
political subdivisions. Total weighted average yield does not include the common
stock holdings.
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 $80,405,000, $68,225,000
and $65,500,000 at December 31, 1996, 1995 and 1994, 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,
------------------------
1996 1995 1994
---- ---- ----
Gross proceeds from securities transactions $73,420 $76,120 $73,405
Securities available for sale:
Realized gains .......................... 842 700 810
Realized losses ......................... 54 5 --
Securities held to maturity:
Realized gains .......................... 1 35 8
Realized losses ......................... -- 120 34
5. LOANS
Loans outstanding at the end of each year consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural.... $149,016 $136,537 $138,267 $147,600 $159,624
Real estate - commercial ................. 118,381 127,462 103,892 110,895 97,519
Real estate - construction ............... 19,680 18,346 12,252 12,394 16,284
Real estate - mortgage ................... 224,374 228,037 225,179 215,389 222,253
Personal ................................. 182,048 191,772 165,050 147,484 137,750
Lease financing .......................... 4,824 4,486 4,071 2,932 2,677
-------- -------- -------- -------- --------
Total ............................... $698,323 $706,640 $648,711 $636,694 $636,107
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
Non-accrual loans at December 31, 1996 and 1995 were $2,079,000 and $1,932,000,
respectively, representing .30% and .27% of loans. Interest income not recorded
on non-accrual loans in 1996, 1995 and 1994 was $201,000, $110,000 and $100,000,
respectively. Gross interest income that would have been recorded on non-accrual
loans had these loans been in a performing status was $273,000 in 1996, of which
$72,000 was included in interest income for the year ended December 31, 1996.
- --------------------------------------------------------------------------------
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance of allowance - beginning of period .. $11,668 $11,057 $11,168 $11,338 $ 8,100
Loans charged off:
Commercial, financial and agricultural .... 428 149 480 674 927
Real estate -
Commercial .............................. 77 -- 5 148 144
Mortgage ................................ -- 119 130 62 39
Personal .................................. 671 585 485 807 815
------- ------- ------- ------- -------
Total charge-offs ..................... 1,176 853 1,100 1,691 1,925
Recoveries of loans previously charged off:
Commercial, financial and agricultural .... 181 101 160 73 238
Real estate -
Commercial .............................. 38 -- 17 21 --
Mortgage ................................ -- 87 45 19 28
Personal .................................. 130 147 144 275 263
------- ------- ------- ------- -------
Total recoveries ...................... 349 335 366 388 529
------- ------- ------- ------- -------
Net charge-offs ............................. 827 518 734 1,303 1,396
Provision for loan losses ................... 979 713 623 1,133 4,634
Allowance acquired through bank purchase .... -- 416 -- -- --
------- ------- ------- ------- -------
Balance of allowance - end of period ........ $11,820 $11,668 $11,057 $11,168 $11,338
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Ratio of net charge-offs during period to
average loans outstanding ................... 0.12% 0.08% 0.12% 0.21% 0.22%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
As of December 31, 1996 and 1995, the recorded investment in the loans for which
impairment has been recognized in accordance with SFAS No. 114 as amended by
SFAS No. 118 is $931,000 and $849,000, respectively. The total allowance for
loan losses related to those impaired loans is $222,000 and $419,000, at
December 31, 1996 and 1995, respectively. 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 1996 1995
---------- -------- --------
Land ................................... -- $ 2,422 $ 2,192
Premises and leasehold improvements .... 5-40 years 19,348 18,901
Furniture, computer software
and equipment ........................ 3-20 years 16,175 14,514
Construction in progress ............... -- 212 339
-------- --------
38,157 35,946
Less accumulated depreciation .......... (20,519) (18,793)
-------- --------
$ 17,638 $ 17,153
-------- --------
-------- --------
Depreciation expense on premises and equipment charged to operations was
$1,763,000 in 1996, $1,987,000 in 1995 and $1,798,000 in 1994.
- --------------------------------------------------------------------------------
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following (in thousands):
December 31,
---------------
1996 1995
------ ------
Notes payable to the U.S. Treasury
Department, interest payable at
1/4 to 1% less than the average federal funds rate $ -- $1,120
Retail repurchase agreements ....................... 5,292 --
Federal Home Loan Bank advances,
interest payable at 5.22% ........................ -- 425
------ ------
$5,292 $1,545
------ ------
------ ------
During 1996, Omega entered into repurchase agreements with several of its
depositors, under which customers' funds are invested daily into an interest
bearing account. These funds are carried by the Corporation as short-term debt
and are collateralized by U.S. Government securities. The interest rate paid on
these funds is variable and subject to change monthly.
Omega has lines of credit established with various financial institutions for
overnight funding needs. These lines provided a total of $20,000,000 in both
1996 and 1995, with interest payable at the daily federal funds rate. There were
no borrowings on December 31, 1996 or December 31, 1995 under these credit
facilities. Additionally, Omega has a $29,074,000 line of credit with the
Federal Home Loan Bank of Pittsburgh for overnight funding needs.
Omega also has credit with the Federal Home Loan Bank of Pittsburgh with a
borrowing capacity of $46,721,000. If the Corporation were to purchase
additional Federal Home Loan Bank stock, the maximum borrowing capacity could be
increased to $303,653,000. The Federal Home Loan Bank is a source of both
short-term and long-term funding. Long-term debt outstanding against this line
was $5,000,000 and $5,700,000 as of December 31, 1996 and 1995, 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,
---------------
1996 1995
------ ------
Notes payable to Federal Home Loan Bank, with fixed rates
payable between 4.10% and 5.13% .............................. $ -- $ 700
Note payable to Federal Home Loan Bank, with variable rate
payable at Libor plus 2 basis points ...................... 5,000 5,000
------ ------
$5,000 $5,700
------ ------
------ ------
The note payable in the amount of $5,000,000 at December 31, 1996 with the
Federal Home Loan Bank will mature in 1998, with the full principal balance
payable upon maturity. Omega must maintain sufficient qualifying collateral, as
defined, to secure all outstanding advances.
- --------------------------------------------------------------------------------
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1996 (in
thousands):
Years ending December 31,
1997.................................. $ 277
1998.................................. 228
1999.................................. 163
2000.................................. 134
2001.................................. 134
Later years........................... 1,122
--------
Total minimum payments required....... $ 2,058
--------
--------
Rental expense charged to operations, net of sublease income, was $88,000,
$60,000 and $44,000 in 1996, 1995 and 1994, respectively, which includes
short-term cancellable leases.
11. INCOME TAXES
The components of income tax expense for the three years ended December 31, 1996
were (in thousands):
1996 1995 1994
------- ------- -------
Current tax expense ............... $ 7,451 $ 5,947 $ 5,123
Deferred tax benefit .............. (324) (214) (246)
------- ------- -------
Total tax expense ................. $ 7,127 $ 5,733 $ 4,877
------- ------- -------
------- ------- -------
Income tax expense related to realized securities gains was $276,000 in 1996,
$213,000 in 1995 and $269,000 in 1994.
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,
--------------------------------
1996 1995 1994
---- ---- ----
Federal tax at statutory rate ........ 35.0% 35.0% 34.3%
Tax exempt income .................... (3.7) (4.6) (6.1)
Low income housing credits ........... (0.4) (0.8) (0.1)
Other, net ........................... (0.4) (0.6) (0.5)
---- ---- ----
Effective rate ....................... 30.5% 29.0% 27.6%
---- ---- ----
---- ---- ----
- --------------------------------------------------------------------------------
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deductible temporary differences and taxable temporary differences gave rise to
a net deferred tax asset for Omega as of December 31, 1996 and 1995. The
components giving rise to the net deferred tax asset are detailed below (in
thousands):
December 31,
----------------------
1996 1995
------- -------
Deferred Tax Assets
Loan loss reserve .............................. $ 3,957 $ 3,774
Deferred compensation .......................... 588 530
Employee benefits .............................. 336 23
Other .......................................... 6 69
------- -------
Total ........................................ 4,887 4,396
Deferred Tax Liabilities
Depreciation ................................... (353) (347)
Unrealized net gains on securities ............. (1,392) (1,177)
Intangibles .................................... (547) (570)
Auto leases, net ............................... (526) (439)
Other .......................................... (358) (340)
------- -------
Total ........................................ (3,176) (2,873)
Net deferred tax asset
------- -------
included in other assets ....................... $ 1,711 $ 1,523
------- -------
------- -------
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 Stock Compensation Plans
Omega has four stock-based compensation plans, the Employee Stock Purchase Plan,
the Stock Option Plan (1986), (the "1986 Plan"), the 1996 Employee Stock Option
Plan (the "1996 Plan") and the Non-Employee Director Stock Option Plan. The 1996
Plan replaces the 1986 Plan pursuant to which no options were issuable after
1996. Omega accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123, Omega's net income and
earnings per share would have been reduced to the following pro forma amounts:
1996 1995
-------- --------
Net income ..................... As reported ....... $ 16,227 $ 14,069
Pro forma ......... 15,789 13,739
Primary earnings per share ..... As reported ....... $ 2.61 $ 2.28
Pro forma ......... 2.54 2.23
Fully diluted earnings per
share .......................... As reported ....... $ 2.53 $ 2.21
Pro forma ......... 2.46 2.16
The FASB Statement No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995. Therefore, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
- --------------------------------------------------------------------------------
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The above computations were derived using the Black-Scholes option pricing model
with the following weighted average assumptions used for options granted in 1996
and 1995:
<TABLE>
<CAPTION>
Options Granted in 1996 Employee Employee Director
Stock Purchase Plan Stock Option Plan (1986) Stock Option Plan
------------------- ------------------------ -----------------
<S> <C> <C> <C>
Expected life of options .......... 1.75 years 5.77 years 5.77 years
Risk-free interest rate ........... 5.87% 6.25% 6.25%
Expected volatility ............... 12.57% 20.98% 20.98%
Expected dividend yield ........... 2.80% 2.80% 2.80%
</TABLE>
<TABLE>
<CAPTION>
Options Granted in 1995 Employee Employee Director
Stock Purchase Plan Stock Option Plan (1986) Stock Option Plan
------------------- ------------------------ -----------------
<S> <C> <C> <C>
Expected life of options .......... 1.75 years 5.77 years 5.77 years
Risk-free interest rate ........... 5.15% 5.41% 5.41%
Expected volatility ............... 9.41% 23.10% 23.10%
Expected dividend yield ........... 2.82% 2.82% 2.82%
</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. All shares
granted under the Plan are immediately vested. 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. Outstanding options are scheduled to
expire through December 31, 2001. The aggregate number of shares which may be
issued upon the exercise of options under this plan is 750,000 shares. Plan
options outstanding at December 31, 1996 have current exercise prices between
$22.05 and $31.50, with a weighted average exercise price of $28.76 and a
weighted average remaining contractual life of 4.26 years. All of these options
are exercisable.
The 1986 Plan and the 1996 Plan (collectively, the "Plans") are administered by
the Committee, whose members are not eligible to receive options under the
Plans. 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 vest over one
year and are exercisable at the fair market value of the shares at date of
grant. These options are scheduled to expire through January 1, 2006. The
aggregate number of shares which may be issued upon the exercise of options
under the 1996 Plan is 750,000 shares. 1986 Plan options outstanding at December
31, 1996 have exercise prices between $15.00 and $31.50, with a weighted average
exercise price of $23.18 and a weighted average remaining contractual life of
6.75 years. 141,531 of these options are exercisable; their weighted average
exercise price is $20.40.
The Non-Employee Director Stock Option Plan ("DSOP") is administered by the
Board. Options are granted automatically on May 1 each year to non-employee
directors of Omega. Options vest over one year and are exercisable at the fair
market value of the shares at the date of grant. These options are scheduled to
expire through May 1, 2006. The aggregate number of shares which may be issued
upon the exercise of options under this plan is 20,000. Plan options outstanding
at December 31, 1996 have exercise prices between $24.50 and $32.00, with a
weighted average exercise price of $27.42 and a weighted average remaining
contractual life of 8.3 years. 4,800 of these options are exercisable; their
weighted average exercise price is $25.13.
