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, 1997
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
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 8,910,783
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(Title of Class) (Number of shares outstanding
as of March 2, 1998)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 2, 1998 was $302,485,145. (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, 1997 are incorporated by reference in Parts II and IV of
this Report.
With the exception of the information incorporated by reference in
Parts I, II and IV of this Report, the Company's Annual Report to Shareholders
for the year ended December 31, 1997 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 1998 Annual Meeting of Shareholders are incorporated by
reference in Part III of this Report.
Other documents incorporated by reference are listed in the Exhibit
Index.
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(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Company's Common Stock outstanding, reduced by the amount of
Common Stock held by officers, directors, shareholders owning in excess of 10%
of the Company's Common Stock and the Company's employee benefit plans
multiplied by the last reported sale price for the Company's Common Stock on
March 2, 1998. 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,
Saxton Bank merged into Penn Central Bank and on March 18, 1995, Peoples Bank
and Russell Bank merged to form Omega Bank N.A. ("Omega 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, 1997, 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 $11,258,000 for Omega Bank, $3,938,000 for
Penn Central Bank, and $4,819,000 for Hollidaysburg Trust Company, as of
December 31, 1997) 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 following discussion sets forth certain of the material elements of
the regulatory framework applicable to bank holding companies and their
subsidiaries and provides certain specific information relevant to the Company.
The regulatory framework is intended primarily for the protection of depositors,
other customers and the federal deposit insurance funds and not for the
protection of security holders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its
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entirety by reference to the particular statutory and regulatory provisions. A
change in applicable statutes, regulations or regulatory policy may have a
material effect on the business of the Company.
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"). The Company is also regulated by the Pennsylvania Department
of Banking.
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. See Interstate Bankiing.
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. Satisfactory financial
condition, particularly with regard to capital adequacy, and satisfactory
Community Reinvestment Act ratings are generally prerequisites to obtaining
federal regulatory approval to make acquisitions. All of the Company's
subsidiary banks are currently rated "satisfactory" under the Community
Reinvestment Act.
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. In addition, under the Banking Code of 1965, the Pennsylvania Department of
Banking has the authority to examine the books, records and affairs of any
Pennsylvania bank holding company or to require any documentation deemed
necessary to ensure compliance with the Banking Code.
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
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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.
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 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.
The OCC has authority under the Financial Institutions Supervisory Act
to prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The FRB has similar authority with respect to the Company and the
Company's non-bank subsidiaries. The FDIC has similar authority with respect to
Hollidaysburg Trust.
Substantially all of the deposits of the banking subsidiaries are
insured up to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC
and are subject to deposit insurance assessments to maintain the BIF. The
insurance assessments are based upon a matrix that takes into account a bank's
capital level and supervisory rating. Effective January 1, 1996, the FDIC
reduced the insurance premiums it charged on bank deposits insured by the BIF to
the statutory minimum of $2,000 annually for "well capitalized" banks. On
September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted
and signed into law. DIFA reduced the amount of FDIC insurance premiums for
savings association deposits acquired by banks to the same levels assessed for
deposits insured by BIF. DIFA further provides for assessments to be imposed on
all insured depository institutions with respect to deposits to pay for the cost
of Financing Corporation bonds; however, banks are assessed for this purpose at
only one-fifth the rate of the assessment on savings associations until December
31, 1999. As a result of these changes, the deposit insurance assessment for
banks and for thrifts has been nearly equalized and will be identical for
comparably rated institutions after January 1, 2000, at which time banks will
share equally in the FICO assessment and the BIF and SAIF funds will be merged.
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
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and other banking organizations are expected to maintain leverage capital ratios
100 to 200 basis points above the minimum depending on their financial
condition.
See Note 20 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.
INTERSTATE BANKING
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 after September 24, 1995. 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
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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.
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, 1997, the Company had a total of 459 full-time
employees and 95 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, 1997, total interest bearing
liabilities maturing or repricing within one year exceeded total interest
earning assets maturing or repricing during the same time period by $40.416
million, representing a negative cumulative one year sensitivity ratio of 0.91.
If interest rates rise, 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" and
Item 7a: Quantitative and Qualitative Disclosure about Market Risk".
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,
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many of the Banks' competitors have higher legal lending limits than do the
Banks. Particularly intense competition exists for sources of funds including
savings and retail time deposits and for loans, deposits and other services that
the Banks offer. See "Item 1: BUSINESS - Competition."
Allowance for Loan Losses. The Company has established an allowance for
loan losses which management believes to be adequate to offset potential losses
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 losses.
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.
Information Systems; Year 2000. The Company is currently in the process
of evaluating its information technology infrastructure to determine whether it
is Year 2000 compliant. The issue with respect to Year 2000 is whether systems
will properly recognize date sensitive information when the year changes to
2000. Systems that do not properly recognize such information could generate
erroneous data or cause complete system failures. The Company has not yet
quantified the anticipated costs of addressing Year 2000 compliance. There can
be no assurance that the Year 2000 problem will not have a material adverse
effect on the financial condition or results of operations of the Company.
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.
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Item 2: Properties
The Company's corporation headquarters are located at 366 Walker Drive,
State College, Pennsylvania. This building is owned by the Company, subject to a
mortgage in the original principal amount of $5,000,000 held by Mid-State Bank
and Trust Co. The Company occupies the first two floors and a portion of the
third floor of this building and is leasing office space on the third floor. In
addition, the Banks operate branch offices and automated teller machines,
indicated by (ATM), at the following locations which are owned by the Company.
Omega Bank
117 South Allen Street, State College, PA (Main Office) (ATM)
222 South Allen Street, State College, PA
1480 East College Ave., State College, PA (ATM)
137 North Allegheny Street, Bellefonte, PA (ATM)
Fourth and Olive Streets, Snow Shoe, PA
Main Street, Rebersburg, PA
Main Street, Millheim, PA
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.
11
<PAGE>
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
110 1/2 Burrowes Street, State College, PA
Centre Community Hospital, 1800 East Park Avenue, State College, PA
116 W. College Ave., State College, PA
135 S. Pugh Street, State College, PA
I80 Exit 22 and Rt 144, Snow Shoe, PA
Sheetz Store, 1671 East Pleasant Valley Boulevard, Altoona, PA
Sheetz Store, 1100 Blair Street, Hollidaysburg, PA
Martin General Store, Route 22, Alexandria, PA
JC Blair Memorial Hospital, Warm Springs Avenue, Huntingdon, PA
Ames Store, Route 22 Plaza, Huntingdon, PA
Sheetz Store, 4th Street and Rt. 22, Huntingdon, PA
Sheetz Store, Jefferson Street, Mount Union, PA
Sheetz Store, 14th and Moore Streets, Huntingdon, PA
Martin General Store, 300 High Street, Williamsburg, PA
12
<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 51 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 54 Senior Vice President and Secretary of the Company since
1987; Vice President, Secretary and Cashier of Omega Bank
since 1973.
JoAnn N. McMinn 45 Senior Vice President and Controller of
the Company since 1988; Vice President and
Controller of Omega Bank since 1976.
Donita R. Koval 37 Senior Vice President of the Company since 1995.
</TABLE>
13
<PAGE>
PART II
Item 5: Market for the Registrant's Common Stock and Related Stockholder
Matters
Incorporated by reference from the section entitled "Common Stock
Market Prices and Dividends" in the Company's Annual Report to Shareholders for
the year ended December 31, 1997. As of March 2, 1998, the number of
shareholders of the Company's common stock was 2,844.
The company did not sell any equity securities during 1997 which were
not registered under the Securities Act.
On March 25, 1997 the Company declared a 3 for 2 stock split issued in
the form of a stock dividend for shareholders of record as of April 18, 1997,
which was 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, 1997.
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,
1997.
Item 7A: Quantitative and Qualitative Disclosure about Market Risk
Incorporated by reference from the sections entitled "Management's
Discussion and Analysis - Financial Condition" in the Company's Annual Report to
Shareholders for the year ended December 31, 1997.
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,
1997.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
14
<PAGE>
PART III
Item 10: Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's Proxy Statement relating
to the 1998 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 1998 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 1998 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 1998 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
15
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements. The following consolidated financial
statements and the notes thereto of the Company, which are included in the
Company's Annual Report to Shareholders for the year ended December 31, 1997,
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, 1997 and 1996
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity Years ended December
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
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
16
<PAGE>
<CAPTION>
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 Intentionally omitted.
*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.
17
<PAGE>
<CAPTION>
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(15) Second Amendment to Omega Amended and Restated Employee Stock Ownership Plan
13.1 Annual Report to Shareholders for the year ended December 31, 1997 (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 LLP
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.
(11) Incorporated by reference from Omega's Registration Statement on
Form S-8 (Registration No. 33-82214).
18
<PAGE>
(12) Incorporated by reference from Omega's Registration Statement on
Form S-4 (Registration No. 33-91472).
(13) Incorporated by reference from Omega's Annual Report on Form 10-K
for the year ended December 31, 1994.
(14) Incorporated by reference from Omega's Annual Report on Form 10-K
for the year ended December 31, 1995.
(15) Incorporated by reference from Omega's Annual Report on Form 10-K
for the year ended December 31, 1996.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
OMEGA FINANCIAL CORPORATION
By: _________________________________
David B. Lee, Chairman of the Board and
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<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 __________________
Robert N. Oliver
20
<PAGE>
_______________________ Director __________________
James W. Powers, Sr.
_______________________ Director __________________
Stanton R. Sheetz
_______________________ Director __________________
Robert A. Szeyller
</TABLE>
21
TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS,
-------------------------------------------
We are pleased to report that Omega Financial Corporation recorded a
net income gain for 1997 of 4.6% over 1996. Omega's net income of $16.968
million was $741,000 higher than our 1996 net income of $16.227 million.
Diluted earnings per common share for the year were $1.77. This figure
represents a 4.7% gain over 1996's earnings of $1.69. Our annual dividends
declared rose 16.1% to $0.65 per common share in 1997. These per share figures,
along with all other per share information in the accompanying report, have been
restated to give effect to the three for two stock split on April 30, 1997, and
to reflect the adoption of Statement of Financial Accounting Standard No. 128,
"Earnings Per Share".
Omega's return on average assets (ROA) was 1.67%, an increase of 3.7%
over the 1.61% ROA achieved for 1996. The corporation's fully tax equivalent net
interest margin rose by 6 basis points to 5.09%. Our loan loss reserve to net
loans ratio remained unchanged at 1.70%, while income from credit activities for
the year increased 1.5%.
As the year came to an end, we were impressed to learn that Omega's
reputation for good performance is being heralded across the country. The shares
of Omega were ranked at the top of a group of bank stocks recommended for
purchase by Hilliard Lyons, a regional brokerage firm headquartered in Kentucky.
We have been able to maintain this kind of momentum because of our
dedication to our core strategies of profitable growth, control of expenses, and
strong marketing initiatives.
We began 1997 with the goal of giving customers the options of banking
via personal computers, telephone banking and telephone bill paying. We not only
achieved this goal, but also added on-line loan applications plus more detailed
information about banking products to our World Wide Web site. We are excited
about this progress, because serving customers through new electronic approaches
can reduce the overall cost of our delivery systems and garner new business.
Our staff incentive program to reward sales of our fee-based checking
products, The Club(R) and Golden Choice Advantage(TM), are paying off as well.
The products both contribute to our non-interest income and serve customers with
expanded benefits. Also contributing to non-interest income is the Omega
CheckCard(SM). Introduced in 1997, this card, which allows purchases to be
charged directly to checking accounts, has been well received by customers and
is on its way to becoming a high performer.
Late in 1997, we decided that our investment-planning program needed a
new name. We began promoting the service as Asset Manager, more aptly
characterizing the planning method that uses mutual funds
2
<PAGE>
to help target clients' financial goals. It has been a tool for our trust
professionals in serving our customers for several years already and is
contributing to the performance of our banks' trust services divisions. The
Asset Manager promotion will remind customers that our trust professionals are
ready to bring the same skills, knowledge and reliability they apply in estate
services to the complex job of planning a family's financial future.
Each of these products -- The Club, Golden Choice Advantage, the Omega
Check Card, and Asset Manager -- are important, of course, in another respect:
they generated non-interest income. Omega Financial's ratio of non-interest
income to average assets improved by 7.3% from year-end 1996 to year-end 1997.
Nevertheless, to serve a customer well, we must consider all aspects of
the relationship. Loans, deposit services, investment strategies and a solid
financial plan are all part of what we want to deliver to every customer; and we
believe every customer deserves this sort of attention.
We also recognize that these needs loom especially large for our
business customers. Recognizing the importance of strong relationships with our
commercial customers has always been a cornerstone of our success. It requires
our continuous renewal of these valued relationships.
As a result, in 1997, we moved to increase our business out-reach
initiative. We have intensified our training, expanded targets for our staff
members and increased our efforts to make effective calls on our customers.
These calls have proven profitable to them and valuable to us.
It is with deep regret that we acknowledge the death of George R.
Lovette. His record of service spans over 20 years. He will be remembered for
his faithful dedication and the leadership contribution he so willingly
provided.