- --------------------------------------------------------------------------------
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of Omega's three stock-based compensation plans as of
December 31, 1994, 1995 and 1996, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1994 1995 1996
---------------------------- ---------------------------- ----------------------------
Employee Stock Purchase Plan Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ... 91,154 $ 19.66 112,595 $ 21.06 120,239 $ 25.24
Granted ............................ 57,251 22.05 56,572 28.35 56,354 31.50
Exercised .......................... (24,391) 17.23 (37,435) 20.55 (46,664) 23.23
Forfeited .......................... (11,419) 21.90 (11,493) 26.04 (5,010) 28.64
-------- -------- --------
Outstanding at end of year ......... 112,595 21.06 120,239 25.24 124,919 28.76
-------- -------- --------
-------- -------- --------
Options exercisable at year-end .... 112,595 120,239 124,919
Weighted-average fair value of
options granted during the year .. $ -- $ 4.25 $ 5.31
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996
---------------------------- ---------------------------- ----------------------------
Employee Stock Option Plan (1986) Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ... 167,664 $ 16.34 156,400 $ 17.82 178,868 $ 19.72
Granted ............................ 31,500 24.50 44,700 24.50 47,200 31.50
Exercised .......................... (38,764) 16.17 (22,232) 15.96 (37,337) 17.14
Forfeited .......................... (4,000) 24.50 -- -- -- --
-------- -------- --------
Outstanding at end of year ......... 156,400 17.82 178,868 19.72 188,731 23.18
-------- -------- --------
-------- -------- --------
Options exercisable at year-end .... 128,900 134,168 141,531
Weighted-average fair value of
options granted during the year .. $ -- $ 5.79 $ 7.54
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996
---------------------------- ---------------------------- ----------------------------
Director Stock Option Plan Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ... -- $ -- 2,600 $ 24.50 5,200 $ 25.10
Granted ............................ 2,600 24.50 2,600 25.75 2,400 32.00
Exercised .......................... -- -- -- (200) 24.50
Forfeited .......................... -- -- -- (200) 25.75
------ ------ --------
Outstanding at end of year ......... 2,600 24.50 5,200 25.10 7,200 27.42
------ ------ --------
------ ------ --------
Options exercisable at year-end .... -- 2,600 4,800
Weighted-average fair value of
options granted during the year $ -- $ 6.08 $ 7.72
</TABLE>
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,
1996, 1995 and 1994, expenses incurred under this plan were $2,173,000,
$1,250,000 and $1,173,000, respectively . Of the expense incurred in 1996, 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 1996, 30,885 shares of Omega common stock were acquired (none from Omega
treasury) at a cost of $1,009,000, and $129,000 was applied to debt service. 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. At
December 31, 1996 the ESOP holds 267,176 shares of Omega common stock 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 April 1, 1996, this loan was
refi-
- --------------------------------------------------------------------------------
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
nanced at a fixed rate of 8.25%, 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 $520,000, 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
1996, the debt service required $525,000, of which $364,000 represented interest
expense incurred by the ESOP. In 1995, the debt service required $537,000, of
which $393,000 represented interest expense incurred by the ESOP. Outstanding
ESOP debt as of December 31, 1996 was $4,213,000. Scheduled principal repayments
on the ESOP debt are as follows:
1997 ............. $ 178,000
1998 ............. 193,000
1999 ............. 210,000
2000 ............. 228,000
2001 ............. 247,000
Later years ...... 3,157,000
Defined Contribution Plan
Omega maintains a defined contribution plan for eligible employees as defined.
Contributions to the plan totaled $146,000, $135,000 and $143,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
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, 1996, six
officers and former officers were designated to be paid these supplemental
retirement benefits. The liability for these future ESI obligations was
$1,085,000 and $983,000 at December 31, 1996 and 1995, respectively. For the
years ended December 31, 1996, 1995 and 1994, $133,000, $128,000 and $128,000,
respectively, were charged to operations in connection with this program.
Defined Benefit Plan Termination
During 1994, management developed a plan to terminate the Corporation's defined
benefit plan and settle the vested benefits of the plan's participants. In
anticipation of this termination, Omega froze the accrual of benefits under the
defined benefit plan in 1994 and settled the plan's obligations to retired
employees receiving benefits in 1995. In 1996, Omega settled the vested benefits
of active employees and terminated the plan. The termination resulted in a
reversion to the Corporation of $391,000, of which $107,000 was contributed to
the ESOP.
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
$53,305,000 and $44,673,000 at December 31, 1996 and 1995, respectively. In
addition, the Corporation had $43,726,000 and $63,709,000 outstanding in unused
lines of credit commitments extended to its customers at December 31, 1996 and
1995, respectively.
- --------------------------------------------------------------------------------
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
There were no financial guarantees or options outstanding at December 31, 1996.
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.
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, 1996 and 1995, standby letters of credit issued and outstanding
amounted to $15,197,000 and $15,770,000, respectively.
Omega has entered into interest rate contracts to help manage its interest rate
risk associated with its commercial loans whose rates float with the prime rate.
These contracts include interest rate swaps and floors.
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, 1996 and 1995, the Corporation had the following interest rate
swap agreements in place:
Notional Amount
(in thousands)
-----------------------------
Maturity Fixed Rate 1996 1995
-------- ---------- ---- ----
8/01/96 8.52 $ -- $ 10,000
8/15/97 8.78 10,000 10,000
2/26/99 8.14 10,000 --
3/1/99 8.47 10,000 --
3/4/99 8.47 10,000 --
On these agreements the Corporation pays the prime rate and receives the fixed
rate.
Under interest rate floors, Omega pays a premium to a third party for interest
rate protection on an agreed notional principal amount, to offset the effect of
interest rates falling below the floor level during a specified period of time.
At December 31, 1996, the Corporation had the following interest rate floor
agreement in place:
(in thousands)
---------------------------------
Maturity Floor Rate Based on Notional Amount Premium Paid
- -------- ---------- -------- --------------- ------------
6/11/98 8.25% Prime $ 10,000 $ 27
Under this agreement, if the prime rate falls below the floor rate of 8.25%,
Omega still earns 8.25% on the notional balance of $10,000,000.
The notional amounts of interest rate contracts 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, 1996, 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.
- --------------------------------------------------------------------------------
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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 $13,949,000, $14,641,000 and $13,428,000 at
December 31, 1996, 1995 and 1994, respectively. During 1996, $3,554,000 of new
loans were made and repayments totaled $4,246,000. None of these loans were past
due, in non-accrual status or restructured at December 31, 1996.
- --------------------------------------------------------------------------------
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. OMEGA FINANCIAL CORPORATION (PARENT COMPANY ONLY)
Financial information (in thousands):
CONDENSED BALANCE SHEETS
(Unaudited)
December 31,
----------------------
ASSETS: 1996 1995
-------- --------
Cash ............................................. $ 2,925 $ 921
Investment in bank subsidiaries .................. 123,240 114,106
Investment in non-bank subsidiaries .............. 7,804 6,613
Premises and equipment, net ...................... 6,980 6,444
Other assets ..................................... 1,708 1,317
-------- --------
TOTAL ASSETS ....................................... $142,657 $129,401
-------- --------
-------- --------
LIABILITIES:
Dividends payable ................................ $ 1,389 $ --
Accounts payable and other liabilities ........... 1,170 857
ESOP debt ........................................ 4,213 4,373
-------- --------
TOTAL LIABILITIES .................................. 6,772 5,230
SHAREHOLDERS' EQUITY ............................... 135,885 124,171
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $142,657 $129,401
-------- --------
-------- --------
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
INCOME:
<S> <C> <C> <C>
Dividends from:
Bank subsidiaries ............................ $ 6,292 $ 6,736 $ 4,252
Non-bank subsidiaries ........................ -- 1,000 1,061
Management fees from subsidiaries .............. 8,372 7,486 6,693
-------- -------- --------
TOTAL INCOME ..................................... 14,664 15,222 12,006
EXPENSE:
Interest expense ............................... 3 2 --
Other .......................................... 8,372 7,486 6,693
-------- -------- --------
TOTAL EXPENSE .................................... 8,375 7,488 6,693
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES ..... 6,289 7,734 5,313
Income tax benefit ............................... (12) (27) (19)
-------- -------- --------
6,301 7,761 5,332
Equity in undistributed net income of subsidiaries 9,926 6,308 7,453
-------- -------- --------
NET INCOME ....................................... $ 16,227 $ 14,069 $ 12,785
-------- -------- --------
-------- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $ 16,227 $ 14,069 $ 12,785
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................... 741 652 615
Decrease (increase) in tax receivable ............................ 280 (168) 13
(Increase) decrease in interest and other receivable ............. (671) 546 (574)
Increase (decrease) in taxes payable ............................. 144 18 (177)
Increase (decrease) in accounts payable and accrued expenses ..... 135 (23) (269)
Undistributed earnings of subsidiaries ........................... (9,926) (6,284) (8,575)
-------- -------- --------
Total adjustments .............................................. (9,297) (5,259) (8,967)
-------- -------- --------
Net cash provided by operating activities .......................... 6,930 8,810 3,818
Cash flows from investing activities:
Acquisition of bank .............................................. -- (2,442) --
Capital expenditures ............................................. (1,240) (413) (432)
-------- -------- --------
Net cash used in investing activities .............................. (1,240) (2,855) (432)
Cash flows from financing activities:
Dividends paid ................................................... (4,080) (4,708) (4,334)
Net change in interest bearing liabilities ....................... 34 32 30
Change in unearned compensation .................................. 800 -- --
Tax benefit from preferred stock dividend
and stock option activity ...................................... 213 154 139
Issuance of common stock, net of retirement
of common stock ................................................ 791 832 814
Issuance, acquisition and sale of treasury stock, net ............ (1,444) (3,700) 38
-------- -------- --------
Net cash used in financing activities .............................. (3,686) (7,390) (3,313)
-------- -------- --------
Net increase (decrease) in cash and due from banks ................. $ 2,004 $ (1,435) $ 73
-------- -------- --------
-------- -------- --------
Cash and due from banks at beginning of period ..................... $ 921 $ 2,356 $ 2,283
Cash and due from banks at end of period ........................... 2,925 921 2,356
-------- -------- --------
Net increase (decrease) in cash and due from banks ................. $ 2,004 $ (1,435) $ 73
-------- -------- --------
-------- -------- --------
Income taxes paid .................................................. $ 6,922 $ 5,891 $ 5,108
</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, 1996, the total dividends which could
be paid to Omega without permission from the Comptroller of the Currency was
$28,806,000.
Under Federal Reserve restrictions, the banking subsidiaries are limited to the
amount they may loan to their affiliates, including Omega. At December 31, 1996,
Omega's banks had an aggregate lending limit to affiliates of $15,806,000 and no
amount was outstanding with Omega.
- --------------------------------------------------------------------------------
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
19. CALCULATION OF EARNINGS PER SHARE
The following table shows the calculation of earnings per share for the years
ended December 31, 1996, 1995 and 1994. (in thousands, except per share data)
<TABLE>
<CAPTION>
(in thousands, except per share data)
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Primary earnings per share
Net income .......................................................... $ 16,227 $ 14,069 $ 12,785
Dividend requirements for preferred stock,
net of tax benefits ............................................... (295) (288) (285)
-------- -------- ---------
Net earnings applicable to common stock ............................. $ 15,932 $ 13,781 $ 12,500
-------- -------- ---------
-------- -------- ---------
Shares and equivalents outstanding:
Weighted average number of common
shares outstanding ................................................ 6,038 5,989 5,957
Common stock equivalents - options .................................. 68 60 58
-------- -------- ---------
Weighted average of common shares
outstanding and equivalents ....................................... 6,106 6,049 6,015
-------- -------- ---------
-------- -------- ---------
Primary earnings per common share ................................... $ 2.61 $ 2.28 $ 2.08
Fully diluted earnings per share
Net income .......................................................... $ 16,227 $ 14,069 $ 12,785
Additional cash contribution required to service
debt on assumed conversion of preferred
stock (tax effected) .............................................. (169) (180) (184)
-------- -------- ---------
Net earnings applicable to common stock ............................. $ 16,058 $ 13,889 $ 12,601
-------- -------- ---------
-------- -------- ---------
Shares and equivalents outstanding:
Weighted average number of common
shares outstanding ................................................ 6,038 5,989 5,957
Common stock equivalents - options .................................. 78 77
59
Assumed conversion of preferred stock
outstanding and equivalents ....................................... 230 230 230
-------- -------- ---------
Weighted average of common shares
outstanding and equivalents ....................................... 6,346 6,296 6,246
-------- -------- ---------
-------- -------- ---------
Fully diluted earnings per common share ............................. $ 2.53 $ 2.21 $ 2.02
-------- -------- ---------
-------- -------- ---------
</TABLE>
- --------------------------------------------------------------------------------
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the years ended December 31,
1996 and 1995 follow (in thousands, except per share data):
<TABLE>
<CAPTION>
1996 Quarter ended
----------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total interest income ............. $18,904 $19,143 $19,427 $19,246
Net interest income ............... 11,310 11,583 11,790 11,717
Provision for loan losses ......... 227 225 302 225
Income before income taxes ........ 5,450 5,720 5,847 6,337
Applicable income taxes ........... 1,622 1,745 1,766 1,994
Net income ........................ 3,828 3,975 4,081 4,343
Primary earnings per share ........ $ .61 $ .64 $ .66 $ .70
Fully diluted earnings per share .. .59 .63 .64 .67
</TABLE>
<TABLE>
<CAPTION>
1995 Quarter ended
----------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
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
</TABLE>
21. REGULATORY CAPITAL REQUIREMENT
The Corporation and its bank subsidiaries are subject to risk-based capital
standards by which all bank holding companies and banks are evaluated in terms
of capital adequacy. These regulatory capital requirements are administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and its bank
subsidiaries must meet specific capital guidelines that involve quantitative
measures of the Corporation's and bank subsidiaries' assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Corporation's and bank subsidiaries' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and bank subsidiaries to each maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and Tier I
capital (as defined) to average assets (as defined). Management believes, as of
December 31, 1996 and 1995, that Omega and its bank subsidiaries meet all
capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the regulatory
banking agencies categorized Omega and its bank subsidiaries as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized Omega and its bank subsidiaries must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table. There are no conditions or events since these notifications that
management believes have changed the institutions' category.
- --------------------------------------------------------------------------------
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
The table below provides a comparison of Omega and its significant bank
subsidiaries risk-based capital ratios and leverage ratios to the minimum
regulatory requirements for the periods indicated:
<TABLE>
<CAPTION>
Minimum Require- Minimum Regulatory
ment For Capital Requirements to be
Actual Adequacy Purposes "Well Capitalized"
-------------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Omega Financial Corporation
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) ................ $139,411 20.3% $ 54,898 8.0% $ 68,622 10.0%
Tier I Capital (to Risk Weighted Assets) ............... 130,759 19.1% 27,449 4.0% 41,173 6.0%
Tier I Capital (to Average Assets) ..................... 130,759 13.0% 40,363 4.0% 50,453 5.0%
As of December 31, 1995:
Total Capital (to Risk Weighted Assets) ................ $127,965 18.5% $ 55,427 8.0% $ 69,283 10.0%
Tier I Capital (to Risk Weighted Assets) ............. 119,231 17.2% 27,713 4.0% 41,570 6.0%
Tier I Capital (to Average Assets) ................... 119,231 12.4% 38,313 4.0% 47,891 5.0%
Omega Bank
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) .............. $ 73,644 18.9% $ 28,350 8.0% $ 35,438 10.0%
Tier I Capital (to Risk Weighted Assets) ............. 68,732 17.6% 14,175 4.0% 21,263 6.0%
Tier I Capital (to Average Assets) ................... 68,732 12.0% 21,197 4.0% 26,496 5.0%
As of December 31, 1995:
Total Capital (to Risk Weighted Assets) .............. $ 64,170 17.7% $ 28,953 8.0% $ 36,192 10.0%
Tier I Capital (to Risk Weighted Assets) ............. 59,639 16.5% 14,477 4.0% 21,715 6.0%
Tier I Capital (to Average Assets) ................... 59,639 11.6% 20,580 4.0% 25,725 5.0%
Hollidaysburg Trust Company
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) .............. $ 29,786 17.5% $ 13,602 8.0% $ 17,002 10.0%
Tier I Capital (to Risk Weighted Assets) ............. 27,648 16.3% 6,801 4.0% 10,201 6.0%
Tier I Capital (to Average Assets) ................... 27,648 11.4% 9,687 4.0% 12,108 5.0%
As of December 31, 1995:
Total Capital (to Risk Weighted Assets) .............. $ 27,246 16.2% $ 13,425 8.0% $ 16,782 10.0%
Tier I Capital (to Risk Weighted Assets) ............. 25,135 15.0% 6,713 4.0% 10,069 6.0%
Tier I Capital (to Average Assets) ................... 25,135 11.2% 9,002 4.0% 11,253 5.0%
Penn Central National Bank
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) .............. $ 24,943 22.2% $ 9,000 8.0% $ 11,251 10.0%
Tier I Capital (to Risk Weighted Assets) ............. 23,516 20.9% 4,500 4.0% 6,750 6.0%
Tier I Capital (to Average Assets) ................... 23,516 12.6% 7,444 4.0% 9,306 5.0%
As of December 31, 1995:
Total Capital (to Risk Weighted Assets) .............. $ 23,852 20.3% $ 9,405 8.0% $ 11,756 10.0%
Tier I Capital (to Risk Weighted Assets) ............. 22,361 19.0% 4,703 4.0% 7,054 6.0%
Tier I Capital (to Average Assets) ................... 22,361 11.8% 7,566 4.0% 9,458 5.0%
</TABLE>
- --------------------------------------------------------------------------------
55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
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,
1996 and 1995, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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 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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Omega Financial
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Lancaster, Pa.
January 22, 1997
NOTICE OF ANNUAL MEETING
OF
SHAREHOLDERS
APRIL 29, 1997
TO OUR SHAREHOLDERS:
The 1997 annual meeting of shareholders of OMEGA FINANCIAL CORPORATION
("Omega") will be held on Tuesday, April 29, 1997 at 10:00 A.M. (prevailing
time), at The Penn State Scanticon, 215 Innovation Blvd., Penn State Research
Park, State College, Pennsylvania for the following purposes:
1. To elect three directors for three year terms, as more fully
described in the accompanying Proxy Statement; and
2. To transact such other business as may properly come before this
meeting or any postponement or adjournment thereof.
The Board of Directors has fixed February 26, 1997 as the record date
for the determination of shareholders entitled to vote at the annual meeting.
Only shareholders of record at the close of business on that date will be
entitled to notice of, and to vote at, the annual meeting.
If the annual meeting is adjourned for one or more periods aggregating
at least 15 days because of the absence of a quorum, those shareholders entitled
to vote who attend the reconvened annual meeting, if less than a quorum as
determined under applicable law, shall nevertheless constitute a quorum for the
purpose of acting upon any matter set forth in this Notice of Annual Meeting.
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE URGED
TO SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY. A SELF-ADDRESSED ENVELOPE
IS ENCLOSED FOR YOUR CONVENIENCE; NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.
By order of the Board of Directors,
David N. Thiel, Secretary
April 2, 1997
<PAGE>
OMEGA FINANCIAL CORPORATION
366 Walker Drive
State College, Pennsylvania 16801
PROXY STATEMENT
The enclosed proxy is solicited by and on behalf of Omega Financial
Corporation ("Omega") for use at the annual meeting of shareholders to be held
on Tuesday, April 29, 1997 at 10:00 A.M. (prevailing time) at The Penn State
Scanticon, 215 Innovation Blvd., Penn State Research Park, State College,
Pennsylvania and at any postponement or adjournment thereof. The approximate
date on which this Proxy Statement and the accompanying form of proxy will first
be sent or given to shareholders is April 2, 1997.
Sending in a signed proxy will not affect the shareholder's right to
attend the annual meeting and vote in person since the proxy is revocable. Any
shareholder giving a proxy has the power to revoke it by, among other methods,
giving written notice to the Secretary of Omega at any time before the proxy is
exercised.
The expense of the proxy solicitation will be borne by Omega. In
addition to solicitation by mail, proxies may be solicited in person or by
telephone, telegraph or teletype by directors, officers or employees of Omega
and its bank subsidiaries, Omega Bank, N.A. ("Omega Bank"), Hollidaysburg Trust
Company ("Hollidaysburg Trust "), and Penn Central National Bank ("Penn Central
Bank") (collectively, the "Banks"), without additional compensation. Omega is
required to pay the reasonable expenses incurred by recordholders of Omega
Common Stock who are brokers, dealers, banks or voting trustees, or their
nominees, for mailing proxy material and annual shareholder reports to any
beneficial owners of Omega's Common Stock they hold of record, upon request of
such recordholders.
A form of proxy is enclosed. If properly executed and received in time
for voting, and not revoked, the enclosed proxy will be voted as indicated in
accordance with the instructions thereon. If no directions to the contrary are
indicated, the persons named in the enclosed proxy will vote all shares of Omega
Common Stock for the election of all nominees for directorships hereinafter
named.
The enclosed proxy confers discretionary authority to vote with respect
to any and all of the following matters that may come before the meeting: (i)
matters which Omega does not know, a reasonable time before the proxy
solicitation, are to be presented at the meeting; (ii) approval of the minutes
of a prior meeting of shareholders, if such approval does not amount to
ratification of the action taken at the meeting; (iii) the election of any
person to any office for which a bona fide nominee is unable to serve or for
good cause will not serve; (iv) any proposal omitted from this Proxy Statement
and Proxy pursuant to Rule 14a-8 or Rule 14a-9 promulgated under the Securities
Exchange Act of 1934; and (v) matters incident to the conduct of the meeting. In
connection with such matters, the persons named in the enclosed form of proxy
will vote in accordance with their best judgment.
Omega had 6,025,348 shares of common stock, par value $5.00 per share
("Common Stock"), and 219,781 shares of Series A ESOP Cumulative Convertible
Preferred Stock, par value $5.00 per share ("Series A ESOP Preferred Stock"),
outstanding at the close of business on February 26, 1997, the record date for
the determination of shareholders entitled to receive notice of, and to vote at,
the annual meeting. Each share of Series A ESOP Preferred Stock is currently
convertible into 1.05 shares of Common Stock. All Series A ESOP Preferred Stock
is held of record by Omega's Employee Stock Ownership Plan Trust ("ESOP Trust").
Except for certain restrictions (hereinafter summarized) on the right to cast
more than 10% of the total votes which all shareholders are entitled to cast,
each holder of Omega's Common Stock and each holder of Series A ESOP Preferred
Stock, voting together and not as separate classes, is entitled to one vote for
each share of Common Stock and 1.05 votes for each share of Series A ESOP
Preferred Stock, respectively, held of record on the record date on each matter
which may be brought before the annual meeting.
The presence, in person or by proxy, of holders entitled to cast at
least a majority of the votes which the holders of all of the aggregate
outstanding shares of Omega Common Stock and Series A ESOP Preferred Stock are
entitled to cast constitutes a quorum for the purpose of considering and acting
on such matters. All shares of Omega's Common Stock and Series A ESOP Preferred
Stock present in person or represented by proxy and entitled to vote, no matter
how they are voted or whether they abstain from voting, will be counted in
1
<PAGE>
determining the presence of a quorum. If the annual meeting is adjourned because
of the absence of a quorum, those shareholders entitled to vote who attend the
adjourned meeting, although constituting less than a quorum as provided herein,
shall nevertheless constitute a quorum for the purpose of electing directors. If
the Annual Meeting is adjourned for one or more periods aggregating at least 15
days because of the absence of a quorum, those shareholders entitled to vote who
attend the reconvened Annual Meeting, if less than a quorum as determined under
applicable law, shall nevertheless constitute a quorum for the purpose of acting
upon any matter set forth in the Notice of Annual Meeting.
The election of directors will be determined by a plurality vote and
the three nominees receiving the most "for" votes will be elected. Approval of
any other proposal will require the affirmative vote of a majority of the shares
cast on the proposal. Under the Pennsylvania Business Corporation Law, an
abstention, withholding of authority to vote or broker non-vote will not have
the same legal effect as an "against" vote and will not be counted in
determining whether a proposal has received the required shareholder vote.
Omega is not currently aware of any matters which will be brought
before the annual meeting (other than procedural matters) which are not referred
to in the enclosed notice of the annual meeting.
Article 8 of Omega's Amended and Restated Articles of Incorporation, as
amended (the "Restated Articles"), restricts the rights of a Person (as
hereafter defined) to cast (or execute written consent with respect to) more
than 10% of the total votes which all shareholders are entitled to cast at a
meeting, unless authorized to do so by the Board of Directors and subject to
such conditions as the Board of Directors may impose. The term "Person" includes
not only individuals and entities, but also groups of individuals and entities
who act together for the purpose of acquiring, holding, disposing of or voting
Common Stock. The restrictions of Article 8 do not apply to the shares of Omega
Common Stock or Series A ESOP Preferred Stock held by the ESOP Trust.
The casting of votes by a Person as a proxy holder for other
shareholders is not counted in computing the 10% limitation to the extent that
the proxies so voted were revocable and were secured from other shareholders who
are not members of a group which includes such Person. Giving a revocable proxy
to a Person does not in itself cause the shareholder giving the proxy to be a
member of a group which includes such Person. Article 8 provides that the
determination by the Board of Directors of the existence or membership of a
group, and of the number of votes any Person or each member of a group is
entitled to cast, is final and conclusive absent clear and convincing evidence
of bad faith.
In the event of a violation of Article 8, in addition to other remedies
afforded Omega, the judges of election cannot count votes cast in violation of
Article 8 and Omega or its nominees have an option to acquire from the violator
shares of Common Stock in excess of the 10% limit at prices which would in
certain situations be lower than the then current market prices of such shares.
The foregoing is a brief summary of Article 8 and is qualified and
amplified in all respects by the exact provisions of the Restated Articles,
which can be obtained in the same manner as Omega's Annual Report on Form 10-K
for 1996 (see "ANNUAL REPORT AND FINANCIAL STATEMENTS").
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock
To the knowledge of Omega, as of February 26, 1997, no person or
entity, other than the ESOP Trust, was the beneficial owner of five percent or
more of its outstanding Common Stock. For information concerning the beneficial
ownership of Omega Common Stock and Series A ESOP Preferred Stock by the ESOP
Trust, see "Series A ESOP Preferred Stock." The following table sets forth
certain information, as of February 26, 1997, with respect to Omega's Common
Stock beneficially owned by each director and nominee for director, each
executive officer of the Company named in the "Summary Compensation Table" and
by all directors, nominees for director and executive officers of Omega as a
group. Also included is information with respect to shares of Series A ESOP
Preferred Stock which has been allocated to the accounts of directors and
officers who are participants in Omega's Employee Stock Ownership Plan ("ESOP").