We would also like to recognize the contributions made by the directors
and staff of Omega and its subsidiaries during 1997. The guidance, counsel and
leadership our directors have provided are extremely important in determining
the direction that Omega Financial Corporation will take in establishing its
future. Our staff must be recognized for resourcefulness and the ability to
react to a constantly changing banking environment. We take pride in our
excellent staff members. The organization's performance is a reflection of their
ability.
As we begin 1998, we plan to concentrate on these strong building
blocks. We will deliver the service customers expect from us, which is the
foundation of continued strong performance in the months and years ahead.
Sincerely,
/s/ David B. Lee /s/ D. Stephen Martz
------------------------- ------------------------
David B. Lee D. Stephen Martz
Chairman and Chief President and Chief
Executive Officer Operating Officer
3
<PAGE>
CORPORATE DIRECTORS AND OFFICERS
--------------------------------
The lists on this page and the following two pages present the directors and
officers of Omega Financial Corporation as of December 31, 1997.
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.
David B. Lee, Chairman
Chief Executive Officer of Omega Financial Corporation
D. Stephen Martz
President and Chief Operating Officer of Omega
Financial Corporation
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
DIRECTORS EMERITI
Ned C. Cummings
William E. Henry, O.D.
Albert N. Masood
Don C. Meyer
John R. Miller, Jr., Esq.
Samuel D. Zeiders, Jr., D.D.S.
OFFICERS
<TABLE>
<S> <C>
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
David N. Thiel .................................Senior Vice President and Secretary
JoAnn N. McMinn .....................Senior Vice President and Corporate Controller
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
</TABLE>
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 James W. Powers, Sr.
Philip E. Gingerich Richard B. Roush
Frederick J. Kissinger Robert A. Szeyller
Charles H. Zendt, Jr.
Directors Emeriti
- -----------------
David D. Borland H. Richard Ishler, M.D.
J. Harold Boyer Jonas B. Kauffman, Jr.
Ned C. Cummings Nathan H. Krauss
Herbert C. Graves Don C. Meyer
Darl H. Heller John R. Miller, Jr., Esq.
William E. Henry, O.D. George R. Smith
Samuel D. Zeiders, Jr., D.D.S.
Officers
- --------
David B. Lee ........................Chairman, President and
Chief Executive Officer
Charles H. Zendt, Jr. ..............Executive 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
Kimberly A. Benner ....................Vice President, Trust
John E. Gravish ............Vice President, Regional Lending
Ann K. Guss ................Vice President, Mortgage Lending
Ronald S. Haring .........Vice President, Commercial Lending
Susan Kratzer ...............................Vice President,
Regional Branch Administration
Mary Grace Kudey ............................Vice President,
Commercial Lending
Francis C. Moyer .............Vice President, Branch Manager
Robert C. Snyder ............................Vice President,
Branch Administration
Jesse Weaver ..........................Vice President, Trust
Thomas D. Weldon ......................Vice President, Trust
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 Steven L. Palm
Jeffrey K. Creighton Ronald C. Shearer
Ralph A. Germak Kenneth O. Stuck, D. Ed.
Jerry Leach William S. Taylor, III
Roy A. Leister Mervin R. Zendt
Montour Region
James P. Garman Thomas N. Mertz
Carol Linnet George A. Park
Charles I. Keiter
Directors Emeriti
- -----------------
William Bamat Lee E. Sausman
Miles X. Clevenstine E. J. Straley, V.M.D.
James G. Corman Jay Struble
C. Richard Dimm Peter Swistock, Sr.
Robert L. Homan Elwood A. Way
Lawrence L. Hoverter Warren K. Zook
5
<PAGE>
BANK DIRECTORS AND OFFICERS
---------------------------
HOLLIDAYSBURG TRUST COMPANY
- ---------------------------
Board of Directors
- ------------------
Ralph W. Arthur, Jr. D. Stephen Martz
Merle K. Evey, Esq. Stanton R. Sheetz
Rex W. Hershberger Joseph Tanner
David C. Hileman Vincent C. Turiano
John P. Kinney
Directors Emeriti
- -----------------
John S. Clapper Dorothea D. Nelson
Charles I. Kreider Lester E. Plank
Joseph R. Good Roy F. Rumbaugh
James J. Madden
Officers
- --------
D. Stephen Martz .......................Chairman, President,
Chief Executive Officer
Rex W. Hershberger ............................Vice Chairman
Vincent C. Turiano ................Executive Vice President,
Chief Operating Officer
Bruce R. Erb ...................Senior Vice President, Trust
Richard A. Scholton ..........Senior Vice President, Lending
Steven C. Lewis ...................Vice President, Community
Banking, Treasurer
Dennis C. O'Connor ...............Vice President, Commercial
Services
Roger W. Oswald ........Vice President, Agricultural Manager
Advisory Committee
- ------------------
Darl E. Bechtel Robert M. Greenleaf
E. Emile Dilling Allan G. Hancock
Louis K. Elliott A. Lloyd Steele
Allen E. Gibboney
Emeriti
- -------
A. Dean Fay G. Reid Shaffer
John A. Loose Ruth B. Weaver
Harold R. Mallow
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
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, 1997, the number of
shareholders of record of the Corporation's common stock was 2,820.
The following table sets forth, for the periods indicated (1) the high and low
sale prices and (2) cash dividends, restated to give effect of the three for two
stock split in April 1997.
<TABLE>
<CAPTION>
1997 1996
----------------------------- ------------------------------
Cash Cash
Dividends Dividends
Quarter Ended High Low Paid High Low Paid
---- --- --------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C>
March 31 ........... $28.00 $23.33 $0.15 $22.50 $20.93 $0.13
June 30 ............ 35.50 27.00 0.16 22.50 20.67 0.14
September 30 ....... 36.88 34.75 0.16 22.17 20.67 0.14
December 31 ........ 36.75 33.13 0.18 24.33 21.17 0.15
</TABLE>
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 Preferred Stock. See
Note 15 of the Notes to Consolidated Financial Statements.
The following firms have chosen to make a market in the stock of the
Corporation. Inquiries concerning their services should be directed to:
Legg Mason Wood Walker, Inc. Janney Montgomery Scott, Inc.
141 West Beaver Avenue 1801 Market Street
State College, PA 16801 Philadelphia, PA 19103
(814-234-7300) (800-526-6397)
F. J. Morrissey & Co. Ryan Beck & Co.
1700 Market St. Suite 1420 80 Main Street
Philadelphia, PA 19103-3913 West Orange, NJ 07052
(800-842-8928) (800-342-2325)
Ferris, Baker Watts, Inc. ABN AMRO Chicago Corporation
6 Bird Cage Walk 208 S. LaSalle Street
Hollidaysburg, PA 16648 Chicago, IL 60604
(800-343-5149) (800-621-0686)
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, 1997 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, 1997, 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 9:00 a.m., Tuesday, April 28, 1998 at The Penn Stater (formerly Penn State
Scanticon), 215 Innovation Blvd., Penn State Research Park, State College,
Pennsylvania.
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 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, 1997 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
at December 31 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars, except share data)
<S> <C> <C> <C> <C> <C>
Assets $1,015,903 $1,007,345 $ 994,840 $ 939,953 $ 934,119
Deposits 840,775 846,030 850,182 801,736 809,778
Loans, net 691,893 696,597 703,125 647,933 635,961
Investment securities 249,817 241,846 219,708 227,822 236,750
Long term debt (including ESOP debt) 9,034 9,213 10,073 5,568 5,699
Shareholders' equity 142,432 135,885 124,171 113,109 102,312
Number of shares outstanding - common ** 8,879,257 9,050,889 9,034,449 8,978,603 8,896,748
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 $ 76,998 $ 76,720 $ 72,973 $ 65,090 $ 66,741
Net interest income 47,121 46,400 43,956 41,443 40,614
Provision for loan losses 1,030 979 713 623 1,133
Income before income taxes and cumulative
effect of change in accounting principle 24,465 23,354 19,802 17,662 16,172
Income tax expense 7,497 7,127 5,733 4,877 4,240
Net income* 16,968 16,227 14,069 12,785 12,679
PER COMMON SHARE DATA**
Net income - basic $ 1.85 $ 1.75 $ 1.52 $ 1.39 $ 1.39
Net income - diluted 1.77 1.69 1.47 1.34 1.34
Cash dividends - common 0.65 0.56 0.48 0.44 0.40
Book value - common 15.83 14.83 13.67 12.54 11.46
</TABLE>
FINANCIAL RATIOS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average equity *** 12.26% 12.51% 11.90% 11.75% 12.91%
Return on average assets *** 1.67 1.61 1.47 1.36 1.38
Dividend payout - common 34.41 31.26 30.65 30.80 28.00
Average equity to average assets 13.64 12.85 12.35 11.61 10.71
</TABLE>
* Net income for 1993 includes a $747 favorable impact from the cumulative
effect of adoption of SFAS 109, "Accounting for Income Taxes".
** Prior period per share information has been restated for the effect of the
3 for 2 stock split in the form of a dividend in 1997, as well as the
adoption of SFAS No. 128, "Earnings per Share" in 1997. 1993 basic and
diluted net income per share includes a favorable impact from the adoption
of SFAS 109 of $.09 per share.
*** 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 the adoption 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, Year
2000 compliance and its effect on the Corporation's financial condition or
results of operation 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
including, without limitation, the effect of economic conditions and related
uncertainties, the effect of interest rates on the Corporation, federal and
state government regulation, competition, and the time and expense of addressing
the Year 2000 issue. 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, 1997, 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 $44,641,000. On December 31, 1996, Montour was merged into
Omega Bank.
On January 28, 1994, Penn Central Bancorp was merged with and into Omega. This
transaction was accounted for as a pooling of interests for financial reporting
purposes, and as a result, all prior period financial information in this Annual
Report has been restated to reflect the combination.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
FINANCIAL CONDITION
Omega functions as a financial intermediary and therefore its financial
condition should be viewed in terms of changes in its uses and sources of funds.
Table 1 depicts average daily balances, the dollar change and percentage change
for the past two years. This table is referenced for the discussion in this
section.
TABLE 1
Changes in Uses and Sources of Funds
($ in thousands)
<TABLE>
<CAPTION>
1997 Increase(Decrease) 1996 Increase(Decrease) 1995
Average ------------------ Average -------------------- Average
Balance Amount % Balance Amount % Balance
---------- -------- ---- ------- ------ --- ---------
Funding Uses:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans ................................ $ 693,131 $(11,128) (1.6%) $ 704,259 $ 30,447 4.5% $ 673,812
Investment securities ................ 208,943 16,454 8.5 192,489 21,203 12.4 171,286
Tax-exempt investment securities ..... 37,726 3,113 9.0 34,613 (8,933) (20.5) 43,546
Interest bearing deposits ............ 605 (52) (7.9) 657 (1,016) (60.7) 1,673
Federal funds sold ................... 18,873 (2,619) (12.2) 21,492 9,002 72.1 12,490
---------- -------- --- ---------- ----------- --- -----------
Total interest earning assets ...... 959,278 5,768 0.6 953,510 50,703 5.6 902,807
Non-interest earning assets .......... 67,084 (844) (1.2) 67,928 1,552 2.3 66,376
Less: Allowance for loan losses ...... (11,755) 40 (0.3) (11,795) (427) 3.8 (11,368)
---------- -------- --- ---------- ----------- --- -----------
Total uses ......................... $1,014,607 $ 4,964 0.5% $1,009,643 $ 51,828 5.4% $ 957,815
========== ======== === ========== =========== === ===========
Funding Sources:
Interest bearing demand deposits ..... $ 219,304 $ (2,600) (1.2%) $ 221,904 $ 1,444 0.7% $ 220,460
Savings deposits ..................... 102,121 (2,136) (2.0) 104,257 (1,601) (1.5) 105,858
Time deposits ........................ 417,396 (610) (0.1) 418,006 35,324 9.2 382,682
Other ................................ 13,758 5,031 57.6 8,727 2,142 32.5 6,585
---------- -------- --- ---------- ----------- --- -----------
Total interest bearing liabilities 752,579 (315) (0.0) 752,894 37,309 5.2 715,585
Demand deposits ...................... 110,520 (2,526) (2.2) 113,046 2,359 2.1 110,687
Other liabilities .................... 13,148 (863) (6.2) 14,011 736 5.5 13,275
Shareholders' equity ................. 138,360 8,668 6.7 129,692 11,424 9.7 118,268
---------- -------- --- ---------- ----------- --- -----------
Total sources .................... $1,014,607 $ 4,964 0.5% $1,009,643 $ 51,828 5.4% $ 957,815
========== ======== === ========== =========== === ===========
</TABLE>
Omega's funding sources have increased over the last two years at rates of 5.4%
and 0.5% in 1996 and 1997, respectively. While all types of deposits decreased
on average in 1997, short-term borrowings were increased to provide needed
funding sources. Available funds were utilized primarily for funding purchases
of investment securities during 1997. Approximately half of the overall funds'
growth in 1996 was due to market expansion through an acquisition in 1995. These
excess funds were used for both loan and investment securities in 1996, while
15% of the 1996 increase was kept in short-term, more liquid investments
(interest bearing deposits and federal funds sold).