2
<PAGE>
Unless otherwise specified, all persons listed on the following chart have sole
voting and investment powers with respect to their shares:
<TABLE>
<CAPTION>
Name of Individual or Number of Shares Percent of
Identity of Group Class Beneficially Owned (a) Ownership
----------------------- ---------------------- ---------
<S> <C> <C>
Raymond F. Agostinelli 10,942(b) *
Merle K. Evey 11,731(c) *
Robert T. Gentry 11,607(d) *
Philip E. Gingerich 30,400(e) *
David K. Goodman, Sr. 9,956(f) *
David B. Lee 110,327(g) 1.8%
George R. Lovette 11,520(h) *
D. Stephen Martz 39,816(i) *
Robert N. Oliver 3,822(j) *
James W. Powers, Sr. 4,647(k) *
Stanton R. Sheetz 2,735(l) *
Robert A. Szeyller 2,768(m) *
Daniel L. Warfel 40,154(n) *
Charles H. Zendt, Jr. 43,541(o) *
All directors and executive officers as
a group (16) persons 371,451(p)(q) 6.0%
*less than 1%
</TABLE>
(a) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in
the regulations of the Securities and Exchange Commission and,
accordingly, may include securities owned by or for, among others, the
spouse and/or minor children of the individual and any other relative
who has the same residence as such individual, as well as other
securities as to which the individual has or shares voting or
investment power or has the right to acquire within 60 days after
February 26, 1997. Beneficial ownership may be disclaimed as to certain
of the securities.
(b) This amount includes 8,058 shares held jointly with Mr. Agostinelli's
wife, 472 shares owned solely by Mr. Agostinelli's wife, and 1,260
shares owned by McLanahan Drug Store Mgmt. Co. Inc. of which Mr.
Agostinelli is president and owner. This amount also includes 400
shares issuable upon the exercise of options granted under the 1994
Stock Option Plan for Non-Employee Directors.
(c) This amount includes 1,307 shares held jointly with Mr. Evey's wife.
This amount also includes 400 shares issuable upon the exercise of
options granted under the 1994 Stock Option Plan for Non-Employee
Directors.
(d) This amount includes 1,030 shares owned jointly with Mr. Gentry's wife,
200 shares owned by their children, 5,000 shares issuable upon the
exercise of stock options granted to Mr. Gentry pursuant to the Omega
Stock Option Plan and 1,278 shares issuable upon the exercise of stock
options granted pursuant to the Omega Stock Purchase Plan, and 1,397
shares of Common Stock and 421 shares of Series A ESOP Preferred Stock
(convertible into 442 shares of Common Stock) allocated to Mr. Gentry's
account under the ESOP.
(e) This amount includes 2,888 shares owned jointly with Mr. Gingerich's
wife. This amount also includes 400 shares issuable upon the exercise
of options granted under the 1994 Stock Option Plan for Non-Employee
Directors.
(f) This amount includes 400 shares issuable upon the exercise of options
granted under the 1994 Stock Option Plan for Non-Employee Directors.
(g) This amount includes 1,908 shares owned jointly with Mr. Lee's wife,
733 shares owned solely by her, 1,134 shares owned by Mr. Lee's
daughter, 1,048 shares owned jointly by Mr. Lee's wife and son, 1,653
shares owned jointly with his children, 1,765 shares owned by the Lee
Family Partnership of which Mr. Lee is a partner and 4,668 shares owned
3
<PAGE>
by Centre Foods Enterprises, Inc., of which Mr. Lee is a director,
officer and shareholder. This amount also includes 32,200 shares
issuable upon the exercise of stock options granted to Mr. Lee pursuant
to the Omega Stock Option Plan, 1,507 shares issuable upon the exercise
of stock options granted pursuant to the Omega Stock Purchase Plan, and
9,143 shares of Common Stock and 2,002 shares of Series A ESOP
Preferred Stock (convertible into 2,102 shares of Common Stock)
allocated to Mr. Lee's account under the ESOP.
(h) This amount represents 8,509 shares owned jointly with Mr. Lovette's
wife and 2,611 shares owned jointly with his children and
grandchildren. This amount also includes 400 shares issuable upon the
exercise of options granted under the 1994 Stock Option Plan for
Non-Employee Directors.
(i) This amount includes 600 shares owned solely by Mr. Martz's wife, 500
shares owned by his wife and daughter, 8,000 shares issuable upon the
exercise of stock options granted to Mr. Martz pursuant to the Omega
Stock Option Plan, 1,507 shares issuable upon the exercise of stock
options granted pursuant to the Omega Stock Purchase Plan, and 1,416
shares of Common Stock and 424 shares of Series A ESOP Preferred Stock
(convertible to 445 shares of Common Stock) allocated to Mr. Martz's
account under the ESOP.
(j) This amount includes 684 shares owned jointly with Mr. Oliver's wife.
This amount also includes 400 shares issuable upon the exercise of
options granted under the 1994 Stock Option Plan for Non-Employee
Directors.
(k) This amount includes 3,640 shares owned by Mr. Powers' wife. This
amount also includes 400 shares issuable upon the exercise of options
granted under the 1994 Stock Option Plan for Non-Employee Directors.
(l) This amount includes 400 shares issuable upon the exercise of options
granted under the 1994 Stock Option Plan for Non-Employee Directors.
(m) This amount includes 400 shares issuable upon the exercise of options
granted under the 1994 Stock Option Plan for Non-Employee Directors.
(n) This amount includes 88 shares owned by Mr. Warfel's wife as custodian
for their son. This amount also includes 19,680 shares issuable upon
the exercise of stock options granted to Mr. Warfel pursuant to the
Omega Stock Option Plan, 1,435 shares issuable upon the exercise of
stock options granted pursuant to the Omega Stock Purchase Plan, and
4,615 shares of Common Stock and 1,376 shares of Series A ESOP
Preferred Stock (convertible into 1,445 shares of Common Stock)
allocated to Mr. Warfel's account under the ESOP.
(o) This amount includes 2,503 shares owned jointly with Mr. Zendt's wife.
This amount also includes 29,522 shares issuable upon the exercise of
options granted to Mr. Zendt pursuant to the Omega Stock Option Plans,
1,280 shares issuable upon the exercise of stock options granted
pursuant to the Omega Stock Purchase Plan, and 5,582 shares of Common
Stock and 1,286 shares of Series A ESOP Preferred Stock (convertible
into 1,350 shares of Common Stock) allocated to Mr. Zendt's account
under the ESOP.
(p) This amount includes an aggregate of 122,180 shares issuable upon the
exercise of stock options granted to all executive officers of Omega as
a group pursuant to the Omega Stock Option Plan and the Omega Stock
Purchase Plan, an aggregate of 3,600 shares issuable upon the exercise
of options granted to all non-employee directors of Omega as a group
under the 1994 Stock Option Plan for Non-Employee Directors, and an
aggregate of 28,232 shares of Common Stock and 6,954 shares of Series A
ESOP Preferred Stock (convertible into an aggregate of 7,302 shares of
Common Stock) allocated under the ESOP to the accounts of all executive
officers of Omega as a group.
(q) Does not include 277,650 shares of common stock and 219,781 shares of
Series A ESOP Preferred Stock (convertible into an aggregate of 230,770
shares of common stock) which are owned by the ESOP of which Mr. Lee,
Mr. Zendt and Mr. Lovette are Trustees, other than any shares which
have been allocated to the accounts of executive officers.
4
<PAGE>
Series A ESOP Preferred Stock
As of February 26, 1997, all of the 219,781 shares of the Series A ESOP
Preferred Stock outstanding were held of record by Omega's ESOP Trust.
Additionally, as of such date, the ESOP Trust held of record 277,650 shares of
Common Stock. Each share of Series A ESOP Preferred Stock is convertible into
1.05 shares of Common Stock. If all of the shares of Series A ESOP Preferred
Stock held of record by the ESOP Trust were converted into Common Stock, the
ESOP Trust would hold of record 508,420 shares or approximately 8.1% of Omega's
Common Stock. The ESOP Trust's business address is c/o Omega Financial
Corporation, 366 Walker Drive, State College, Pennsylvania 16801.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires Omega's
executive officers, directors, and persons who beneficially own more than ten
percent of a registered class of Omega's Common Stock to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of Omega.
Executive officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish Omega with copies of all Section 16(a)
forms they file.
To Omega's knowledge, based solely on a review of the copies of such
reports furnished to Omega and written representations that no other reports
were required, all Section 16(a) filing requirements applicable to Omega's
executive officers, directors and greater than ten percent beneficial
shareholders were complied with during the year ended December 31, 1996, except
that Mr. Stanton R. Sheetz did not report one transaction on a timely basis.
ELECTION OF DIRECTORS
The Bylaws of Omega provide that the Board of Directors shall consist
of not less than five nor more than twenty-five directors and that within these
limits the number of directors shall be as established by the Board of
Directors. The Board of Directors has set the number of directors at twelve. The
Bylaws further provide that the Board shall be classified into three classes, as
nearly equal in number as possible. One class of directors is to be elected
annually. Three directors are to be elected at the 1997 annual meeting of
shareholders for a term of three years each.
In connection with the merger of Penn Central Bancorp, Inc. ("Penn
Central Bancorp") into Omega on January 28, 1994, Merle K. Evey, Robert T.
Gentry, David K. Goodman, Sr., D. Stephen Martz, Robert N. Oliver and Stanton R.
Sheetz were appointed to the Board of Directors of Omega. Subject to reaching
Omega's mandatory retirement age of 70, Omega has undertaken to have the
individuals designated by Penn Central Bancorp as directors to serve for a
period of not less than three years from and after the effective date of the
merger.
The Board of Directors, pursuant to the Bylaws, has nominated the three
persons listed below to be nominees for election to the Board of Directors. All
are currently serving as directors of Omega. If any of the nominees becomes
unavailable for election for any reason, the Board of Directors may designate a
substitute nominee. Omega expects all nominees to be willing and able to serve.
The Bylaws of Omega require that nominations for directors to be
elected at the annual meeting of shareholders, other than those made by or on
behalf of the existing management of Omega, must be in writing, must contain
certain information required by the Bylaws and must be delivered or mailed to
the President of Omega not less than fourteen days nor more than fifty days
preceding the date of the annual meeting.
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. On December 31, 1996, Montour Bank
("Montour") was also merged into Omega Bank. Any reference below to service with
Omega Bank includes service with Omega Bank's predecessors prior to such merger.
5
<PAGE>
The following table sets forth certain information regarding Omega's
nominees for election to the Board of Directors:
<TABLE>
<CAPTION>
Positions with Omega/
Principal Occupation During
Name of Nominee Age the Past Five Years
--------------- --- -------------------
<S> <C> <C>
Raymond F. Agostinelli 62 Director of Omega Since 1993; Director of Omega
Bank since 1982; President and owner of
McLanahan Drug Store Mgmt. Co. Inc.
Merle K. Evey 66 Director of Omega since 1994; Director of Penn
Central Bancorp from 1985 to 1994; Director of
Hollidaysburg Trust since 1981; a partner in
the law firm of Evey, Routch, Black, Dorezas
and Magee.
David B. Lee 59 Chairman of the Board of Omega since 1989,
Chief Executive Officer of Omega since 1986;
President of Omega from 1986 to 1994;
President, Chief Executive Officer and Director
of Omega Bank since 1977; Director, President
and Chief Executive Officer of Montour since
1995.
The following table sets forth certain information regarding those
directors whose terms will expire at either the 1998 or 1999 annual meeting of
shareholders:
Terms expiring at the 1998 annual meeting of shareholders:
Positions with Omega/
Principal Occupation During
Name of Director Age the Past Five Years
---------------- --- -------------------
George R. Lovette 66 Director of Omega since 1986; Director of Omega
Bank since 1982; Vice President for Business and
Operations of Pennsylvania State University
until retirement in 1989.
Robert N. Oliver 63 Director of Omega since 1994; Director of Penn
Central Bancorp from 1993 to 1994; Director of
Penn Central Bank since 1991; owner and
operator of Oliver Farms.
Stanton R. Sheetz 41 Director of Omega since 1994; Director of
Hollidaysburg Trust since 1986; Executive Vice
President and Director of Sheetz, Inc. until
1995; since 1995, Director, President and Chief
Executive Officer of Sheetz, Inc. since 1995,
retail convenience stores.
Robert A. Szeyller 58 Director of Omega since 1989; Director of Omega
Bank since 1985; Managing Director,
Pennsylvania Financial Group, Inc., an
insurance, securities and consulting firm.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Terms expiring at the 1999 annual meeting of shareholders:
Positions with Omega/
Principal Occupation During
Name of Director Age the Past Five Years
---------------- --- -------------------
<S> <C> <C>
Robert T. Gentry 53 Director and Executive Vice President of Omega
since 1994; Director of Penn Central Bancorp
and Penn Central Bank from 1991 to 1994.
Executive Vice President and Chief Operating
Officer of Penn Central Bancorp from 1991 to
1994; Chairman, President and Chief Executive
Officer of Penn Central Bank since 1991
Philip E. Gingerich 59 Director of Omega since 1994; Director of Omega
Bank since 1988. Self-employed real estate
appraiser/consultant.
David K. Goodman, Sr. 69 Director of Omega since 1994; Director of Penn
Central Bancorp from 1992 to 1994; Director of
Penn Central Bank since 1987. Chairman and
President of the Board of D.C. Goodman and
Sons, Inc., a plumbing and heating contractor.
D. Stephen Martz 54 Director of Omega since 1994; President and
Chief Operating Officer of Omega since 1994;
Chairman, President, Chief Executive Officer
and Director of Penn Central Bancorp from 1985
to 1994; Director of Hollidaysburg Trust since
1974; Chairman, President and Chief Executive
Officer of Hollidaysburg Trust since 1984.
James W. Powers, Sr. 62 Director of Omega since 1994; Director of Omega
Bank since 1989; President of Polestar
Plastics, Inc., a manufacturing company until
his retirement in 1996.
</TABLE>
In accordance with the mandatory retirement provisions of the Bylaws,
William E. Henry, O.D., Don C. Meyer and Samuel D. Zeiders, Jr. DDS retired as
directors effective December 31, 1996.
Except as indicated above, each of the nominees or continuing directors
has had the same principal occupation for at least five years.
COMMITTEES OF THE BOARD, ATTENDANCE AND RELATED MATTERS
In 1996, there were twelve regular board meetings of Omega. The Board
of Directors of Omega has established an Audit Committee, Executive Committee
and a Compensation Committee. The entire Board serves as the Nominating
Committee for Omega. In addition, each of Omega's subsidiary banks have
established various committees of their respective Boards. During 1996, all
directors of Omega attended at least 75% of the total number of meetings of the
Board of Directors of Omega and of all committees of which they were members.
7
<PAGE>
Executive Committee
The Board of Directors has appointed an Executive Committee to act on
behalf of the Board in the intervals between meetings. The Executive Committee
is composed of David B. Lee, Chairman, Messrs. D. Stephen Martz, David K.
Goodman, Sr., George R. Lovette, Philip E. Gingerich and Raymond F. Agostinelli.
This Committee did not meet in 1996.
Audit Committee
The Board of Directors of Omega has appointed a standing Audit
Committee consisting of Raymond F. Agostinelli, Chairman, and Messrs. James W.
Powers, Sr., Stanton R. Sheetz, and Robert N. Oliver. The principal duties of
the Audit Committee are to meet with the independent certified public
accountants of Omega for the purpose of reviewing the scope and results of the
annual audit, to review the reports of examination of various regulatory
agencies and the replies to these reports. This committee reviews, formulates
and approves procedures for the Omega Audit Department. In addition, the
Committee reviews and recommends to the Board of Directors the firm to be
engaged as Omega's independent public accountants. This committee met six times
during 1996.
Omega Compensation Committee
The Board of Directors of Omega has appointed a standing Compensation
Committee currently consisting of Robert A. Szeyller, Chairman and Messrs.
George R. Lovette, Merle K. Evey and David K. Goodman, Sr. The report of the
Compensation Committee is set forth beginning on page 9.
Director Compensation
The Board members of Omega are paid $600 for each regular meeting of
the Board of Directors attended, along with an annual retainer of $3,000.
Members of the Omega Board are not compensated for committee meetings.
Each director of Omega Bank is paid $350 for attendance at each regular
monthly meeting of the Board of Directors and an annual retainer of $1,800.
Board members are not compensated for committee meetings.
Board members of Penn Central Bank are paid $400 for each monthly
meeting plus an annual retainer of $1,200 provided at least 75% of the regularly
scheduled meetings are attended. Directors are permitted two absences and are
not paid for committee meetings.
Hollidaysburg Trust directors are paid $400 for each monthly meeting
plus an annual retainer of $1,200 provided at least 75% of the regularly
scheduled meetings are attended. Directors are permitted only one absence and
are not paid for committee meetings.
Montour directors were paid $75 for each meeting attended and $50 for
each committee meeting.
On May 1, 1996, the then existing directors of Omega who were not
employees of Omega or any subsidiary, i.e. Messrs. Agostinelli, Evey, Gingerich,
Goodman, Lovette, Oliver, Powers, Sheetz, and Szeyller, were each automatically
granted options to purchase 200 shares of Common Stock at an exercise price of
$25.75 per share pursuant to the 1994 Stock Option Plan for Non-Employee
Directors. See "Executive Compensation - 1994 Stock Option Plan for Non-Employee
Directors."
Certain directors of Omega and Omega Bank have elected to participate
in the Deferred Compensation Plan for Directors. Any director may elect to
participate in the Plan by executing a Deferred Compensation Agreement, under
the terms of which the participating director waives for a specified period his
right to receive the directors' fees to which he would otherwise be entitled in
return for an undertaking on the part of Omega to invest those fees and to pay
him or his designated beneficiary the amounts so deferred, together with the
interest earned on such amounts, over a specified period commencing either at
age 62, upon his retirement as a director, or upon his death.
8
<PAGE>
No director of Omega, or any of its bank subsidiaries, who is also an
employee of Omega, or any of its bank subsidiaries, receives director's fees.
THE COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors is composed of
directors who are not employees of Omega or the Banks and is responsible for
developing and making recommendations to the Board with respect to Omega's
executive compensation programs. In addition, the Compensation Committee,
pursuant to authority delegated by the Board, determines on an annual basis the
compensation to be paid to the Chief Executive Officer and each of the other
executive officers of Omega.
The policies of Omega's executive compensation program are to:
1) Provide compensation that will attract and retain superior executive
talent;
2) Support the achievement of the goals contained in Omega's annual plan
by linking a portion of the executive officer's compensation to the
achievement of such goals; and
3) Enhance shareholder value by the use of stock options to further align
the interests of the executive officers with those of shareholders.
The Compensation Committee believes that its executive compensation
program provides an overall level of compensation opportunity that is
competitive to that offered within the banking community. Actual compensation
levels may be greater or less than median competitive levels based on the
surveys to which the Compensation Committee subscribes.
Omega's executive officer compensation program is comprised of base
salary, annual cash incentive compensation, long term incentive compensation in
the form of stock options, and various benefits generally available to employees
of Omega, including employee stock purchase plan options, group medical and life
insurance coverage and participation in the ESOP and 401(k) plans. In
determining the level of base salary, annual incentive compensation and stock
options for executive officers, the Compensation Committee reviews the
recommendations made by the Chief Executive Officer with respect to subordinate
executive officers, consults with an independent executive compensation
specialist, reviews surveys of compensation data for comparable banks and bank
holding companies and uses its discretion to set compensation for individual
executive officers, including the Chief Executive Officer, at levels where, in
its judgment, external, internal or individual circumstances warrant.
Base Salary. Base salary levels for Omega's executive officers are
competitively set relative to companies in the banking industry of comparable
size within Pennsylvania as well as in the United States. In determining
salaries, the Committee also takes into account individual experience and
performance of executive officers as it relates to the particular needs of
Omega.
Annual Incentive Compensation. Omega's Executive Incentive Compensation
Plan is the Company's annual incentive program for executive officers and key
managers. The purpose of this Plan is to provide a direct financial incentive in
the form of an annual cash bonus to executives to achieve Omega's annual goals
set at the beginning of each fiscal year. In fiscal 1996, the following measures
of corporate performance were selected:
1) Percentage change in return on average assets; and
2) Percentage change in Omega's net income compared to the prior
fiscal year.
Individual performance may also be taken into account in determining bonus, but
no bonus is paid unless a predetermined threshold for return on average assets
has been reached. Target bonus awards are set at competitive levels within the
banking industry determined by review of the industry surveys discussed above
and advice of the compensation consultant.
9
<PAGE>
Stock Options. The Compensation Committee uses the 1986 Stock Option
Plan and the 1996 Employee Stock Option Plan (collectively the "Stock Option
Plans") as Omega's long-term incentive plan for executive officers and key
managers. The 1996 Employee Stock Option Plan replaced the 1986 Stock Option
Plan under which no new options could be granted after 1996. The objectives of
the Stock Option Plans are to align the long-term interests of executive
officers and shareholders by creating a direct link between executive
compensation and shareholder return and to enable executives to develop and
maintain a significant long-term equity interest in Omega. The Stock Option
Plans authorize the Compensation Committee to award stock options to officers
and key employees. In general under the Plans, options are granted with an
exercise price equal to the fair market value of the Common Stock on the date of
grant (although the Compensation Committee has the authority to grant
non-qualified options under the 1996 Employee Stock Option Plan at an exercise
price less than the fair market value on the date of grant and are exercisable
beginning one year after the date of the grant (earlier in the event of a
"change in control" as defined in the Plan) up to ten years after the date of
grant. Awards are made at a level calculated to be competitive within the
banking industry based on reviews of industry surveys and advice of the
compensation consultant.
Determination of Compensation of the Chief Executive Officer. During
1996, Mr. Lee was the Chairman and Chief Executive Officer of Omega and
President and Chief Executive Officer of Omega Bank and Montour Bank. The
Compensation Committee reviewed base salaries of chief executive officers of
peer group companies in determining Mr. Lee's base compensation. The committee
reviewed Mr. Lee's performance with respect to corporate goals and objectives
such as earnings per share, return on equity, return on assets and non interest
expense control. The Committee believed that his individual actions and
leadership had a significant effect on Omega's overall financial and business
culture results, enhancing shareholder value through appreciation and earnings
available to pay dividends. Other subjective criteria such as community
leadership and industry involvement were used in determining his merit increase.
During the year, Mr. Lee was also chosen to serve a three year term on the
Federal Reserve Bank of Philadelphia Board of Directors beginning in 1997. At
the beginning of 1996, Mr. Lee's base salary was $293,562. Taking into
consideration the responsibility as both President and Chief Executive Officer
of two banks as well as Chairman of Omega, effective August 1, 1996 Mr. Lee's
base salary was increased by $17,760, representing a 6.05% merit increase. His
base salary at the end of the fiscal year was $311,322.
Mr. Lee's bonus in fiscal 1996 was $146,257. The bonus was determined
in accordance with the Executive Incentive Compensation Plan and was based upon
attainment of the performance goals established for Omega at the beginning of
the year. Options to purchase a total of 7,500 shares of Common Stock were
awarded to Mr. Lee for fiscal 1996 based upon the overall performance of the
Company, the number of stock options granted to Mr. Lee in 1995 and
reviews of the industry surveys discussed above.
Policy with respect to Section 162(m) of the Internal Revenue Code.
Section 162(m) of the Internal Revenue Code denies a deduction for certain
compensation exceeding $1,000,000 paid to the chief executive officer and four
other highest paid executive officers excluding (among other things) certain
performance based compensation. The Compensation Committee continually evaluates
to what extent 162(m) applies to its compensation program. Where appropriate,
the Compensation Committee has taken action to reduce the impact of this
provision. For example, the 1996 Employee Stock Option Plan is intended to
comply with the regulations relating to the performance based exception for
stock options which have an exercise price of not less than the fair market
value of the Common Stock on the date of grant.
Members of the Compensation Committee for 1996: Robert Szeyller, Chairman,
William E. Henry, George R. Lovette, Don C. Meyer, Merle K. Evey and David
K. Goodman, Sr.
10
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
The following table reflects information concerning the annual and long
term compensation earned by the Chief Executive Officer and the four most highly
compensated executive officers of Omega whose annual compensation for 1996
exceeded $100,000 for their services in all capacities during the fiscal years
ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Annual Long-Term
Compensation(1) Compensation
Awards
Securities Underlying
Name and Principal Position Year Salary Bonus(2) Options(3) All Other Compensation
- --------------------------- ---- ------ ----- ------- ----------------------
<S> <C> <C> <C> <C> <C>
David B. Lee 1996 $300,962 $146,257 8,214 $149,616 (5)
Chairman and Chief 1995 282,733 110,546 7,293 114,656
Executive Officer of 1994 253,582 88,000 7,520 113,887
Omega; President and
Chief Executive Officer
of Omega Bank; and
President and Chief
Executive Officer of
Montour (4)
D. Stephen Martz 1996 $173,664 -0- 1,124 $18,723 (7)
President and Chief Operating 1995 170,054 53,134 4,793 16,417
Officer of Omega; Chairman, 1994 161,584 42,900 4,815 15,698
President and Chief Executive
Officer of Hollidaysburg
Trust (6)
Daniel L. Warfel 1996 $152,499 $64,669 4,864 $18,723 (8)
Executive Vice President 1995 144,695 49,297 4,721 16,417
and Chief Financial Officer 1994 133,208 36,400 4,692 14,698
of Omega
Charles H. Zendt, Jr. 1996 $133,535 $26,879 4,652 $38,499 (9)
Executive Vice President 1995 129,323 21,951 4,638 34,194
of Omega Bank 1994 122,801 18,700 4,615 33,076
Robert T. Gentry
Executive Vice President 1996 $131,711 $26,849 3,141 $18,723 (11)
of Omega; Chairman, 1995 128,333 21,920 3,137 16,324
President and Chief Executive 1994 123,372 17,800 3,130 14,803
Officer of Penn Central Bank (10)
</TABLE>
(1) Does not include the value of perquisites provided to certain executive
officers which in the aggregate did not exceed the lesser of $50,000 or
10% of such officer's salary and bonus.
(2) Represents the bonus paid in the following year for services performed
in the year listed.
(3) Represents the total of the number of stock options issued pursuant to
Omega's Employee Stock Purchase and Stock Option Plans during the years
listed.
11
<PAGE>
(4) Mr. Lee also served as the President of Omega until the merger with
Penn Central Bancorp on January 28, 1994.