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
OVERVIEW
Referencing the average balances chart, it is clear that Omega has enjoyed
steady growth in average assets over the past five years, however, during 1997,
the balance sheet was slightly restructured, as loan volumes declined.
During 1997, for the first time in 5 years, average loans and deposits balances
were lower than the previous year. 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, resulting from an acquisition during 1995. The decreased
loan volumes in 1997 (discussed in the Loan section which follows) resulted in
less aggressive deposit pricing, as high-costing funding was not needed. Excess
funds from loan runoff and from non-deposit funding sources were used to
increase levels of investments in 1997. 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).
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.
LOANS
In 1997, total average loans were $693.1 million as compared to $704.3 million
in 1996, a decrease of $11.2 million, or 1.6%. The loan category that
contributed the most to this decrease is personal installment loans,
specifically indirect auto loans. Balances in this category averaged $13.3
million less in 1997 than in 1996 due to heavy competition from the auto
manufacturers' financing plans. Additionally, because of concerns of overall
increased levels of consumer debt, Omega has tightened its credit standards. In
December of 1997, the Corporation's credit card portfolio was sold. Its
outstanding balances were $2.2 million at the time of the sale. This is expected
to have a negative effect on growth in 1998.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
Emphasis in the consumer lending area in 1997 was placed on residential
mortgages and home-equity products, where balances at year-end 1997 were $276.7
million, or $24.9 million higher than December 31, 1996. Commercial loans and
commercial real estate loans in total maintained similar balances on December
31, 1997 as in 1996, however, commercial real estate loans grew as commercial,
financial and agricultural loans declined. New loan demands kept pace with
pay-offs.
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,
financial and agricultural loans outstanding dropped by $5.4 million from
December 31, 1995 to December 31, 1996 due to several large scheduled pay-offs
and competitive pressure. The only area to experience significant increases was
the commercial mortgage category of loans, which increased steadily throughout
1996 in all of the banks.
The loan portfolio as of December 31, 1997 was comprised of 58% consumer loans
and 42% commercial loans (including construction), as compared to 59% and 41%,
respectively, at December 31, 1996.
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 aggressively pursue growth in each of the loan
categories during 1998. 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, and aggresive monitoring and collection
policies.
Loan loss reserves have been established in order to absorb potential loan
losses on existing loans. 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,
1997 was 1.70% of total loans, net of unearned discount, as compared to 1.70% of
total loans at the end of 1996. The allowance decreased $27,000 from 1996 as net
charge-offs of $1,057,000 exceeded the provision of $1,030,000. Net charge-offs
for 1997 were 0.15% of average loans as compared to 0.12% in 1996. The majority
of charge-offs related to personal loans in both years. Because of the
non-performing loans increase in 1997 and the increase in net charge-offs in
both 1997 and 1996, management likewise increased the provision for loan losses
in both years. Non-performing loans had decreased to 0.48% of loans, as of
December 31, 1996, but have risen to 1.00% of loans as of December 31, 1997 (See
Table 2). The increase in non-accrual loans is due primarily to one loan
relationship that was classified to non-accrual status during 1997, with an
outstanding balance of $2,375,000. Accruing loans past due 90 days or more were
significantly decreased in 1996, but have risen as of December 31, 1997 to
$2,103,000, an increase of $862,000. Most of the increase is related to one loan
to a commercial borrower.
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, 1997, non-performing loans (as defined in Table 2) as a
percentage of the allowance for loan losses were 58.6% as compared to 28.2% at
December 31, 1996. Of the $6,912,000 of non-performing loans at December 31,
1997, $6,277,000 were collateralized with real estate, $453,000 with other
assets, and $182,000 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,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans ........................ $4,762 $2,079 $1,932 $1,596 $1,849
Accruing loans past due 90 days or more... 2,103 1,241 2,697 1,317 952
Restructured loans ....................... 47 14 -- 44 --
------ ------ ------ ------ ------
Total non-performing loans ............... $6,912 $3,334 $4,629 $2,957 $2,801
====== ====== ====== ====== ======
</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 1998 follows (in thousands):
Commercial, financial and agricultural.............. $ 353
Real estate - commercial............................ --
Real estate - mortgage.............................. 64
Personal............................................ 553
-----
Total............................................... $ 970
=====
INVESTMENTS
Average investments (as defined above) increased by $18.7 million, or 7.4%,
during 1997, after increasing by $21.0 million, or 9.1% during 1996. Because of
reduced loan volumes in 1997, funds from loan runoff and pay-offs became
available, as did other non-deposit sources of funding (short-term borrowings),
for investing opportunities outside the loan market. This accounted for the
investment balance increase. It is important to note that $1.9 million of the
increase in investments is due to the mark-to-market adjustment necessary on the
portion of the portfolio that is classified as available for sale.
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. 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, lower yielding, liquid investments.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
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. Note 4 to the Consolidated Financial
Statements analyzes the investment securities (including the tax-exempt
investment securities). At December 31, 1997, the market value of the entire
securities portfolio exceeded amortized cost by $7,677,000 as compared to
December 31, 1996 when market value was greater than amortized cost. The
weighted average maturity of the investment portfolio is 1 year and 8 months as
of December 31, 1997 as compared to 1 year and 10 months at the end of 1996. 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 decreased $804,000, or 1.4% on average in 1997 as
compared to an increase of $1,125,000, or 2.0% in 1996.Changes occuring in both
years were the result of normal operating activities.
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. This goal was achieved during the year,
accounting for most of the capital spending. Additionally, further commitment
was made to technological advances through updated and new computer software and
equipment which will be on-going expenditures over the next several years.
DEPOSITS
The banking industry in general continues to experience limited deposit growth
because of fierce competition in the marketplace provided by mutual funds and
other investment options that directly compete with traditional bank products.
During the past 5 years, Omega has experienced slow deposit growth. As reflected
in Table 3, average total deposits actually declined in 1997 by $7.9 million, or
0.9% as compared to 1996. This followed a year where average deposits rose by
4.6%, or $37.5 million, with 94% of the increase in time deposits. This occurred
primarily as a result of an acquisition.The bulk of the reduction in deposits in
1997 was evident in the core transaction accounts, accounting for 92% of the
decrease. The remaining 8% reduction was attributed to time deposits.
One event that influenced deposit levels somewhat over the last 2 years was the
introduction of a new product. 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). In 1997, average deposits were reduced by
$8.1 million as a result of the repurchase agreements, as compared to $1.8
million in 1996. Because this program has been responsive to the needs of our
customers, this activity is expected to continue, having the impact of reducing
deposit growth and increasing Omega's funding costs in the future.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
TABLE 3
Changes in Deposits
($ in thousands)
<TABLE>
<CAPTION>
1997 Increase(Decrease) 1996 Increase(Decrease) 1995
Average ------------------ Average ------------------- Average
Balance Amount % Balance Amount % Balance
------- ------ ---- -------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest bearing demand deposits ... $219,304 $ (2,600) (1.2)% $221,904 $ 1,444 0.7% $220,460
Savings deposits ................... 102,121 (2,136) (2.0) 104,257 (1,601) (1.5) 105,858
Demand deposits .................... 110,520 (2,526) (2.2) 113,046 2,359 2.1 110,687
-------- -------- ---- -------- -------- --- --------
Total core(transaction) accounts 431,945 (7,262) (1.7) 439,207 2,202 0.5 437,005
Time deposits ...................... 417,396 (610) (0.1) 418,006 35,324 9.2 382,682
-------- -------- ---- -------- -------- --- --------
Total deposits ................. $849,341 $ (7,872) (0.9)% $857,213 $ 37,526 4.6% $819,687
======== ======== ==== ======== ======== === ========
</TABLE>
OTHER INTEREST BEARING LIABILITIES
Other interest bearing liabilities on average increased $5,031,000, or 57.6% in
1997, as compared to an increase of $2,142,000, or 32.5% in 1996. The increases
in 1997 and 1996 are due to the addition of $6,334,000 and $1,813,000,
respectively, in the average balances of retail repurchase agreements (See Note
9 of Notes to Consolidated Financial Statements).
SHAREHOLDERS' EQUITY
Shareholders' equity was once again an important funding source during 1997,
providing an average of $138,360,000, an increase of $8,668,000 or 6.7% from the
$129,692,000 provided in 1996. In spite of increased dividends, Omega continued
a strong rate of internal capital generation. This rate was 7.9% in 1997 and
8.7% in 1996. This internal capital generation is dependent on high earnings
performance which is reflected by a return on average assets of 1.67% in 1997
and 1.61% in 1996, in conjunction with a prudent dividend policy that is
represented by payout ratios on the common stock of 34.4% for 1997 and 31.3% for
1996. 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
$23,000,000 for purchasing treasury stock in order to fund the Corporation's
stock option and stock purchase plans. As a result, at December 31, 1997, Omega
held 171,473 shares of stock in treasury at a cost of $5,947,000.
Omega increased the value to shareholders by issuing a 3 for 2 stock split in
the form of a dividend in the second quarter of 1997 (All share and per share
information in this report is restated to reflect the effect of the split).
Omega also increased the return to shareholders this year by increasing its
dividend 16.1% to $.65 per share. Cash dividends per share in prior years were
$.56 and $.48 in 1996 and 1995, respectively. Omega paid a dividend of $1.80 per
preferred share in each of the years ending 1997, 1996 and 1995. See Note 18 of
Notes to Consolidated Financial Statements regarding restrictions on dividends
from subsidiary banks to the holding company.
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, 1997 and 1996, Omega's Tier I capital ratio was 19.9% and 19.1%,
respectively, and its total capital ratio was 21.1% and 20.3%, 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, 1997 and 1996, Omega's
leverage ratio was 13.3% and 13.0%, respectively, against a required leverage
ratio of 4%. (See Note 21 of Notes to the Consolidated Financial Statements).
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
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, while 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 risk in
achieving these levels of net interest income. Interest rate risk is the risk to
net interest income or capital arising from movement of interest rates. Sources
of interest rate risk include; repricing risk, basis risk and yield curve risk.
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. Gap is one of the tools used to manage repricing risk.
Repricing risk results from differences in the timing of rate changes and cash
flows that occur in the pricing and maturity of 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, 1997. 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 negative gap position of $40,416,000 at
December 31, 1997, indicating more interest bearing liabilities than earning
assets will reprice during that period. Over the past year, the level of our gap
and interest rate risk positions have been affected by both the extension of our
loan portfolio, which reflects our customers preference for fixed rates and the
shortening of our certificate of deposit base as customers continue to prefer
shorter term certificates.
ECONOMIC SIMULATION
Economic simulation is another tool used by management to measure and manage
interest rate risk, including repricing, basis and yield curve risk. Management
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, 1997, should interest rates rise by 100
basis points immediately and Omega's balances do not grow and the mix does not
change, net interest income would increase over the next twelve months by
$604,000. If interest rates would decline by 100 basis points immediately, net
interest income would decrease by $524,000 over the next twelve months. There is
not an inverse 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 prime-based 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 $40,000,000 as of December 31, 1997, 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 $30,000,000 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 14 months
at a weighted rate of 8.36% 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 $30,000,000 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 a prime-based 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 5
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, 1997, with and without the $40,000,000 of
interest rate contracts, the following results would occur over the next twelve
months (in thousands):
Change in Change in Net Interest Income
Interest Rates Interest Rate Contracts
(Basis Points) With Without
400 $2,224 $3,424
300 1,764 2,664
200 1,224 1,824
100 604 904
0 0 0
(100) (568) (899)
(200) (1,116) (1,789)
(300) (1,630) (2,644)
(400) (2,097) (3,453)
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
$331,000 for a 100 basis point decline in rates and by $673,000 for a 200 basis
point drop, thus reducing Omega's risk to interest rate movements.
Net interest income at risk for a 100 basis point decrease in rates as of
December 31, 1997 was $568,000 compared to $1,043,000 as of December 31, 1996.
This reduction in risk is directly related to the preference of our customers
for fixed rate loans and shorter term deposits.
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 that
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,
1997, Omega's net interest income and MVE were within the guidelines established
by management.
Basis risk is another source of interest rate risk and arises from the
difference in movements of interest rates earned on assets and the interest
rates paid on liabilities with otherwise similar repricing characteristics. The
Corporation analyzed the effects of basis risk on both net interest income and
MVE. 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:
<TABLE>
<CAPTION>
Change in Change in Change in
Basis Interest Rates Net Interest Income Market Value of Equity
----- -------------- ------------------- ----------------------
<S> <C> <C> <C>
Prime Risk -100 $(1,056) $ 7,011
Treasury Risk +100 $(1,137) $11,517
</TABLE>
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 $1,056,000 and market value
of equity would increase by $7,011,000. 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 $1,137,000 and market value of
equity would increase $11,517,000. 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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
Interest rate risk can also result from yield curve risk. Yield curve risk is
the exposure of earnings due to the pricing of assets or liabilities being
influenced by the shape of the yield curve. The Corporation analyzed the effects
of yield curve risk on both net interest income and MVE. The analysis included
the affects of an inverted yield curve, where the thirty year rate was 500 basis
points under the one month rate. Results indicate that this type of yield curve
would decrease the Corporation's net interest income by $5,359,000, or 11.6%,
and market value of equity would increase by $51,146,000, or 25.6%.