(5) For 1996, consists of $2,256 contributed to Mr. Lee's account in the
401(k) Plan, $16,467 allocated to his account in the ESOP and $100,893
reserved for his account under the Executive Supplemental Income
Benefit Plan and $30,000 paid for the premium for a split dollar life
insurance policy.
(6) Mr. Martz also served as Chairman, President and Chief Executive
Officer of Penn Central Bancorp until the merger with Omega on January
28, 1994. Compensation for all periods prior to the merger was paid by
Penn Central Bancorp and Hollidaysburg Trust.
(7) For 1996, consists of $2,256 contributed to Mr. Martz's account in the
401(k) Plan and $16,467 allocated to his account in the ESOP.
(8) For 1996, consists of $2,256 contributed to Mr. Warfel's account in the
401(k) Plan and $16,467 allocated to his account in the ESOP.
(9) For 1996, consists of $2,256 contributed to Mr. Zendt's account in the
401(k) Plan, $16,467 allocated to his account in the ESOP and $19,776
contributed to his account under his salary continuation agreement.
(10)Mr. Gentry also served as Executive Vice President and Chief Operating
Officer of Penn Central Bancorp until the merger with Omega on January
28, 1994. Compensation for the period prior to the merger was paid by
Penn Central Bancorp and Penn Central Bank.
(11)For 1996, consists of $2,256 contributed to Mr. Gentry's account in the
401(k) Plan and $16,467 allocated to his account in the ESOP.
STOCK OPTION GRANTS IN 1996
Set forth below is information concerning stock options granted for
1996 under the Stock Purchase Plan and the 1996 Stock Option Plan to the Chief
Executive Officer and the four most highly compensated executive officers of
Omega named in the Summary Compensation Table:
<TABLE>
<CAPTION>
Number of Percentage of Potential Realizable Value at
Securities Total Options Assumed Annual Rates of Stock
Underlying Granted to All Price Appreciation for
Options Employees in Exercise or Expiration Option Term (3)
Name Granted 1996 Base Price Date 0% 5% 10%
---- ------- ---- ---------- ---- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
David B. Lee
(1) 714 1.27% $31.50 12/31/2001 $2,499 $3,189 $4,025
(2) 7,500 16.60% 35.00 01/01/2007 N/A 165,085 418,358
D. Stephen Martz
(1) 714 1.27% 31.50 12/31/2001 2,499 3,189 4,025
(2) 410 1.00% 35.00 01/01/2007 N/A 9,025 22,870
Daniel L. Warfel
(1) 714 1.27% 31.50 12/31/2001 2,499 3,189 4,025
(2) 4,150 9.17% 35.00 01/01/2007 N/A 91,347 231,491
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Number of Percentage of Potential Realizable Value at
Securities Total Options Assumed Annual Rates of Stock
Underlying Granted to All Price Appreciation for
Options Employees in Exercise or Expiration Option Term (3)
Name Granted 1996 Base Price Date 0% 5% 10%
---- ------- ---- ---------- ---- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Charles H. Zendt, Jr.
(1) 642 1.14% 31.50 12/31/2001 2,247 2,868 3,619
(2) 4,010 8.86% 35.00 01/01/2007 N/A 88,265 223,682
Robert. T. Gentry
(1) 641 1.14% 31.50 12/31/2001 2,244 2,863 3,613
(2) 2,500 5.52% 35.00 01/01/2007 N/A 55,028 139,452
</TABLE>
(1) Granted pursuant to the Employee Stock Purchase Plan. "Exercise or Base
Price" column shows the exercise price in effect for the first 27 months
after the date of grant. See footnote (3).
(2) Granted pursuant to the Stock Option Plan.
(3) Shows the difference between the market value of the Common Stock for which
the option may be exercised less the exercise price of the option assuming
that the market price of the Common Stock appreciates in value from the
date of grant to the end of the option term at annualized rates of 5% and
10%, respectively. The rates of appreciation used in this table are
prescribed by regulations of the Securities and Exchange Commission and are
not intended to forecast future appreciation of the market value of the
Common Stock. Because the Employee Stock Purchase Plan options were granted
at 90% of the market price of the Common Stock on the date of grant, the
"0%" column shows the market value of the Common Stock for which such
options may be exercised as of December 31, 1996 less the exercise price
and assumes no appreciation in the value of the Common Stock during the
option term. By the terms of the Employee Stock Purchase Plan options, the
exercise price of options exercised more than 27 months after the date of
grant cannot be less than 90% of the fair market value of Omega's Common
Stock on the date of exercise, which provision is reflected in the "5%" and
"10%" appreciation columns for such options.
AGGREGATED STOCK OPTION EXERCISES DURING 1996
AND YEAR-END OPTION VALUES
Set forth below is information concerning the exercise during 1996 of
options granted under the Stock Purchase Plan and Stock Option Plan by the Chief
Executive Officer and the four most highly compensated executive officers named
in the Summary Compensation Table and the value of unexercised options held by
them at the end of 1996:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares Acquired Value Realized(1) December 31, 1996 December 31, 1996(2)
Name On Exercise On Shares Acquired Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David B. Lee 13,620 $207,021 34,727 7,500 $411,831 -0-
D. Stephen Martz 815 7,702 9,507 410 63,772 -0-
Daniel L. Warfel 8,252 126,372 21,115 4,150 245,244 -0-
Charles H. Zendt, Jr. 1,020 16,845 23,460 4,010 311,686 -0-
Robert T. Gentry -0- -0- 6,908 2,500 49,637 -0-
</TABLE>
(1) Represents the difference between the market price (bid price) of the
Common Stock on the date of exercise and the exercise price of the options
multiplied by the number of options exercised.
(2) Represents the difference between $35.00, the market price (bid price) of
the Common Stock on December 31, 1996, and the exercise price of the
options multiplied by the number of options held.
13
<PAGE>
Stock Performance Graph
The following graph illustrates the five-year cumulative total return
for Omega's Common Stock as compared to The Nasdaq Stock Market Composite Market
Index and The Nasdaq Bank Stock Index, assuming an investment of $100 in each on
December 31, 1991 and the reinvestment of all dividends.
[In the printed version there appears a line chart depicted by the following
plot points]
Nasdaq
Omega Composite
Common Market Index Nasdaq Bank
Date Stock (US Companies)(1) Stock Index(1)
------------------------------------------------------------------
12/31/91 100.000 100.708 91.286
1/31/92 100.000 106.597 95.853
2/28/92 100.000 109.013 100.886
4/7/92 100.000 100.000 100.000
4/30/92 107.692 99.413 107.056
5/29/92 104.487 100.704 111.887
6/30/92 101.897 96.767 111.586
7/31/92 101.897 100.195 114.405
8/31/92 98.028 97.132 112.319
9/30/92 102.560 100.743 115.058
10/30/92 104.507 104.710 117.477
11/30/92 104.961 113.042 125.130
12/31/92 107.729 117.203 132.868
1/29/93 119.394 120.539 138.030
2/26/93 115.277 116.043 141.293
3/31/93 122.886 119.401 147.014
4/30/93 122.886 114.305 141.020
5/28/93 149.120 121.133 138.168
6/30/93 144.458 121.693 142.079
7/30/93 144.458 121.837 147.151
8/31/93 159.737 128.134 151.070
9/30/93 152.260 131.950 155.308
10/29/93 142.482 134.916 153.038
11/30/93 136.895 130.893 146.907
12/31/93 143.385 134.541 151.525
1/31/94 149.008 138.625 154.014
2/28/94 144.791 137.329 152.078
3/31/94 144.272 128.882 149.692
4/29/94 144.272 127.210 154.532
5/31/94 147.100 127.521 161.578
6/30/94 146.623 122.858 161.586
7/29/94 148.047 125.377 163.828
8/31/94 148.047 133.370 168.015
9/30/94 146.207 133.029 163.376
10/31/94 145.490 135.643 158.468
11/30/94 149.074 131.144 151.852
12/30/94 150.073 131.512 150.974
1/31/95 144.301 132.249 156.049
2/28/95 155.845 139.243 163.680
3/31/95 149.592 143.369 165.295
4/28/95 153.223 147.882 169.876
5/31/95 152.497 151.696 175.053
6/30/95 155.000 163.989 182.495
7/31/95 159.387 176.043 191.093
8/31/95 163.773 179.611 201.351
9/29/95 176.570 183.741 206.001
10/31/95 176.570 182.688 209.362
11/30/95 185.399 186.978 220.102
12/29/95 198.369 185.982 224.855
1/31/96 195.408 186.902 225.453
2/29/96 188.006 194.025 228.544
3/29/96 190.621 194.670 233.788
4/30/96 196.577 210.817 232.585
5/31/96 190.621 220.496 236.494
6/28/96 197.888 210.560 237.681
7/31/96 185.895 191.807 234.765
8/30/96 193.390 202.555 251.266
9/30/96 196.149 218.058 263.374
10/31/96 202.184 215.668 274.870
11/29/96 208.220 229.034 295.419
12/31/96 212.635 228.774 297.228
(1) Source: Center for Research in Securities Prices (CRSP)
University of Chicago, Chicago, IL
On April 7, 1992, Omega's Common Stock was listed for trading on The Nasdaq
Stock Market under the symbol "OMEF." Prior to that time, the Common Stock was
traded over-the-counter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during 1996 were: Robert
Szeyller, Chairman, William E. Henry, George R. Lovette, Don C. Meyer, Merle K.
Evey and David K. Goodman, Sr. No person who served as a member of the
Compensation Committee during 1996 was a current or former officer or employee
of Omega or the Banks or engaged in certain transactions with Omega or the Banks
required to be disclosed by regulations of the Securities and Exchange
Commission. Additionally, there were no compensation committee "interlocks"
during 1996, which generally means that no executive officer of Omega served as
a director or member of the compensation committee of another entity, one of
whose executive officers served as a director or member of the Compensation
Committee of Omega.
14
<PAGE>
SEVERANCE AND SALARY CONTINUATION AGREEMENTS AND STOCK OPTION PLANS
Severance Agreements
Omega and certain of the Banks have entered into Severance Agreements
with David B. Lee, Daniel L. Warfel, D. Stephen Martz, and Robert T. Gentry each
providing for certain severance payments in the event that (i) Omega and/or the
Banks (collectively, "Employer" except that in the case of Mr. Warfel,
"Employer" shall mean Omega only) terminates such employee's employment without
cause or (ii) such employee terminates his employment with the Employer (a) for
any reason, whether with or without cause, at any time within three years after
a "change in control of Employer," or (b) due to the fact that, without such
employee's consent and whether or not a change in control of Employer has
occurred, the nature and scope of his authority with the Employer or the
surviving or acquiring person are materially reduced to a level below that which
he enjoys on the date of the Severance Agreement, the duties or responsibilities
assigned to him are materially inconsistent with that which he has on the date
of the Severance Agreement, his then current base annual salary is materially
reduced to a level below that which he enjoys on the date of the Severance
Agreement or at any time thereafter (whichever may be greater), such employee's
position or title with the Employer or the surviving or acquiring person is
reduced from his current position or title with the Employer, such employee's
principal place of employment with the Employer is changed, in the case of Mr.
Lee, to a location greater than 40 miles from his current principal place of
employment with the Employer, or, in the case of Mr. Warfel, to a location
greater than 40 miles from his current principal place of residence, and in the
case of Messrs. Martz and Gentry, to a location greater than 50 miles from his
current principal place of employment, or in the case of Messrs. Lee and Warfel
if the fringe benefits the Employer provides such employee on the date of the
Severance Agreement or at any time thereafter (whichever may be greater) are
materially reduced.
"Cause" is defined in Messrs. Lee's, Martz's and Gentry's agreements as
a conviction for any felony, fraud or embezzlement or failure or refusal to
comply with the written policies or directives of the Board of the Employer or
being guilty of misconduct in connection with the performance of his duties for
the Employer and failing to cure such non-compliance or misconduct within 20
days of receiving written notice from the Board of Directors of the Employer;
Mr. Warfel's agreement does not define cause.
A "change in control of Employer" is defined as a change in control of
the Employer of a nature that would be required to be reported in response to
Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934 (as amended), whether or not the Employer is subject to
such reporting requirement. Additionally, a change of control of the Employer is
deemed to have occurred if (i) any person other than those persons in control of
the Employer on the date of the Severance Agreement, acquires the power,
directly or indirectly, to direct the management or policies of the Employer or
to vote 25% or more of any class of voting securities of the Employer or (ii)
within any period of three consecutive years during the term of the Severance
Agreement, individuals who at the beginning of such period constitute the Board
of Directors of the Employer cease for any reason to constitute at least a
majority thereof.
The term of each of Messrs. Lee's, Martz's and Gentry's Severance
Agreement will end on the earliest of his death or permanent disability, the
termination of his employment for cause, mutual agreement, resignation or
retirement or upon his reaching age 65, in the case of Mr. Lee, or age 60 in the
case of Messrs. Martz and Gentry. Mr. Warfel's Severance Agreement provides for
a three year term beginning June 1, 1990, unless terminated earlier as provided
in the Agreement, and will continue for successive terms of three years each
unless the Omega Board of Directors notifies him during the first year of any
three year term that it does not intend to renew the Severance Agreement at the
end of the then current three year term. Accordingly, Mr. Warfel's Severance
Agreement will continue until at least June 1, 1999.