The gap analysis, rate shock simulation and basis 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.
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, 1997, total liquid assets were $153,779,000 while the short-term liabilities
were $54,141,000. This left a surplus of liquid assets of $99,638,000, or 9.8%
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 81.6% at December 31, 1997 and 82.2% at December 31, 1996. 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, 1997. At December 31, 1997, 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 $65,397,000 as of December 31, 1997. At December 31,
1997, 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.
In the printed version there appears a bar chart with the following plot
points depicted:
Net Income
(in thousands)
1993 *$11,932
1994 $12,785
1995 $14,069
1996 $16,227
1997 $16,968
* (1993 net income shown before favorable effect of accounting change of $747)
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
TABLE 4
MATURITY DISTRIBUTION
AS OF DECEMBER 31, 1997
(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 ............. $ 600 $ -- $ -- $ -- $ -- $ 600
Federal funds sold .................... 22,650 -- -- -- -- 22,650
Investment securities:
U.S. Treasury securities
and obligations of other
U.S. Government agencies
and corporations ............ 27,720 11,101 20,770 43,559 -- 103,150
Corporate and other securities ... 1,661 573 5,407 29,099 9,840 46,580
Obligations of state and political
subdivisions ................. 4,386 1,906 6,269 24,114 430 37,105
Mortgage backed securities ....... 7,219 6,472 11,747 19,832 -- 45,270
Stocks ........................... -- -- -- -- 10,035 10,035
Loans:
Commercial, financial and
agricultural ................. 76,980 5,223 6,397 17,023 21,117 126,740
Interest rate swap agreements
(notional amount) ............ (30,000) -- -- 30,000 -- --
Real estate - commercial ......... 48,657 2,349 3,723 29,968 56,788 141,485
Real estate - construction ....... 10,191 392 251 1,908 8,425 21,167
Real estate - mortgage ........... 13,725 15,409 27,036 79,569 77,041 212,780
Home equity ...................... 18,901 2,178 4,110 25,336 13,380 63,905
Personal (net of unearned
interest) .................... 29,318 8,485 15,917 58,377 9,350 121,447
Lease financing (net of
unearned interest) ........... 155 226 701 3,281 6 4,369
--------- --------- --------- --------- --------- ---------
Total Interest Earning Assets .............. 232,163 54,314 102,328 362,066 206,412 957,283
========= ========= ========= ========= ========= =========
Interest Bearing Liabilities
Demand deposits ....................... 24,340 -- -- 137,925 -- 162,265
Savings deposits ...................... 95,393 -- 20,287 38,960 -- 154,640
Certificates of deposit
over $100,000 ....................... 22,785 9,976 5,046 14,624 363 52,794
Time deposits ......................... 102,734 63,629 66,185 123,180 571 356,299
Short-term borrowings ................. 13,260 -- -- -- -- 13,260
Long-term debt ........................ 5,000 -- -- -- -- 5,000
Other interest bearing liabilities .... 452 134 -- -- 4,034 4,620
--------- --------- --------- --------- --------- ---------
Total Interest Bearing Liabilities ......... 263,964 73,739 91,518 314,689 4,968 748,878
--------- --------- --------- --------- --------- ---------
Gap ........................................ $ (31,801) $ (19,425) $ 10,810 $ 47,377 $ 201,444 $ 208,405
========= ========= ========= ========= ========= =========
Cumulative Gap ............................. $ (31,801) $ (51,226) $ (40,416) $ 6,961 $ 208,405
========= ========= ========= ========= =========
Cumulative sensitivity ratio ............... 0.88 0.85 0.91 1.01 1.28
Commercial, financial and agricultural
loans maturing after one year with:
Fixed interest rates .................. $ 17,023 $ 21,117 $ 38,140
Variable interest rates ............... 13,606 18,860 32,466
--------- --------- ---------
Total ................................. $ 30,629 $ 39,977 $ 70,606
========= ========= =========
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
RESULTS OF OPERATIONS
OVERVIEW
1997
Omega reported earnings in 1997 of $16,968,000, an increase of 4.6% over 1996.
On a diluted basis, net income per common share continued to improve, reaching
$1.77 in 1997, an increase of 4.7%, or $.08, over 1996. The key factors which,
in management's opinion, influenced the operating results in 1997 are as
follows:
o increased net interest margin
o increased fee income on traditional services
o increase from gains on securities and loan sales
In the printed version there appears a bar graph with the
following plot points depicted:
Return on Average Assets
1993 1.30%
1994 1.36%
1995 1.47%
1996 1.61%
1997 1.67%
Assets were $1,015,903,000 at December 31, 1997, representing an $8,558,000, or
0.8%, increase over year end 1996. Loans (net of unearned discount) were
$691,893,000 compared to $696,597,000 at December 31, 1996, a decrease of 0.7%,
or $4,704,000. Deposits decreased by $5,255,000, or 0.6%, from December 31,1996
to December 31, 1997.
Return on average equity decreased from 12.51% in 1996 to 12.26% in 1997, while
return on average assets increased to 1.67% from 1.61% in 1996. 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, 1997).
Omega Peers
----- -----
Return on average assets 1.64% 1.31%
Return on average equity 12.04% 14.78%
1996
Omega reported earnings in 1996 of $16,227,000, an increase of 15.3% over 1995.
On a diluted basis, net income per common share continued to improve, reaching
$1.69 in 1996, an increase of 15.0%, or $.22, 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
In the printed version there appears a bar graph
with the following plot points depicted:
Return on Average Equity
1993 12.15%
1994 11.75%
1995 11.90%
1996 12.51%
1997 12.26%
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, as of December 31, 1996.
Omega Peers
----- -----
Return on average assets 1.61% 1.21%
Return on average equity 12.51% 13.53%
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
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.
NET INTEREST INCOME
Net interest income is the amount by which interest income on earning assets
exceeds interest paid on interest bearing liabilities. Because 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 1995-1997. In
addition, it shows the changes attributable to the volume and rate components of
net interest income.
1997
Total average loans were $693,131,000 in 1997 at a yield of 8.90% that produced
$61,683,000 in interest income. This represented an $11,128,000, or 1.6%
decrease in average volumes from 1996. The yield decreased 1 basis point from
8.91% in 1996 to 8.90% in 1997. As a result of the decreased average loan
volumes, interest income was reduced by $1,034,000. The lower average yield
further reduced interest income by $23,000. The volume decrease was caused by a
number of factors, including a general tightening of credit standards and
increased competition for indirect auto loans, as discussed earlier in the
Financial Condition section. The 1997 average balance of investment securities
was $246,649,000 for an increase over 1996 of $19,567,000, or 8.6%. The yield
increased to 5.77% in 1997 from 5.64% in 1996. Interest income from securities
increased a total of $1,440,000, with $1,121,000 attributable to higher volumes,
and $319,000 due to higher yields. Average interest bearing deposits decreased
$52,000, or 7.9%, and federal funds sold decreased 12.2%, or $2,619,000. The net
increase in average volumes of $16,896,000 on the above three types of assets
was a result of reduced loan funding needs and improved employment of excess
cash.
Total interest earning assets averaged $959,278,000 at a yield of 8.03% and
produced total interest income of $76,998,000 for 1997. Compared to 1996, the
average volumes increased $5,768,000, or 0.6%. The yield decreased 2 basis
points from 8.05% as compared to 8.03% in 1996 as the mix of earning assets
shifted from 69.8% loans in 1996 to 68.3% loans in 1997 (See Average Asset Mix
Change chart on page 11). Interest income decreased $60,000 from volume and mix
changes and increased $338,000 from rate differences producing a net increase of
0.4%, or $278,000.
Total interest bearing liabilities in 1997 averaged $752,579,000 at a cost of
$29,877,000 for a composite rate of 3.97%. This represented a decrease in
interest bearing liabilities of $315,000, over 1996. The composite rate
decreased from 4.03% in 1996, or 6 basis points. In 1997 interest expense
decreased $555,000 due to lower rates and increased $112,000 due to favorable
volume and mix changes compared to 1996. These changes resulted in a total
decrease of $443,000, or 1.5%, in interest expense.
Non-interest bearing funding sources, including equity, averaged $262,028,000 in
1997, compared to $256,749,000 in 1996, for an increase of $5,279,000, or 2.1%.
This resulted in a decrease of 6 basis points in the rate to fund interest
earning assets (computed by dividing the total interest expense by the total
average earning assets) from 3.18% in 1996 to 3.12% in 1997.
Net interest income was $47,121,000 for 1997, an increase of $721,000, or 1.6%,
from 1996. This was the result of a decrease of $172,000 in volume and mix
changes and an increase of $893,000 as a result of interest rate effects. Net
yield increased 4 basis points to 4.91% from 4.87% in 1996. On a fully tax
equivalent basis, the net yield increased from 5.03% to 5.08% in 1997.
Following is a schedule comparing Omega's margin performance to the average of
its national peers as of September 30, 1997:
Percent of average earning assets Omega Peers
--------------------------------- ----- -----
Interest income - tax equivalent 8.08% 8.44%
Interest expense 3.08 3.92
Net interest income - tax equivalent 5.00 4.52
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
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.
Following is a schedule comparing Omega's margin performance to the average of
its national peers as of December 31, 1996:
Percent of average earning assets Omega Peers
--------------------------------- ----- -----
Interest income - tax equivalent 8.16% 8.28%
Interest expense 3.16 3.76
Net interest income - tax equivalent 5.00 4.55
23
<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>
Years Ended December 31,
-------------------------------------------------------------------------------
1997 1996
-------------------------------------- ------------------------------------
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) ......................... $ 674,112 $ 60,380 8.96% $ 686,541 $ 61,504 8.96%
Tax-exempt loans ...................... 19,019 1,303 6.85 17,718 1,236 6.98
----------- ----------- ---- ----------- ----------- ----
Total loans ......................... 693,131 61,683 8.90 704,259 62,740 8.91
Investment securities ................. 208,943 12,542 6.00 192,489 11,208 5.82
Tax-exempt investment securities ...... 37,726 1,699 4.50 34,613 1,593 4.60
----------- ----------- ---- ----------- ----------- ----
Total investment securities ......... 246,669 14,241 5.77 227,102 12,801 5.64
Interest bearing deposits ............. 605 34 5.62 657 35 5.33
Federal funds sold .................... 18,873 1,040 5.51 21,492 1,144 5.32
----------- ----------- ---- ----------- ----------- ----
Total interest earning assets ........... 959,278 76,998 8.03 953,510 76,720 8.05
Non-interest earning assets:
Cash and due from banks ............... 29,972 32,581
Allowance for loan losses ............. (11,755) (11,795)
Premises and equipment ................ 17,917 17,584
Other assets (8) ...................... 19,195 17,763
----------- -----------
Total ............................... $ 1,014,607 $ 1,009,643
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2) .. $ 219,304 4,109 1.87 $ 221,904 4,496 2.03
Savings deposits ...................... 102,121 2,309 2.26 104,257 2,407 2.31
Time deposits ......................... 417,396 22,804 5.46 418,006 22,960 5.49
Other, including short-term borrowings,
long-term debt and other interest
bearing liabilities ................. 13,758 655 4.76 8,727 457 5.24
----------- ----------- ---- ----------- ----------- ----
Total interest bearing liabilities ...... 752,579 29,877 3.97 752,894 30,320 4.03
----------- -----------
Non-interest bearing liabilities:
Demand deposits ....................... 110,520 113,046
Other ................................. 13,148 14,011
Shareholders' equity .................... 138,360 129,692
----------- -----------
Total ............................... $ 1,014,607 $ 1,009,643
=========== ===========
Net interest income ..................... $ 47,121 $ 46,400
=========== ===========
Net yield on interest earning assets (3) 4.91% 4.87%
==== ====
Net yield -- tax equivalent basis (4) ... 5.08% 5.03%
==== ====
<CAPTION>
1995
--------------------------------------
Average Yield/
Balance (1) Interest Rate
----------- -------- ------
<S> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (5),(7) ......................... $ 660,560 $ 59,657 9.03%
Tax-exempt loans ...................... 13,252 948 7.15
--------- --------- ----
Total loans ......................... 673,812 60,605 8.99
Investment securities ................. 171,286 9,498 5.55
Tax-exempt investment securities ...... 43,546 2,035 4.67
--------- --------- ----
Total investment securities ......... 214,832 11,533 5.37
Interest bearing deposits ............. 1,673 92 5.50
Federal funds sold .................... 12,490 743 5.95
--------- --------- ----
Total interest earning assets ........... 902,807 72,973 8.08
Non-interest earning assets:
Cash and due from banks ............... 33,636
Allowance for loan losses ............. (11,368)
Premises and equipment ................ 16,988
Other assets (8) ...................... 15,752
---------
Total ............................... $ 957,815
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2) .. $ 220,460 4,603 2.09
Savings deposits ...................... 105,858 2,451 2.32
Time deposits ......................... 382,682 21,556 5.63
Other, including short-term borrowings,
long-term debt and other interest
bearing liabilities ................. 6,585 407 6.18
--------- --------- ----
Total interest bearing liabilities ...... 715,585 29,017 4.06
---------
Non-interest bearing liabilities:
Demand deposits ....................... 110,687
Other ................................. 13,275
Shareholders' equity .................... 118,268
---------
Total ............................... $ 957,815
=========
Net interest income ..................... $ 43,956
==========
Net yield on interest earning assets (3) 4.87%
====
Net yield -- tax equivalent basis (4) ... 5.05%
====
</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%.
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 $(13,000) in 1997, $72,000 in
1996 and $(71,000) in 1995 from interest rate contracts used to hedge prime
interest rate loans.
8) Includes gross unrealized gains on securities available for sale.
24
<PAGE>
TABLE 5
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(In thousands)
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Due To (6) Increase (Decrease) Due To (6)
------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (5),(7) ......................... $(1,124) $ 0 $(1,124) $ 2,315 $ (468) $ 1,847
Tax-exempt loans ...................... 90 (23) 67 312 (24) 288
------- ------- ------- ------- ------- -------
Total loans ......................... (1,034) (23) (1,057) 2,627 (492) 2,135
Investment securities ................. 980 354 1,334 1,228 482 1,710
Tax-exempt investment securities ...... 141 (35) 106 (412) (30) (442)
------- ------- ------- ------- ------- -------
Total investment securities ......... 1,121 319 1,440 816 452 1,268
Interest bearing deposits ............. (3) 2 (1) (54) (3) (57)
Federal funds sold .................... (144) 40 (104) 487 (86) 401
------- ------- ------- ------- ------- -------
Total interest earning assets ........... (60) 338 278 3,876 (129) 3,747
Non-interest earning assets:
Cash and due from banks ...............
Allowance for loan losses .............
Premises and equipment ................
Other assets (8) ......................
Total ...............................
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2) .. (50) (337) (387) 29 (136) (107)
Savings deposits ...................... (48) (50) (98) (34) (10) (44)
Time deposits ......................... (33) (123) (156) 1,950 (546) 1,404
Other, including short-term borrowings,
long-term debt and other interest
bearing liabilities ................. 243 (45) 198 118 (68) 50
------- ------- ------- ------- ------- -------
Total interest bearing liabilities ...... 112 (555) (443) 2,063 (760) 1,303
------- ------- ------- ------- ------- -------
Non-interest bearing liabilities:
Demand deposits .......................
Other .................................
Shareholders' equity ....................
Total ...............................
Net interest income ..................... $ (172) $ 893 $ 721 $ 1,813 $ 631 $ 2,444
======= ======= ======= ======= ======= =======
Net yield on interest earning assets (3).
Net yield -- tax equivalent basis (4) ...
</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%.
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 $(13,000) in 1997, $72,000 in
1996 and $(71,000) in 1995 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 $1,030,000 in 1997 and $979,000 in 1996
for an increase of $51,000 that was precipitated by the increase in the amount
of non-performing loans. Net charge-offs exceeded the loan loss provision by
$27,000 in 1997 while the loan loss provision in 1996 exceeded net charge-offs
by $152,000. Net charge-offs in 1997 and 1996 were .15% and .12%, respectively,
of average loans outstanding. Non-performing loans as a ratio to the allowance
for loan losses was 58.6% at year end 1997 and 28.2% at the end of 1996. The
allowance for loan losses as a ratio to net loans was 1.70% at December 31, 1997
and 1996. The ratio of net charge-offs to average loans compared to Omega's
national peers is as follows:
Omega Peers
----- -----
September 30, 1997 .16% .28%
December 31, 1996 .12 .29
Management believes that the allowance for loan losses at December 31, 1997 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.
In the printed version there appears a bar graph
with the following plot points depicted:
Net Interest Yield
Yield on Cost to Fund Net Interest
Earning Assets Earning Assets Yield
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%
1997 8.03% 3.12% 4.91%
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
NON-INTEREST INCOME
1997
Non-interest income grew to $10,156,000 during 1997 for a 12.6%, or $1,136,000,
increase when compared to $9,020,000 for 1996. As has been the case the last few
years, the focus in 1997 has been on increasing revenues generated from
traditional services, by delivering new products and expanded services to our
customer base, such as debit cards and asset managment services. As a result,
trust fees increased by $236,000, or 9.4%, while fees relating to deposit
accounts grew $384,000, or 13.3%, in 1997. Net gains from investment
transactions of $1,218,000 in 1997 represented an increase of $429,000, or
54.4%, over 1996. Also, during 1997, the credit card portfolio was sold,
resulting in a gain of $220,000. Total other income in 1997 was $139,000 less
than in 1996, however, in 1996 a one-time $300,000 gain was recorded from the
disposition of an asset carried as other real estate.
As a percentage of average assets, non-interest income (excluding securities
gains) was .88% for 1997, as compared to .82% in 1996. When compared to our
national peers (most current data as of September 30, 1997), Omega's ratio was
.86% and the peer average was 1.19%.
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. The national peer average
for 1996 was 1.12%.
In the printed version there appears a bar graph
with the following plot points depicted:
Non-Interest Income to Average Assets
(excluding security gains)
1993 0.77%
1994 0.75%
1995 0.77%
1996 0.82%
1997 0.88%
NON-INTEREST EXPENSE
1997
Omega's operating expenses were $31,782,000 for 1997 as compared to $31,087,000
for 1996, representing an increase of $695,000, or 2.2%. In order to understand
the change, it is important to review some unusual events which affected this
area in previous years. For example, during 1996, Omega's defined benefit
retirement plan was terminated, resulting in a one-time reduction of employee
benefits expense of $391,000 (Refer to the section immediately following, titled
1996 for a detailed explanation). Therefore, it was expected that salaries and
employee benefits expense in 1997 would increase by 2.4%, just to replace the
normal required benefits costs. The additional increase of 3.6%, or $590,000,
was a result of normal staffing adjustments and merit increases. Another area
that requires a look back to previous years is FDIC insurance premiums. This has
been an expense that has been very erratic over the last several years. Prior to
1995, the base rate on insurance premiums for Omega's banks was 23 cents per
hundred dollars of deposits. In April of 1995, the rate was reduced
significantly to 4 cents, then further reduced in 1996 to the minimum of $2,000
per year per bank. Then, in 1997, the rate was increased again, causing an
increase in expense for FDIC premiums of $96,000, or 1200%. These fluctuations
have been the result of the FDIC attempting to maintain the Bank Insurance Fund
at reasonable levels. While occupancy expense and data processing service costs
remained relatively unchanged, equipment expense rose by $83,000, or 4.6%,
resulting primarily from purchases for technology advancement. Other expense
decreased in 1997 by $470,000, or 5.1%, bringing this category to approximately
the same level as in 1995.
In the printed version there appears a bar graph
with the following plot points depicted:
Non-Interest Expense to Average Assets
1993 3.37%
1994 3.30%
1995 3.28%
1996 3.08%
1997 3.13%
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
------------------------------------
At December 31, 1997, Omega's ratio of non-interest expense to average assets
was 3.13%, compared to a 3.08% in 1996. At September 30, 1997, Omega's ratio of
non-interest expense to average assets was 3.10%, compared to a national peer
average of 3.10%.
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
further 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 in 1996
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.
As a percentage of average assets, non-interest expense was 3.08% for 1996 as
compared to 3.28% in 1995. The national peer average for 1996 was 3.24%.
INCOME TAXES
Income taxes for 1997 amounted to $7,497,000 compared to $7,127,000 in 1996. The
effective tax rate increased from 30.5% in 1996 to 30.6% in 1997, 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 8.4%,
or $4,414,000 in 1997. Average tax-exempt investments and loans were 5.6% of
total average assets for 1997 and 5.2% for 1996. Tax-exempt income as a
percentage of income before income tax increased to 12.3% from 12.1%. 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. 130,
"Reporting Comprehensive Income", which is effective for fiscal years beginning
after December 15, 1997. This Statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The objective of the Statement is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events of the period other than transactions with owners.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management believes that adoption of the
statement will have no impact on the Corporation's financial condition or
results of operations.
YEAR 2000 COMPLIANCE
Omega is currently in the process of evaluating its information technology
infrastructure for Year 2000 compliance. This involves both an analysis of the
readiness of internal software and an assessment of the compliance of external
software service providers. A committee, consisting of executive officers and
operations personnel from all major divisions of the Corporation, is dedicated
to this process. All computer software programs and operating systems (Programs
and Systems) are being scrutinized. External service providers are being
required to furnish the Corporation with assurances of compliance, and Omega's
primary service provider will have an independent audit performed on the Year
2000 compliance efforts. Any internal Programs and Systems found to be
non-compliant will be re-programmed or replaced. In addition, Omega is
communicating with vendors, business partners and key commercial banking
customers to assess their Year 2000 compliance status. Omega plans to complete
the evaluation phase of the Year 2000 project by December 31, 1998, with testing
to occur throughout 1999. Related costs will be expensed as incurred. There have
been no significant costs incurred to date related to this project, and
management does not expect that the cost to modify its information technology
infrastructure to be Year 2000 compliant will be material to its financial
condition or results of operations going forward.
28
<PAGE>
CONSOLIDATED BALANCE SHEETS
----------------------------------
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Cash and due from banks (Notes 1 and 3) ........................... $ 31,938 $ 30,380
Interest bearing deposits with other financial institutions ....... 600 512
Federal funds sold ................................................ 22,650 18,075
Investment securities held to maturity
(market value-$117,344 and $114,171 respectively) (Notes 1 and 4) 116,802 114,192
Investment securities available for sale (Notes 1 and 4) .......... 133,015 127,654
Total loans (Notes 1, 5, 6 and 17) ................................ 692,861 698,323
Less: Unearned discount .......................................... (968) (1,726)
Allowance for loan losses .................................. (11,793) (11,820)
---------- ----------
680,100 684,777
Premises and equipment, net (Notes 1 and 7) ....................... 17,589 17,638
Other assets (Note 1) ............................................. 13,209 14,117
---------- ----------
TOTAL ASSETS ...................................................... $1,015,903 $1,007,345
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing ............................................ $ 114,777 $ 114,870
Interest bearing ................................................ 725,998 731,160
---------- ----------
840,775 846,030
Short-term borrowings (Note 8) .................................... 18,260 10,292
Other liabilities ................................................. 9,816 10,332
ESOP debt (Note 12) ............................................... 4,034 4,213
Other interest bearing liabilities ................................ 586 593
---------- ----------
TOTAL LIABILITIES ................................................. 873,471 871,460
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 ........................ (3,125) (3,375)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares;
Issued -
9,050,730 shares at December 31, 1997;
6,104,246 shares at December 31, 1996
Outstanding -
8,879,257 shares at December 31, 1997;
6,033,926 shares at December 31, 1996 ......................... 45,258 30,521
Capital surplus ................................................... 1,822 5,649
Retained earnings ................................................. 94,426 97,749
Cost of common stock in treasury:
171,473 shares at December 31, 1997;
70,320 shares at December 31, 1996 .............................. (5,947) (2,266)
Net unrealized gain on securities available for sale .............. 4,998 2,607
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ........................................ 142,432 135,885
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................ $1,015,903 $1,007,345
========== ==========
</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,
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans ........................... $ 61,683 $ 62,740 $ 60,605
Interest and dividends on investment securities:
Taxable interest income ............................ 12,004 10,711 9,054
Tax-exempt interest income ......................... 1,699 1,593 2,035
Dividend income .................................... 538 497 444
Other interest income ................................ 1,074 1,179 835
-------- -------- --------
TOTAL INTEREST INCOME ................................ 76,998 76,720 72,973
INTEREST EXPENSE:
Interest on deposits ................................. 29,222 29,863 28,610
Interest on short-term borrowings .................... 342 134 243
Interest on long-term debt and
other interest bearing liabilities ................. 313 323 164
-------- -------- --------
TOTAL INTEREST EXPENSE ............................... 29,877 30,320 29,017
-------- -------- --------
NET INTEREST INCOME .................................. 47,121 46,400 43,956
Provision for loan losses (Note 6) ................... 1,030 979 713
-------- -------- --------
INCOME FROM CREDIT ACTIVITIES ........................ 46,091 45,421 43,243
OTHER INCOME:
Trust fees ........................................... 2,746 2,510 2,355
Service fees on deposit accounts ..................... 3,281 2,897 2,668
Investment securities gains and (losses), net (Note 4)
Investment securities held to maturity ............. 2 1 (85)
Investment securities available for sale ........... 1,216 788 695
Gain on sale of loans ................................ 241 15 41
Other ................................................ 2,670 2,809 2,347
-------- -------- --------
TOTAL OTHER INCOME ................................... 10,156 9,020 8,021
OTHER EXPENSE:
Salaries and employee benefits (Note 12) ............. 17,384 16,403 16,134
Net occupancy expense ................................ 2,185 2,189 2,374
Equipment expense .................................... 1,869 1,786 1,805
Data processing service .............................. 1,542 1,533 1,446
FDIC insurance premiums .............................. 104 8 933
Other ................................................ 8,698 9,168 8,770
-------- -------- --------
TOTAL OTHER EXPENSE .................................. 31,782 31,087 31,462
-------- -------- --------
INCOME BEFORE INCOME TAXES ........................... 24,465 23,354 19,802
Income tax expense (Notes 1 and 11) .................. 7,497 7,127 5,733
-------- -------- --------
NET INCOME ........................................... $ 16,968 $ 16,227 $ 14,069
======== ======== ========
EARNINGS PER SHARE (Notes 1 and 9)
Basic ................................................ $ 1.85 $ 1.75 $ 1.52
Diluted .............................................. $ 1.77 $ 1.69 $ 1.47
Weighted average shares and equivalents:
Basic ................................................ 8,950 9,057 8,983
Diluted .............................................. 9,476 9,508 9,429
</TABLE>
All share and per share information has been restated to give effect to the 3
for 2 stock split on April 30, 1997.