In the event that an employee is entitled to severance payments under
his Severance Agreement, he will be paid annual compensation for a period of
three years (in the case of Messrs. Lee and Warfel), or 5 years (in the case of
Messrs. Martz and Gentry) following the date on which his employment is
terminated ("Termination Date") at a rate equal to 100% (in the case of Messrs.
Lee and Warfel), or 85% and 75% (in the case of Messrs. Martz and Gentry
respectively), of his highest annual cash compensation, including cash bonuses,
during the three year period ending on the Termination Date. In the case of
15
<PAGE>
Messrs. Lee, Martz and Gentry, such amount will be increased on January 1 of
each year following the Termination Date based on the increase in the cost of
living as measured by the consumer price index.
In the event that an employee is entitled to severance payments, he
will also be entitled to all medical, hospitalization, and life insurance
benefits for a period of three years following the Termination Date, in the case
of Messrs. Lee and Warfel, or five years, in the case of Messrs. Martz and
Gentry, except that, if new employment is accepted by the employee during such
period, continuation of such benefits will be offset by coverages provided
through the employee's subsequent employer. For a period of one year following
the Termination Date, Mr. Lee will be entitled to reimbursement for all
reasonable expenses incurred by him in connection with the search for new
employment and reimbursement for all reasonable relocation expenses incurred by
him in connection with securing such new employment, provided however, that, in
each case, such reimbursement will not exceed one-third of his highest annual
compensation. Mr. Warfel is entitled to reimbursement for all reasonable
relocation expenses incurred by him and not paid by his new employer in securing
new employment, provided that such reimbursement will not exceed one-third of
his highest annual compensation.
Messrs. Lee's and Warfel's agreements provide that each of them may
require the Employer to maintain a letter of credit in the face amount of three
times his current base annual salary on the date of grant plus $50,000 to secure
the Employer's obligations under the agreement. Messrs. Lee's and Warfel's
agreements provide that the severance payments and benefits to which each may be
entitled under their respective Severance Agreements will not be otherwise
offset or reduced by any income or earnings received from any other employment
or other activity that such employee may engage in during the three year period
following the Termination Date. Messrs. Martz's and Gentry's agreements provide
that any severance payments and benefits which they may be receiving will
terminate immediately upon death or upon his reaching age 60. No terminated
employee is required to mitigate his damages. The Severance Agreements also
contain provisions restricting each of the employee's right to compete with
Employer in certain portions of Pennsylvania for varying periods following the
Termination Date.
Mr. Lee's Severance Agreement also amends his Executive Supplemental
Income Plan Agreement ("ESI Agreement") by providing that in the event that the
Termination Date occurs after a sale of stock or assets, merger or substantial
change in ownership of Omega Bank, Mr. Lee will have the right to defer any
retirement benefit to which he is entitled under the ESI Agreement for any
period of time until he reaches age 65 and, in such event, solely for the
purpose of calculating his annual average compensation in order to determine the
benefits payable under the ESI Agreement, Mr. Lee will be deemed to have
remained an employee of Omega Bank from the Termination Date until he elects to
receive his retirement benefit or reaches age 65, whichever occurs first, and
his annual compensation during such period shall be deemed to be equal to his
highest annual compensation, as calculated for the purposes of the Severance
Agreement, increased as of January 1 of each year following the Termination Date
by the cost of living increase as measured by the consumer price index.
Salary Continuation Agreement
Omega Bank has a non-qualified deferred compensation agreement with Mr.
Zendt which provides for monthly benefits to him or on his behalf at a normal
retirement age of 65 and has provisions for death and disability benefits. The
retirement benefit is a monthly payment of $3,333 for a period of ten years. The
disability benefit is a monthly payment of $1,250 for ten years. The death
benefit payable to Mr. Zendt's beneficiary is $2,083 per month payable for a
period of ten years.
Stock Option Plans
In March 1996, the Board of Directors adopted, and in April 1996 the
shareholders approved, the 1996 Employee Stock Option Plan (the "1996 Plan").
The 1996 Plan replaces the 1986 Stock Option Plan (the "1986 Plan") under which
no new options could be granted after 1996. Under Omega's 1996 Plan, options may
be granted for a total of 1,000,000 shares of Common Stock (subject to
appropriate adjustments to reflect changes in the capitalization of Omega).
Options to purchase an aggregate of 188,731 shares of Common Stock remain
outstanding under the 1986 Plan. Options issued pursuant to the 1986 Plan
continue to be administered under the terms of such Plan. Pursuant to the 1986
Plan and the 1996 Plan (collectively the "Plans"), stock options may be granted
which are intended to qualify as incentive stock options under the Internal
Revenue Code of 1986, as amended ("Code"), as well as stock options not intended
16
<PAGE>
to so qualify. The purpose of the Plans is to provide additional incentive to
employees of Omega by encouraging them to invest in Omega Common Stock and
thereby acquire a proprietary interest in Omega and an increased personal
interest in Omega's continued success and progress. All officers and key
employees of Omega or any current or future subsidiary are eligible to receive
options under the 1996 Plan.
The Plans are administered by the Compensation Committee ("Committee")
which is appointed by the Board. The Committee determines, among other things,
which officers and key employees will receive an option or options, the type of
option (incentive or non-qualified, or both) to be granted, the number of shares
subject to each option, the rate of option exercisability, and subject to
certain limitations, the option price and duration of the option. The Committee
has the exclusive right to adopt rules for the administration and interpretation
of the Plans and the options issued pursuant to the Plans. Shares of Common
Stock subject to options under the 1996 Plan that terminate unexercised are
available for future options granted under the 1996 Plan. The Code provides that
the aggregate fair market value of the stock with respect to which incentive
stock options are exercisable for the first time by an optionee during any
calendar year cannot exceed $100,000 and the excess amount will be treated as
non-qualified options.
The option price for options issued under the 1996 Plan must be at
least equal to 100% of the fair market value of Omega Common Stock as of the
date of the grant of the option, as determined by the Committee, while the
option price for non-qualified options granted under the 1996 Plan may be
established by the Committee for less than the fair market value of Omega's
Common Stock on the date of the grant. Unless terminated earlier by the option's
terms, incentive options expire ten years after the date of grant, and
non-qualified options expire ten years and ten days after the date of grant.
Payment of the option price on exercise of both incentive options and
non-qualified options may be made in cash, Omega Common Stock, or a combination
of both. The rate of option exercisability is determined by the Committee at the
time of the grant. Generally, no stock option granted under the Plans may be
exercised in the first year after the date of grant, except in the event of a
change in control (as defined in the Plans) in which event they become
immediately exercisable. After one year from the date of grant, each optionee
may exercise up to the total number of optioned shares granted to such optionee.
Employee Stock Purchase Plan
Under Omega's Employee Stock Plan (the "Stock Purchase Plan"), options
may be granted for a total of 750,000 shares of Common Stock (subject to
appropriate adjustments to reflect changes in the capitalization of Omega). The
Stock Purchase Plan is intended to advance the interests of Omega by giving
employees of Omega and its subsidiaries a vested interest in the growth and
earnings of Omega. The Stock Purchase Plan is administered by the Committee. The
Committee is authorized to grant options to purchase Common Stock of Omega to
employees of Omega and its subsidiaries. The Committee has discretion as to the
total number of options, if any, granted in each year, the rate of
exercisability, the price as to which each option is exercisable, and the
duration of each option. Shares of Common Stock subject to options which expire
unexercised are available for future option grants under the Stock Purchase
Plan.
All options granted under the Stock Purchase Plan expire at such time,
not later than five years after the date of grant, as the Committee shall
determine; provided, however, that options exercised more than 27 months after
the date of grant must be exercised at an option price equal to at least 85% of
the fair market value of the shares on the date of exercise. No option may be
granted to any person who immediately after the grant would own more than 5% of
Omega Common Stock and no option may be granted which, at the date the option is
granted, would permit such person's right to purchase stock under the Stock
Purchase Plan and all other employee stock purchase plans of Omega and
subsidiaries to accrue at a rate exceeding $25,000 of the fair market value of
such stock (determined at the time such option is granted) for each year such
option is outstanding. Except as noted above, the option price per share must
not be less than the lesser of: (a) 85% of the fair market value of the stock on
the date of grant, or (b) 85% of the fair market value on the date of exercise.
If the Committee decides to issue options pursuant to the Stock
Purchase Plan, options must be granted to all employees of Omega and its
subsidiaries who have been employed for at least one year subject to certain
exclusions. When options are granted, each eligible employee will be permitted
to elect to purchase the number of whole shares which could be purchased with no
more than 25% of his "base salary rate" (as defined) determined as of the date
the option is granted. The Committee, in its discretion, may change the maximum
percentage of "base salary rate" which may be elected by eligible employees so
long as such change applies to all eligible employees. Based on the elections by
eligible employees, if the total number of whole shares elected to be purchased
17
<PAGE>
exceeds the total number of shares determined by the Committee to be allocated
to any date on which options are granted, then each eligible employee will be
granted an option for such proportion of the total shares allocated by the
Committee as the number of shares elected to be purchased by such eligible
employee bears to the total number of shares elected to be purchased by all
eligible employees.
1994 Stock Option Plan for Non-Employee Directors
In March, 1994, the Board of Directors adopted, and in April 1995, the
shareholders approved, the 1994 Stock Option Plan for Non-Employee Directors
(the "Director Plan"). The purpose of the Director Plan is to provide additional
incentive to members of the Board of Directors of Omega who are not also
employees of Omega or any subsidiary corporation by encouraging them to invest
in Omega's Common Stock and thereby acquire a further proprietary interest in
Omega and an increased personal interest in Omega's continued success and
progress.
Each person who was, as of May 1, 1994, a director of Omega, and who
was not as of such date an employee of Omega or any subsidiary corporation, was,
as of May 1, 1994, automatically granted an option to purchase 200 shares of
Omega's Common Stock. Each person who was not a director of Omega as of May 1,
1994, and is not an employee of Omega or any subsidiary corporation and who on
or after May 1, 1994 is first elected or appointed as a director of Omega, shall
as of the date of such election or appointment, automatically be granted an
option to purchase a prorated number of shares of Omega's Common Stock (not to
exceed 200 shares). On May 1, 1996 and on each May 1st thereafter (each, an
"anniversary date") and provided a person described in the two preceding
sentences continues to be a non-employee director on such anniversary date, such
person shall automatically be granted on each such anniversary date an option to
purchase 200 shares of Omega's Common Stock or such lower number of shares as
shall be equal to the number of shares as shall then be available (if any) for
grant under the Director Plan divided by the number of persons who are to
receive an option on such anniversary date.
The Director Plan is administered by the Board of Directors of Omega,
including non-employee directors. Under the Director Plan, the Board has the
right to adopt such rules for the conduct of its business and the administration
of the Director Plan as it considers desirable. The Board of Directors has the
exclusive right to construe the Director Plan and the options issued pursuant to
it, to correct defects and omissions and to reconcile inconsistencies to the
extent necessary to effectuate the purpose of the Director Plan and the options
issued pursuant to it.
The aggregate number of shares which may be issued upon the exercise of
options under the Director Plan is 20,000 shares of Omega Common Stock. In the
event of any change in the capitalization of Omega, such as by stock dividend,
stock split or what the Board of Directors deems in its sole discretion to be
similar circumstances, the aggregate number and kind of shares which may be
issued under the Director Plan will be appropriately adjusted in a manner
determined in the sole discretion of the Board of Directors. Reacquired shares
of Omega's Common Stock, as well as unissued shares, may be used for the purpose
of the Director Plan. Common Stock of Omega subject to options which have
terminated unexercised, either in whole or in part, will be available for future
options granted under the Director Plan.
The option price for options issued under the Director Plan will be
equal to the fair market value of Omega Common Stock on the date of grant. Fair
market value shall mean the last reported sale price of Omega's Common Stock as
reported on the Nasdaq National Market System as of the date of grant. Payment
of the option price on exercise of options granted under the Director Plan may
be made in (a) cash, (b) Omega Common Stock which will be valued by the
Secretary of Omega at its fair market value (unless prohibited by the Board of
Directors) or (c) any combination of cash and Common Stock of Omega valued as
provided in clause (b) (unless prohibited by the Board of Directors).
Options granted pursuant to the Director Plan may be exercised in
whole, or from time to time in part, beginning on the earlier to occur of (i)
one year after the date of their grant or (ii) a "change in control" of Omega,
as such term is defined in the Director Plan. Unless terminated earlier by the
option's terms, options granted under the Director Plan will expire ten years
after the date they are granted. Options terminate one year after the optionee
ceases to be a director of Omega (whether by resignation, removal, failure to be
reelected or otherwise, and regardless of whether the failure to continue as a
director was for cause or otherwise) except that the options will terminate one
year after the optionee ceases to be a director due to death, disability or
mandatory retirement at age 70, but in all events not later than ten years after
the date of option grant. Options granted pursuant to the Director Plan are not
transferable, except by will or the laws of descent and distribution in the
event of death. During an optionee's lifetime, the option is exercisable only by
18
<PAGE>
the optionee, including, for this purpose, the optionee's legal guardian or
custodian in the event of disability. Options may not be granted pursuant to the
Director Plan after the expiration of ten years from and after the adoption of
the Director Plan by Omega's shareholders at the 1994 Annual Meeting.