The accompanying notes are an integral part of these statements.
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, 1995, 1996 and 1997
--------------------------------------------------------------------------------
Cost of
Unearned Common
Preferred Comp- Common Capital Retained Stock
Stock ensation Stock Surplus Earnings In Treasury
--------- --------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 ......... $ 5,000 $ (4,518) $ 29,929 $ 4,211 $ 77,263 $ --
Net income ......................... 14,069
Common dividends declared -
$.48 per share ................... (4,312)
Cash dividends, preferred -
$1.80 per share .................. (396)
Amortization of
unearned compensation ............ 145
Net unrealized gains on securities .
Tax benefit from employee
stock options .................... 47
Tax benefit from preferred stock
dividends paid to ESOP ........... 107
Purchase of treasury stock -
143,393 shares ................... (3,925)
Montour acquisition - retirement of
Omega stock - 3,000 shares ....... (15) (46)
Montour acquisition - 14,038 shares
issued, 109,919 from treasury .... 70 337 2,878
Exercised employee stock options -
59,667 shares .................... 261 632 225
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 ....... 5,000 (4,373) 30,245 5,134 86,778 (822)
Net income ......................... 16,227
Common dividends declared -
$.56 per share ................... (5,073)
Cash dividends, preferred -
$1.80 per share .................. (396)
Amortization of unearned
compensation ..................... 998
Net unrealized gains on securities .
Tax benefit from employee
stock options .................... 113
Tax benefit from preferred stock
dividends paid to ESOP ........... 100
Purchase of treasury stock -
73,241 shares .................... (2,383)
Exercised employee stock options -
84,201 shares .................... 276 515 939
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 ....... 5,000 (3,375) 30,521 5,649 97,749 (2,266)
Net income ......................... 16,968
Common dividends declared -
$.65 per share ................... (5,838)
Cash dividends, preferred -
$1.80 per share .................. (396)
Amortization of unearned
compensation ..................... 250
Net unrealized gains on securities .
Tax benefit from employee
stock options .................... 321
Tax benefit from preferred stock
dividends paid to ESOP ........... 93
Purchase of treasury stock -
279,603 shares ................... (10,140)
Exercised employee stock options -
108,610 shares ................... 292 324 1,712
Issuance of treasury stock to ESOP -
17,192 shares .................... 596
3 for 2 stock split, issued in
the form of a stock dividend -
2,999,164 shares ................. 14,445 (4,151) (14,471) 4,151
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 ....... $ 5,000 $ (3,125) $ 45,258 $ 1,822 $ 94,426 $ (5,947)
======== ======== ======== ======== ======== ========
<CAPTION>
Net
Unrealized
Securities
Gains Total
---------- -----
Balance at January 1, 1995 ......... $ 1,224 $113,109
Net income ......................... 14,069
Common dividends declared -
$.48 per share ................... (4,312)
Cash dividends, preferred -
$1.80 per share .................. (396)
Amortization of
unearned compensation ............ 145
Net unrealized gains on securities . 985 985
Tax benefit from employee
stock options .................... 47
Tax benefit from preferred stock
dividends paid to ESOP ........... 107
Purchase of treasury stock -
143,393 shares ................... (3,925)
Montour acquisition - retirement of
Omega stock - 3,000 shares ....... (61)
Montour acquisition - 14,038 shares
issued, 109,919 from treasury .... 3,285
Exercised employee stock options -
59,667 shares .................... 1,118
-------- --------
Balance at December 31, 1995 ....... 2,209 124,171
Net income ......................... 16,227
Common dividends declared -
$.56 per share ................... (5,073)
Cash dividends, preferred -
$1.80 per share .................. (396)
Amortization of unearned
compensation ..................... 998
Net unrealized gains on securities . 398 398
Tax benefit from employee
stock options .................... 113
Tax benefit from preferred stock
dividends paid to ESOP ........... 100
Purchase of treasury stock -
73,241 shares .................... (2,383)
Exercised employee stock options -
84,201 shares .................... 1,730
-------- --------
Balance at December 31, 1996 ....... 2,607 135,885
Net income ......................... 16,968
Common dividends declared -
$.65 per share ................... (5,838)
Cash dividends, preferred -
$1.80 per share .................. (396)
Amortization of unearned
compensation ..................... 250
Net unrealized gains on securities . 2,391 2,391
Tax benefit from employee
stock options .................... 321
Tax benefit from preferred stock
dividends paid to ESOP ........... 93
Purchase of treasury stock -
279,603 shares ................... (10,140)
Exercised employee stock options -
108,610 shares ................... 2,328
Issuance of treasury stock to ESOP -
17,192 shares .................... 596
3 for 2 stock split, issued in
the form of a stock dividend -
2,999,164 shares ................. (26)
-------- --------
Balance at December 31, 1997 ....... $ 4,998 $142,432
======== ========
</TABLE>
Common dividends in 1996 and 1995 have been adjusted to reflect the 3 for 2
stock split on April 30, 1997.
The accompanying notes are an integral part of these statements.
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,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 16,968 $ 16,227 $ 14,069
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................. 2,489 3,349 3,416
Provision for loan losses ..................................... 1,030 979 713
Gain on sale of investment securities ......................... (1,218) (789) (610)
Gain on sale of fixed assets and other property owned ......... (77) (304) (13)
Gain on sale of loans ......................................... (241) (15) (41)
Decrease (increase) in deferred tax asset ..................... 26 (188) (175)
(Increase) decrease in interest receivable and other assets ... (1,044) 45 2,334
(Decrease) increase in interest payable ....................... (179) (570) 332
(Decrease) increase in taxes payable .......................... (689) 338 (134)
Amortization of deferred net loan fees ........................ (104) (233) (362)
Deferral of net loan fees ..................................... 299 237 180
Increase in accounts payable and accrued expenses ............. 741 836 36
-------- -------- --------
Total adjustments ........................................... 1,033 3,685 5,676
-------- -------- --------
Net cash provided by operating activities ......................... 18,001 19,912 19,745
Cash flows from investing activities:
Proceeds from the sale or maturity of:
Interest bearing deposits with other financial institutions ... 1,269 3,471 5,755
Investment securities available for sale - sales and maturities 44,350 43,446 11,189
Investment securities held to maturity - maturities .......... 39,286 29,974 64,931
Purchase of:
Interest bearing deposits with other financial institutions ... (1,357) (3,140) (1,515)
Investment securities available for sale ...................... (45,290) (47,592) (11,986)
Investment securities held to maturity ........................ (41,793) (47,098) (54,293)
Decrease (increase) in loans .................................... 736 (5,207) (27,714)
Gross proceeds from sale of loans ............................... 2,957 10,919 8,175
Capital expenditures ............................................ (1,783) (2,448) (1,546)
Sale of fixed assets and other property owned ................... 502 524 237
Increase in federal funds sold .................................. (4,575) (5,615) (12,051)
Acquisition of bank, net of cash acquired of $562 ............... -- -- (1,880)
-------- -------- --------
Net cash used in investing activities ............................. (5,698) (22,766) (20,698)
Cash flows from financing activities:
(Decrease) increase in deposits, net ............................ (5,255) (4,152) 13,520
Increase (decrease) in short-term borrowings, net ............... 7,968 3,047 (8,623)
Net change in other interest bearing liabilities ................ (7) 63 62
Dividends paid .................................................. (6,053) (4,080) (4,708)
Tax benefit from preferred stock dividend and
stock option activity ......................................... 414 213 154
Issuance of common stock ........................................ 616 791 893
Acquisition of treasury stock ................................... (10,140) (2,383) (3,925)
Proceeds from sale of treasury stock ............................ 1,712 939 225
-------- -------- --------
Net cash used in financing activities ............................. (10,745) (5,562) (2,402)
-------- -------- --------
Net increase (decrease) in cash and due from banks ................ $ 1,558 $ (8,416) $ (3,355)
======== ======== ========
Cash and due from banks at beginning of period .................... $ 30,380 $ 38,796 $ 42,151
Cash and due from banks at end of period .......................... 31,938 30,380 38,796
-------- -------- --------
Net increase (decrease) in cash and due from banks ................ $ 1,558 $ (8,416) $ (3,355)
======== ======== ========
Interest paid ..................................................... $ 30,056 $ 30,890 $ 28,685
Income taxes paid ................................................. 7,112 6,944 5,927
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
OMEGA FINANCIAL CORPORATION AND SUBSIDIARES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 balances 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
Investment securities within the Corporation's investment portfolio are
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 held to maturity when it is
management's intent to hold such securities until maturity.
Securities classified as 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. Investment securities classified as 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
-------------------------------------------
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, 1997 and 1996, the carrying
value of other real estate owned and held for investment was $618,000 and
$519,000, 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
As of December 31, 1997, Omega adopted Statement of Financial Accounting
Standard ("SFAS") No. 128, "Earnings per Share", which established standards for
computing and presenting earnings per share (EPS). This Statement replaced the
presentation of primary EPS with a presentation of basic EPS, and replaced the
presentation of fully diluted EPS with a presentation of diluted EPS. Basic EPS
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. On a
diluted basis, both earnings and shares outstanding are adjusted to assume the
conversion of all potentially dilutive securities into the common stock. All
prior period EPS data presented in these financial statements has been restated
to conform with this data.
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. 130,
"Reporting Comprehensive Income", which is effective for fiscal years beginning
after December 15, 1997. This Statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The objective of the Statement is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events of the period other than transactions with owners.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management believes that adoption of the
statement will have no impact on the Corporation's financial condition or
results of operations.
Reclassifications
Certain amounts in prior years' financial statements have been reclassified to
conform with current years' presentation.
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 or repricing
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
period. The discount rates utilized for these loans are equivalent to the
national prime rate with a spread of approximately 50-125 basis points at
December 31, 1997 and a spread of 100-150 basis points at December 31, 1996.
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 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 - 250 basis points at December 31, 1997 and a spread
of 150 - 200 basis points at December 31, 1996. The current market rate for the
fixed rate mortgages ranged from 7.25% to 7.75% at December 31, 1997 and from
7.80% to 8.25% at December 31, 1996.
Home equity - This category is comprised primarily of fixed rate loans, but does
include home equity lines of credit which have floating rates. The fair value of
the fixed rate loans is estimated by discounting the future contractual cash
flows using rates at which similar loans would be made to borrowers for the same
remaining maturity. Home equity lines of credit are on a floating basis and
approximate current market rates.
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 of the fixed rate loans is estimated by discounting the
future contractual cash flows. The discount factor for these loans is the
current national market rate for a 48 month automobile loan plus 25 basis
points. This rate was 9.20% and 9.36% on December 31, 1997 and 1996,
respectively. Personal lines of credit are on a floating basis and approximate
current market rates.
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. The rates utilized for time deposits are
equivalent to the U.S. Treasury rate for the same term minus a spread of 35-60
basis points at December 31, 1997 and 40-70 basis points at December 31, 1996.
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 semi-annually
at current market rates.
At December 31, 1997, Omega had existing interest rate contracts with a total
notional balance of $40,000,000. These agreements had a negative fair value of
$54,000 based on dealer quotes on that date. At December 31, 1996, existing
interest rate swap agreements had a total notional balance of $50,000,000 and a
negative fair value of $99,000. (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, 1997 and 1996, the commitment amount approximates fair value for
these financial instruments.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
<TABLE>
<CAPTION>
(in thousands)
December 31, 1997 December 31, 1996
------------------------- -------------------------
Book Fair Book Fair
Value Value Value Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and due from banks ................ $ 31,938 $ 31,938 $ 30,380 $ 30,380
Interest bearing deposits .............. 600 600 512 512
Federal funds sold ..................... 22,650 22,650 18,075 18,075
Investment securities held to maturity . 116,802 117,344 114,192 114,171
Investment securities available for sale 133,015 133,015 127,654 127,654
Loans (net of unearned interest):
Commercial, financial and agricultural 126,740 125,970 149,016 146,276
Real estate - commercial ............. 141,485 140,725 118,381 116,864
Real estate - construction ........... 21,167 21,182 19,680 19,597
Real estate - mortgage ............... 212,780 214,226 206,653 215,224
Home equity .......................... 63,905 64,154 45,182 45,416
Personal ............................. 121,447 121,991 153,441 153,760
Lease financing ...................... 4,369 4,364 4,244 4,135
Allowance for loan losses ............ (11,793) -- (11,820) --
---------- ---------- ---------- ----------
Total loans ............................ 680,100 692,612 684,777 701,272
Interest receivable .................... 7,855 7,855 7,549 7,549
---------- ---------- ---------- ----------
Total financial assets ................. $ 992,960 $1,006,014 $ 983,139 $ 999,613
========== ========== ========== ==========
Demand deposits ........................ $ 277,042 $ 277,042 $ 267,933 $ 267,933
Savings deposits ....................... 154,640 154,640 158,878 158,878
Time deposits .......................... 409,093 411,583 419,219 422,061
Short-term borrowings .................. 13,260 13,260 5,292 5,292
Long-term debt ......................... 5,000 4,997 5,000 5,000
Other interest bearing liabilities ..... 4,620 4,620 4,806 4,806
Interest payable ....................... 2,213 2,213 2,339 2,339
---------- ---------- ---------- ----------
Total financial liabilities ............ $ 865,868 $ 868,355 $ 863,467 $ 866,309
========== ========== ========== ==========
</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 $2,158,000
and $1,004,000 as of December 31, 1997 and 1996, respectively.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. INVESTMENT SECURITIES (IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------------
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 ............................. $ 2,993 $ 3,003 6.02% $ 13 $ (3)
After one year but within five years ........ 18,014 18,186 6.29 172
After five years but within ten years ....... 3,000 3,011 6.51 11 --
After ten years ............................. -- -- -- -- --
Obligations of state and political subdivisions
Within one year ............................. 1,281 1,284 6.07 3 --
After one year but within five years ........ 2,626 2,646 6.26 20 --
After five years but within ten years ....... 1,892 1,940 6.69 48 --
After ten years ............................ -- -- -- -- --
Corporate and other securities
Within one year ............................. 5,883 5,873 6.04 5 (15)
After one year but within five years ........ 21,590 21,736 6.32 151 (5)
After five years but within ten years ...... 9,472 9,514 6.22 44 (2)
After ten years ............................. 160 162 6.71 2 --
Mortgage-backed securities
Within one year ............................. 2,600 2,590 5.52 1 (11)
After one year but within five years ........ 13,645 13,641 6.34 31 (35)
After five years but within ten years ....... 11,625 11,679 6.26 61 (7)
After ten years ............................. 17,400 17,458 5.83 113 (55)
Investment in low income housing projects ..... 489 489 N/M -- --
Common stock .................................. 4,132 4,132 N/M -- --
-------- -------- ----- -------- -------
Total ......................................... $116,802 $117,344 6.19% $ 675 $ (133)
======== ======== ===== ======== =======
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------------
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.............................. $ 54,597 $ 54,612 5.66% $ 63 $ (48)
After one year but within five years......... 24,546 24,629 6.08 113 (30)
After five years but within ten years........ -- -- -- -- --
After ten years.............................. -- -- -- -- --
Obligations of state and political subdivisions
Within one year.............................. 6,360 6,369 6.05 13 (4)
After one year but within five years......... 26,473 26,857 6.72 388 (4)
After five years but within ten years........ 6,903 6,999 6.72 96 --
After ten years.............................. 1,045 1,057 7.26 18 (6)
Common stock................................... 5,414 12,492 N/M 7,078 --
-------- -------- ----- -------- -------
Total.......................................... $125,338 $133,015 6.08% $ 7,769 $ (92)
======== ======== ===== ======== =======
</TABLE>
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
<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)
======== ======== ==== ======== =======
<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>
39
<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>
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 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):
<TABLE>
<CAPTION>
Amortized Market
Cost Value
----------- ---------
<S> <C> <C>
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
=========== =========
</TABLE>
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 $85,628,000, $80,405,000
and $68,225,000 at December 31, 1997, 1996 and 1995, 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):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Gross proceeds from securities transactions ...... $ 83,636 $ 73,420 $ 76,120
Securities available for sale:
Realized gains ................................. 1,422 842 700
Realized losses ................................ 206 54 5
Securities held to maturity:
Realized gains ................................. 2 1 35
Realized losses ................................ -- -- 120
</TABLE>
5. LOANS
Loans outstanding at the end of each year consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural ...... $ 126,740 $ 131,147 $ 136,537 $ 138,267 $ 147,600
Real estate - commercial .................... 141,485 136,250 127,462 103,892 110,895
Real estate - construction .................. 21,167 19,680 18,346 12,252 12,394
Real estate - mortgage ...................... 212,780 206,653 209,453 205,524 199,584
Home equity ................................. 63,905 45,182 39,827 35,974 30,694
Personal .................................... 121,813 154,587 170,529 148,731 132,595
Lease financing ............................. 4,971 4,824 4,486 4,071 2,932
----------- ----------- ----------- ----------- -----------
Total .................................. $ 692,861 $ 698,323 $ 706,640 $ 648,711 $ 636,694
=========== =========== =========== =========== ===========
</TABLE>
Non-accrual loans at December 31, 1997 and 1996 were $4,762,000 and $2,079,000,
respectively, representing .68% and .30% of loans. Interest income not recorded
on non-accrual loans in 1997, 1996 and 1995 was $401,000, $201,000 and $110,000,
respectively. Gross interest income that would have been recorded on non-accrual
loans had these loans been in a performing status was $532,000 in 1997, of which
$131,000 was included in interest income for the year ended December 31, 1997.
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,
---------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance of allowance - beginning of period $11,820 $11,668 $11,057 $11,168 $11,338
Loans charged off:
Commercial, financial and agricultural .. 70 428 149 480 674
Real estate -
Commercial ............................ 348 77 -- 5 148
Mortgage .............................. -- -- 119 130 62
Personal ................................ 984 671 585 485 807
------- ------- ------- ------- -------
Total charge-offs ................... 1,402 1,176 853 1,100 1,691
Recoveries of loans previously charged off:
Commercial, financial and agricultural .. 225 181 101 160 73
Real estate -
Commercial ............................ 6 38 -- 17 21
Mortgage .............................. -- -- 87 45 19
Personal ................................ 114 130 147 144 275
------- ------- ------- ------- -------
Total recoveries .................... 345 349 335 366 388
------- ------- ------- ------- -------
Net charge-offs ........................... 1,057 827 518 734 1,303
Provision for loan losses ................. 1,030 979 713 623 1,133
Allowance acquired through bank purchase .. -- -- 416 -- --
------- ------- ------- ------- -------
Balance of allowance - end of period ...... $11,793 $11,820 $11,668 $11,057 $11,168
======= ======= ======= ======= =======
Ratio of net charge-offs during period to
average loans outstanding ................. 0.15% 0.12% 0.08% 0.12% 0.21%
======= ======= ======= ======= =======
</TABLE>
As of December 31, 1997 and 1996, 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 $3,471,000 and $931,000, respectively. The total allowance for
loan losses related to those impaired loans is $585,000 and $222,000, at
December 31, 1997 and 1996, 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):
<TABLE>
<CAPTION>
December 31,
Estimated -----------------------------
Useful Life 1997 1996
----------- ----------- -------------
<S> <C> <C> <C>
Land -- $ 2,371 $ 2,422
Premises and leasehold improvements 5-40 years 19,809 19,348
Furniture, computer software
and equipment 3-20 years 17,489 16,175
Construction in progress -- 221 212
----------- -------------
39,890 38,157
Less accumulated depreciation (22,301) (20,519)
----------- -------------
$ 17,589 $ 17,638
============ ============
</TABLE>
Depreciation expense on premises and equipment charged to operations was
$1,831,000 in 1997, $1,762,000 in 1996 and $1,987,000 in 1995.
42
<PAGE>
8. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following (in thousands):
December 31,
---------------------------------
1997 1996
-------------- ---------------
Retail repurchase agreements .............. $ 13,260 $ 5,292
Note payable to Federal Home Loan
Bank, with variable rates
payable at Libor plus 2 basis points ... 5,000 5,000
-------------- --------------
$ 18,260 $ 10,292
============== ==============
Omega has 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.
The note payable in the amount of $5,000,000 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.
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
1997 and 1996, with interest payable at the daily federal funds rate. There were
no borrowings on December 31, 1997 or December 31, 1996 under these credit
facilities. Additionally, Omega has a $29,420,000 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 total
borrowing capacity of $65,397,000. If the Corporation were to purchase
additional Federal Home Loan Bank stock, the maximum borrowing capacity could be
increased to $299,811,000. 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 on December 31, 1997 and 1996 (See Note 9). The Corporation must
maintain sufficient qualifying collateral, as defined, to secure all outstanding
advances.
9. CALCULATION OF EARNINGS PER SHARE
The following table shows the calculation of earnings per share for the years
ended December 31, 1997, 1996 and 1995. Prior year data has been restated to
reflect the 3 for 2 stock split in the form of a dividend in 1997 as well as the
adoption of SFAS No. 128, "Earnings per Share".
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31, 1996
----------------------------------- ------------------------------
Shares Per-Share Shares Per-Share
Income Denom- Income Denom-
Numerator inator Amount Numerator inator Amount
----------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income .......................... $ 16,968 $ 16,227
Less: Preferred stock dividends ..... (396) (396)
-------- --------
Basic EPS
Income available to common
shareholders .................... 16,572 8,950 $ 1.85 15,831 9,057 $ 1.75
======== ========
Effect of Dilutive Securities
Impact of:
assumed conversion of preferred
to common stock ............ 346 346
assumed excercise of outstanding
options .................... 180 105
Preferred stock dividends
available to common
shareholders ................ 396 396
Elimination of tax benefit of
allocated preferred dividends (45) (38)
Additional expense required to
fund ESOP debt .............. (111) (131)
-------- --------
Diluted EPS
Income available to common
shareholders plus assumed
conversions .................... $ 16,812 9,476 $ 1.77 $ 16,058 9,508 $ 1.69
======== ===== ======== ======== ===== ========
<CAPTION>
Year Ended December 31, 1995
-----------------------------
Shares Per-Share
Income Denom-
Numerator inator Amount
-----------------------------
Net income .......................... $ 14,069
Less: Preferred stock dividends ..... (396)
--------
Basic EPS
Income available to common
shareholders .................... 13,673 8,983 $ 1.52
========
Effect of Dilutive Securities
Impact of:
assumed conversion of preferred
to common stock ............ 346
assumed excercise of outstanding
options .................... 100
Preferred stock dividends
available to common
shareholders ................ 396
Elimination of tax benefit of
allocated preferred dividends (31)
Additional expense required to
fund ESOP debt .............. (149)
--------
Diluted EPS
Income available to common
shareholders plus assumed
conversions .................... $ 13,889 9,429 $ 1.47
======== ===== ========
</TABLE>
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, 1997 (in
thousands):
Years ending December 31,
1998.................................. $ 252
1999.................................. 177
2000.................................. 141
2001.................................. 141
2002.................................. 138
Later years........................... 967
--------
Total minimum payments required....... $ 1,816
========
Rental expense charged to operations, net of sublease income, was $73,000,
$88,000 and $60,000 in 1997, 1996 and 1995, respectively, which includes
short-term cancellable leases.
11. INCOME TAXES
The components of income tax expense for the three years ended December 31, 1997
were (in thousands):
1997 1996 1995
------ ------ ------
Current tax expense ......... $7,625 $7,451 $5,947
Deferred tax benefit ........ (128) (324) (214)
------ ------ ------
Total tax expense ........... $7,497 $7,127 $5,733
====== ====== ======
Income tax expense related to realized securities gains was $426,000 in 1997,
$276,000 in 1996 and $213,000 in 1995.
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,
-----------------------------------
1997 1996 1995
---- ---- ----
Federal tax at statutory rate .... 35.0% 35.0% 35.0%
Tax exempt income ................ (3.8) (3.7) (4.6)
Low income housing credits ....... (0.4) (0.4) (0.8)
Other, net ....................... (0.2) (0.4) (0.6)
---- ---- ----
Effective rate ................... 30.6% 30.5% 29.0%
==== ==== ====
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, 1997 and 1996. The
components giving rise to the net deferred tax asset are detailed below (in
thousands):
December 31,
-----------------------
1997 1996
------- -------
Deferred Tax Assets
Loan loss reserve ................ $ 4,121 $ 3,957
Deferred compensation ............ 622 588
Employee benefits ................ 414 336
Interest on non-accrual loans .... 109 82
Other ............................ 3 6
------- -------
Total .......................... 5,269 4,969
Deferred Tax Liabilities
Depreciation ..................... (349) (353)
Unrealized net gains on securities (2,679) (1,392)
Intangibles ...................... (543) (547)
Auto leases (net) ................ (520) (526)
Other ............................ (299) (361)
------- -------
Total .......................... (4,390) (3,179)
Net deferred tax asset ------- -------
included in other assets ......... $ 879 $ 1,790
======= =======
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 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 the fair value method under FASB Statement No.