OTHER EMPLOYEE BENEFIT PLANS
Omega Financial Corporation Defined Benefit Pension Plan
The Omega Financial Corporation Defined Benefit Pension Plan
("Retirement Plan') was frozen in 1994 with no further accrual of benefits and
was terminated effective October 31, 1995. In 1996, Omega made distributions to
all participants of their respective amounts of accrued benefits. Set forth
below is the amount distributed in 1996 to each of the executive officers named
in the Summary Compensation Table.
Name of Executive Officer Amount of Distribution
------------------------- ----------------------
David B. Lee $323,572
D. Stephen Martz -0-
Daniel L. Warfel 55,546
Charles H. Zendt, Jr. 85,576
Robert T. Gentry 18,066
Peoples Executive Supplemental Income Benefit Plan
In September, 1984, the Board of Directors of Peoples Bank (now Omega
Bank) adopted a nonqualified Executive Supplemental Income Benefit Plan ("ESI
Plan") effective as of January 1, 1984. The ESI Plan is an unfunded plan which
provides death benefits and supplemental retirement benefits for David B. Lee
and four retired participants.
Under the ESI Plan, Omega Bank enters into individual agreements with
participants. The agreements provide for annual payments to the participant's
designated beneficiary for a specified period of years following the
participant's death. The ESI Plan also provides for supplemental retirement
benefits for a participant who has attained age 65 and who has remained in the
continuous employment of Omega Bank (or its predecessor) until his retirement;
however, in the case of the sale of the stock or assets, merger or substantial
change in the ownership of Omega Bank, continuous employment of the participant
is required only until the date the participant voluntarily terminates his
employment or is discharged by the Bank without "just cause."
Under the supplemental retirement provisions, participants are eligible
for supplemental benefits of up to 75% of the participant's final average
salary. Those supplemental retirement benefits are subject to reduction for
social security benefits and benefits received under the Omega Retirement Plan.
Subject to the approval of Omega Bank Board of Directors, a participant can
elect early retirement at age 55; however, a participant can elect early
retirement without Board approval at age 55 if there is a sale of the stock or
assets, merger, or substantial change in ownership of Omega Bank. The retirement
benefits payable to a participant who has elected early retirement will be
actuarially reduced.
In 1988, Peoples Bank terminated the ESI Plan for all participants
except the four retired participants and David B. Lee. Based on current
estimates of Mr. Lee's final average salary, his estimated monthly ESI Plan
benefit would be approximately $11,525 per month payable for a period of 15
years beginning at age 65. In the event that Mr. Lee should die prior to
retirement, his beneficiaries would receive $8,166 per month for the first year
following his death, $6,125 per month for the next four years, and $4,083 per
month for the next ten years.
Omega Executive Incentive Compensation Plan
The Russell Bank Executive Incentive Compensation Plan was discontinued
in 1987 and a new Executive Incentive Compensation Plan ("EIC Plan") for Omega
was implemented. The purpose of this plan is to motivate key management level
employees by rewarding performance which exceeds normal expectations. The EIC
Plan is administered by the Omega Compensation Committee which designates
permanent and special participants in the EIC Plan. Individuals are selected by
19
<PAGE>
the Omega Compensation Committee based on their responsibilities and value to
Omega, and once selected generally remain a participant as long as the level of
responsibility is not significantly reduced. In addition, other employees may
from time to time be selected by the management of Omega as special participants
in the EIC Plan in any given plan year based upon outstanding individual
contribution to Omega.
Awards to the permanent participants under the EIC Plan are based on
pre-determined performance goals which are established by the Compensation
Committee each year and are based upon such standards as change in return on
average assets and net income. Awards to such special participants are made from
a special bonus pool established each year not to exceed 25% of the amount
awarded in any EIC Plan Year to the permanent participants as a group. Awards
are paid to the participants in the first quarter following the end of each
year. During 1996, awards were made to Messrs. D. B. Lee, D. S. Martz, D. L.
Warfel, R. T. Gentry, and C. H. Zendt, Jr. based upon results achieved during
the year ended December 31, 1996 and are included in the preceding Summary
Compensation Table.
CERTAIN TRANSACTIONS
Through its bank subsidiaries, Omega has had, and expects to continue
to have, loan and other banking transactions (including, but not limited to,
checking accounts and savings and time deposits) with certain of its directors,
nominees for director, officers, certain of their immediate family members and
certain corporations or organizations with which they are affiliated. All such
loan and other banking transactions (i) were made in the ordinary course of
business, (ii) were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and (iii) did not involve more than the normal
risk of collectibility or present other unfavorable features.
INDEPENDENT PUBLIC ACCOUNTANTS
The accounting firm of Arthur Andersen LLP acted as Omega's independent
public accountant for the 1996 fiscal year and has been selected to act as
Omega's independent public accountant for the 1997 fiscal year. A representative
of Arthur Andersen LLP is expected to be present at the Annual Shareholders'
Meeting and to have the opportunity to make a statement, if he desires to do so,
and is expected to be available to respond to appropriate questions.
SHAREHOLDER PROPOSALS
Shareholder proposals regarding the 1998 Annual Meeting of Shareholders
must be submitted to Omega by December 5, 1997 for inclusion in Omega's Proxy
Statement.
ANNUAL REPORT AND FINANCIAL STATEMENTS
This Proxy Statement is accompanied by Omega's Annual Report to
Shareholders for the year ended December 31, 1996.
EACH PERSON SOLICITED HEREUNDER CAN OBTAIN A COPY OF OMEGA'S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WITHOUT CHARGE EXCEPT FOR EXHIBITS TO THE
REPORT, BY SENDING A WRITTEN REQUEST TO:
Corporate Secretary
Omega Financial Corporation
P. O. Box 619
State College, PA 16804-0619
A COPY OF THE REQUIRED ANNUAL FINANCIAL DISCLOSURES FOR EACH BANK
SUBSIDIARY WILL ALSO BE PROVIDED, WITHOUT CHARGE, UPON WRITTEN REQUEST TO:
Corporate Secretary
Omega Financial Corporation
P. O. Box 619
State College, PA 16804-0619
<PAGE>
OMEGA FINANCIAL CORPORATION
ANNUAL MEETING OF SHAREHOLDERS - APRIL 29, 1997
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF OMEGA FINANCIAL CORPORATION
The undersigned hereby constitutes and appoints David N. Thiel, Daniel L. Warfel
and JoAnn N. McMinn, and each of them, as attorneys-in-fact and proxies of the
undersigned, with full power of substitution , for and in the name, place and
stead of the undersigned, to appear at the Annual Meeting of Shareholders of
Omega Financial Corporation ("Omega") to be held on the 29th day of April, 1997,
and at any postponement or adjournment thereof, and to vote all of the shares of
Common Stock of Omega which the undersigned is entitled to vote, with all the
powers and authority the undersigned would possess if personally present. The
undersigned hereby directs that this proxy be voted as follows:
ITEM 1 - For the election of the nominees listed below for three year terms, as
described in the accompanying Proxy Statement.
For Raymond F. Agostinelli
Withhold authority to vote for
Raymond F. Agostinelli
For Merle K. Evey
Withhold authority to vote
for Merle K. Evey
For David B. Lee
Withhold authority to vote
for David B. Lee
ITEM 2 - To transact such other business as may properly come before the Annual
Meeting or any postponement or adjournment thereof.
(Please date and sign on other side)
THIS PROXY WILL, WHEN PROPERLY EXECUTED, BE VOTED AS DIRECTED. IF NO DIRECTIONS
TO THE CONTRARY ARE INDICATED IN THE BOXES PROVIDED, THE PERSONS NAMED HEREIN
INTEND TO VOTE "FOR" THE ELECTION OF THE NOMINEES LISTED.
THIS PROXY CONFERS CERTAIN DISCRETIONARY AUTHORITY DESCRIBED IN THE PROXY
STATEMENT. A MAJORITY OF SAID ATTORNEYS AND PROXIES PRESENT AT SAID MEETING (OR
IF ONLY ONE SHALL BE PRESENT, THEN THAT ONE) MAY EXERCISE ALL OF THE POWERS
HEREUNDER.
The undersigned hereby acknowledges receipt of the Omega Proxy Statement
relating to the 1997 Annual Meeting of Shareholders and Omega's Annual Report to
Shareholders for 1996.
Dated __________________, 1997
____________________________________(SEAL)
(Shareholder's Signature)
____________________________________(SEAL)
(Shareholder's Signature)
It would be helpful if you signed your name or names exactly as it appears
hereon, indicating any official position or representative capacity.
PLEASE DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN
THE ENCLOSED ENVELOPE.
<PAGE>
OMEGA FINANCIAL CORPORATION
ANNUAL MEETING OF SHAREHOLDERS - APRIL 29, 1997
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF OMEGA FINANCIAL CORPORATION
The undersigned hereby instructs George R. Lovette and Charles H. Zendt, Jr. ,
and each of them, Trustees under the Omega Employee Stock Ownership Plan, to
vote the shares allocated to the account of the undersigned under said Plan at
the Annual Meeting of Shareholders of Omega Financial Corporation ("Omega") to
be held on the 29th day of April, 1997, and at any postponement or adjournment
thereof, for the transaction of such business as properly comes before the
meeting, and with respect to the following matters:
ITEM 1 - For the election of the nominees listed below for three year terms, as
described in the accompanying Proxy Statement.
For Raymond F. Agostinelli
Withhold authority to vote for
Raymond F. Agostinelli
For Merle K. Evey
Withhold authority to vote
for Merle K. Evey
For David B. Lee
Withhold authority to vote
for David B. Lee
ITEM 2 - To transact such other business as may properly come before the Annual
Meeting or any postponement or adjournment thereof.
(Please date and sign on other side)
THIS PROXY WILL, WHEN PROPERLY EXECUTED, BE VOTED AS DIRECTED. IF NO DIRECTIONS
TO THE CONTRARY ARE INDICATED IN THE BOXES PROVIDED, THE PERSONS NAMED HEREIN
INTEND TO VOTE "FOR" THE ELECTION OF THE NOMINEES LISTED.
THIS PROXY CONFERS CERTAIN DISCRETIONARY AUTHORITY DESCRIBED IN THE PROXY
STATEMENT. A MAJORITY OF SAID ATTORNEYS AND PROXIES PRESENT AT SAID MEETING (OR
IF ONLY ONE SHALL BE PRESENT, THEN THAT ONE) MAY EXERCISE ALL OF THE POWERS
HEREUNDER.
The undersigned hereby acknowledges receipt of the Omega Proxy Statement
relating to the 1997 Annual Meeting of Shareholders and Omega's Annual Report to
Shareholders for 1996.
Dated __________________, 1997
____________________________________(SEAL)
(Shareholder's Signature)
____________________________________(SEAL)
(Shareholder's Signature)
It would be helpful if you signed your name or names exactly as it appears
hereon, indicating any official position or representative capacity.
PLEASE DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
FOR SHARES ALLOCATED UNDER THE EMPLOYEE STOCK OWNERSHIP PLAN ONLY
Exhibit 21.1
Subsidiaries of Omega Financial Corporation
<TABLE>
<CAPTION>
Name of Subsidiary State or Jurisdiction Trade Name
of Incorporation (if any)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
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 --
</TABLE>
27
<PAGE>
Exhibit 23.1
Consent of Arthur Andersen L.L.P.
28
<PAGE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 22, 1997, 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 LLP
Lancaster, Pa.
March 26, 1997
29
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 30,380
<INT-BEARING-DEPOSITS> 512
<FED-FUNDS-SOLD> 18,075
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 127,654
<INVESTMENTS-CARRYING> 114,192
<INVESTMENTS-MARKET> 114,171
<LOANS> 696,597
<ALLOWANCE> 11,820
<TOTAL-ASSETS> 1,007,345
<DEPOSITS> 846,030
<SHORT-TERM> 5,885
<LIABILITIES-OTHER> 10,332
<LONG-TERM> 9,213
0
1,625
<COMMON> 134,260
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,007,345
<INTEREST-LOAN> 62,740
<INTEREST-INVEST> 12,801
<INTEREST-OTHER> 1,179
<INTEREST-TOTAL> 76,720
<INTEREST-DEPOSIT> 29,863
<INTEREST-EXPENSE> 30,320
<INTEREST-INCOME-NET> 46,400
<LOAN-LOSSES> 979
<SECURITIES-GAINS> 789
<EXPENSE-OTHER> 31,087
<INCOME-PRETAX> 23,354
<INCOME-PRE-EXTRAORDINARY> 16,227
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,227
<EPS-PRIMARY> 2.61
<EPS-DILUTED> 2.53
<YIELD-ACTUAL> 4.87
<LOANS-NON> 2,079
<LOANS-PAST> 1,241
<LOANS-TROUBLED> 14
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,668
<CHARGE-OFFS> 1,176
<RECOVERIES> 349
<ALLOWANCE-CLOSE> 11,820
<ALLOWANCE-DOMESTIC> 11,820
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