123, Omega's net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Net income .................... As reported ... $ 16,968 $ 16,227 $ 14,069
Pro forma ..... 16,336 15,732 13,686
Basic earnings per share ...... As reported ... $ 1.85 $ 1.75 $ 1.52
Pro forma ..... 1.78 1.70 1.48
Diluted earnings per share .... As reported ... $ 1.77 $ 1.69 $ 1.47
Pro forma ..... 1.70 1.64 1.43
</TABLE>
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
1997, 1996 and 1995:
<TABLE>
<CAPTION>
Options Granted in 1997 Employee Employee Director
Stock Purchase Plan Stock Option Plan (1996) Stock Option Plan
------------------- ------------------------ -----------------
<S> <C> <C> <C>
Expected life of options ....... .95 years 5.77 years 5.77 years
Risk-free interest rate ........ 5.53% 5.75% 5.75%
Expected volatility ............ 11.06% 19.46% 19.46%
Expected dividend yield ........ 2.73% 2.73% 2.73%
Options Granted in 1996 Employee Employee Director
Stock Purchase Plan Stock Option Plan (1986) Stock Option Plan
------------------- ------------------------ -----------------
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%
Options Granted in 1995 Employee Employee Director
Stock Purchase Plan Stock Option Plan (1986) Stock Option Plan
------------------- ------------------------ -----------------
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 ("ESPP") 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, 2002. The aggregate number of shares which may be
issued upon the exercise of options under this plan is 1,125,000 shares. Plan
options outstanding at December 31, 1997 have current exercise prices between
$18.90 and $30.15, with a weighted average exercise price of $25.37 and a
weighted average remaining contractual life of 4.31 years. All of these options
are exercisable.
The 1986 Plan and the 1996 Plan (collectively, the "SOPs") are administered by
the Committee, whose members are not eligible to receive options under the SOPs.
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, 2007. The aggregate number of
shares which may be issued upon the exercise of options under the 1996 Plan is
1,500,000 shares. The SOPs options outstanding at December 31, 1997 have
exercise prices between $10.00 and $23.33, with a weighted average exercise
price of $17.33 and a weighted average remaining contractual life of 6.66 years.
253,995 of these options are exercisable; their weighted average exercise price
is $15.72.
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, 2007. The aggregate number of shares which may be issued
upon the exercise of options under this plan is 30,000. Plan options outstanding
at December 31, 1997 have exercise prices between $16.33 and $28.25, with a
weighted average exercise price of $20.77 and a weighted average remaining
contractual life of 7.83 years. 8,100 of these options are exercisable; their
weighted average exercise price is $18.28.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
A summary of the status of Omega's three stock-based compensation plans as of
December 31, 1995, 1996 and 1997, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------- ------------------------- --------------------------
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 ...... 168,893 $ 14.04 180,359 $ 16.83 187,123 $ 19.17
Granted ............................... 84,858 18.90 84,531 21.00 86,603 30.15
Exercised ............................. (56,153) 13.70 (69,996) 15.49 (103,414) 18.33
Forfeited ............................. (17,240) 17.36 (7,771) 19.09 (1,137) 22.37
------- -------- --------
Outstanding at end of year ............ 180,359 16.83 187,123 19.17 169,175 25.28
======= ======== ========
Options exercisable at year-end ....... 180,359 187,123 169,175
Weighted-average fair value of
options granted during the year .. $ 2.83 $ 3.54 $ 4.18
<CAPTION>
1995 1996 1997
------------------------- ------------------------- --------------------------
Employee Stock Option Plans Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ---------------- ------ ----------------
Outstanding at beginning of year ...... 234,600 $ 11.88 268,302 $ 13.15 283,090 $ 15.45
Granted ............................... 67,050 16.33 70,800 21.00 67,902 23.33
Exercised ............................. (33,348) 10.64 (56,012) 11.43 (29,095) 13.03
------- -------- --------
Outstanding at end of year ............ 268,302 13.15 283,090 15.45 321,897 17.33
======= ======== ========
Options exercisable at year-end ....... 201,252 212,297 253,995
Weighted-average fair value of
options granted during the year... $ 3.86 $ 5.03 $ 5.13
<CAPTION>
1995 1996 1997
------------------------- ------------------------- --------------------------
Director Stock Option Plan Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ---------------- ------ ----------------
Outstanding at beginning of year ... 3,900 $ 16.33 7,800 $ 16.73 10,800 $ 18.28
Granted ............................ 3,900 17.17 3,600 21.33 2,700 28.28
Exercised .......................... -- (300) 16.33 (2,700) 18.28
Forfeited .......................... -- (300) 17.17 --
------- -------- -------
Outstanding at end of year ......... 7,800 16.73 10,800 18.28 10,800 20.78
======= ======== =======
Options exercisable at year-end .... 3,900 7,200 8,100
Weighted-average fair value of
options granted during the year $4.05 $ 5.15 $ 5.61
</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,
1997, 1996 and 1995, expenses incurred under this plan were $1,623,000,
$2,173,000 and $1,250,000, respectively. 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 1997, 32,049 shares of Omega
common stock were acquired at a cost of $944,000, and 17,192 shares were
contributed directly to the ESOP from Omega treasury (cost basis of $596,000),
and $125,000 was applied to debt service. 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. At December 31, 1997 the ESOP holds
445,339 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
refinanced at a fixed rate of 8.25%, with all other terms remaining the same.
The loan is collateralized by a mortgage on the Corporation's administration
center and guarantee.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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
1997, the debt service required $520,000, of which $342,000 represented interest
expense incurred by the ESOP. In 1996, the debt service required $525,000, of
which $364,000 represented interest expense incurred by the ESOP. Outstanding
ESOP debt as of December 31, 1997 was $4,034,000. Scheduled principal repayments
on the ESOP debt are as follows:
1998 ..................... $ 193,000
1999 ..................... 210,000
2000 ..................... 228,000
2001 ..................... 247,000
2002 ..................... 268,000
Later years .............. 2,888,000
Defined Contribution Plan
Omega maintains a defined contribution plan for eligible employees as defined.
Contributions to the plan totaled $142,000, $146,000 and $135,000 for the years
ended December 31, 1997, 1996 and 1995, 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, 1997, five
current or former officers were designated to be paid these supplemental
retirement benefits. The liability for these future ESI obligations was
$1,190,000 and $1,085,000 at December 31, 1997 and 1996, respectively. For the
years ended December 31, 1997, 1996 and 1995, $133,000, $133,000 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
$24,686,000 and $53,305,000 at December 31, 1997 and 1996, respectively. In
addition, the Corporation had $93,895,000 and $43,726,000 outstanding in unused
lines of credit commitments extended to its customers at December 31, 1997 and
1996, respectively.
There were no financial guarantees or options outstanding at December 31, 1997.
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.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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, 1997 and 1996, standby letters of credit issued and outstanding
amounted to $14,827,000 and $15,197,000, 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, 1997 and 1996, the Corporation had the following interest rate
swap agreements in place:
Notional Amount
(in thousands)
----------------------------
Maturity Fixed Rate 1997 1996
-------- ---------- -------- --------
8/15/97 8.78% $ -- $ 10,000
2/26/99 8.14 10,000 10,000
3/1/99 8.47 10,000 10,000
3/4/99 8.47 10,000 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, 1997 and 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, 1997, there were no concentrations of credit to any
particular industry equaling 10% or more of total outstanding loans. Omega's
business activities are geographically concentrated in Central Pennsylvania,
within Centre, Blair, Huntingdon, Mifflin, Juniata, Clinton, Montour and Bedford
counties. Omega has a diversified loan portfolio; however, a substantial portion
of its debtors' ability to honor their obligations is dependent upon the economy
in Central Pennsylvania.
14. COMMITMENTS AND CONTINGENT LIABILITIES
In 1994, the Corporation entered into a six year agreement to obtain data
processing services from an outside service bureau. The agreement provides for
termination penalties if it is canceled prior to the end of the commitment
period by the Corporation.
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.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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 1.575 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 $13,020,000, $13,949,000 and $14,641,000 at
December 31, 1997, 1996 and 1995, respectively. During 1997, $4,249,000 of new
loans were made and repayments totaled $5,030,000. None of these loans were past
due, in non-accrual status or restructured at December 31, 1997.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. OMEGA FINANCIAL CORPORATION (PARENT COMPANY ONLY)
Financial information (in thousands):
CONDENSED BALANCE SHEETS
(Unaudited)
December 31,
--------------------
1997 1996
-------- --------
ASSETS:
Cash ................................... $ 4,660 $ 2,925
Investment in bank subsidiaries ........ 125,062 123,240
Investment in non-bank subsidiaries .... 10,664 7,804
Premises and equipment, net ............ 7,283 6,980
Other assets ........................... 1,400 1,708
-------- --------
TOTAL ASSETS ............................. $149,069 $142,657
======== ========
LIABILITIES:
Dividends payable ...................... $ 1,596 $ 1,389
Accounts payable and other liabilities . 1,007 1,170
ESOP debt .............................. 4,034 4,213
-------- --------
TOTAL LIABILITIES ........................ 6,637 6,772
SHAREHOLDERS' EQUITY ..................... 142,432 135,885
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $149,069 $142,657
======== ========
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
INCOME:
Dividends from:
Bank subsidiaries ............................ $ 14,864 $ 6,292 $ 6,736
Non-bank subsidiaries ........................ -- -- 1,000
Management fees from subsidiaries .............. 9,250 8,372 7,486
-------- -------- --------
TOTAL INCOME ..................................... 24,114 14,664 15,222
EXPENSE:
Interest expense ............................... 4 3 2
Other .......................................... 9,250 8,372 7,486
-------- -------- --------
TOTAL EXPENSE .................................... 9,254 8,375 7,488
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES .... 14,860 6,289 7,734
Income tax expense (benefit) ..................... 33 (12) (27)
-------- -------- --------
14,827 6,301 7,761
Equity in undistributed net income of subsidiaries 2,141 9,926 6,308
-------- -------- --------
NET INCOME ....................................... $ 16,968 $ 16,227 $ 14,069
======== ======== ========
</TABLE>
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 16,968 $ 16,227 $ 14,069
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............................. 926 741 652
Decrease (increase) in tax receivable ...................... (80) 280 (168)
(Increase) decrease in interest and other receivable ....... 360 (671) 546
Increase (decrease) in taxes payable ....................... (246) 144 18
Increase (decrease) in accounts payable and accrued expenses 642 135 (23)
Undistributed earnings of subsidiaries ..................... (2,291) (9,926) (6,284)
-------- -------- --------
Total adjustments ........................................ (689) (9,297) (5,259)
-------- -------- --------
Net cash provided by operating activities .................... 16,279 6,930 8,810
Cash flows from investing activities:
Acquisition of bank ........................................ -- -- (2,442)
Capital expenditures ....................................... (1,157) (1,240) (413)
-------- -------- --------
Net cash used in investing activities ........................ (1,157) (1,240) (2,855)
Cash flows from financing activities:
Dividends paid ............................................. (6,027) (4,080) (4,708)
Net change in interest bearing liabilities ................. 38 34 32
Change in unearned compensation ............................ -- 800 --
Tax benefit from preferred stock dividend
and stock option activity ................................ 414 213 154
Issuance of common stock, net of retirement
of common stock .......................................... 616 791 832
Issuance, acquisition and sale of treasury stock, net ...... (8,428) (1,444) (3,700)
-------- -------- --------
Net cash used in financing activities ........................ (13,387) (3,686) (7,390)
-------- -------- --------
Net increase (decrease) in cash and due from banks ........... $ 1,735 $ 2,004 $ (1,435)
======== ======== ========
Cash and due from banks at beginning of period ............... $ 2,925 $ 921 $ 2,356
Cash and due from banks at end of period ..................... 4,660 2,925 921
-------- -------- --------
Net increase (decrease) in cash and due from banks ........... $ 1,735 $ 2,004 $ (1,435)
======== ======== ========
Income taxes paid ............................................ 7,015 6,922 5,891
</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, 1997, the total dividends which could
be paid to Omega without permission from the Comptroller of the Currency was
$31,173,000.
Under Federal Reserve restrictions, the banking subsidiaries are limited to the
amount they may loan to their affiliates, including Omega. At December 31, 1997,
Omega's banks had an aggregate lending limit to affiliates of $20,015,000 and no
amount was outstanding with Omega.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the years ended December 31,
1997 and 1996 follow (in thousands, except per share data). All per share data
has been restated to give effect to the three for two stock split on April 30,
1997, and to reflect the adoption of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share".
<TABLE>
<CAPTION>
1997 Quarter ended
------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total interest income .............. $18,748 $19,208 $19,495 $19,547
Net interest income ................ 11,454 11,794 11,844 12,029
Provision for loan losses .......... 258 257 258 257
Income before income taxes ......... 5,670 6,313 5,976 6,506
Applicable income taxes ............ 1,769 1,952 1,808 1,968
Net income ......................... 3,901 4,361 4,168 4,538
Primary earnings per share ......... $ .42 $ .47 $ .46 $ .50
Fully diluted earnings per share ... .40 .45 .44 .48
<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 $ 15,499
Net interest income ................. 11,310 11,583 11,790 9,273
Provision for loan losses ........... 227 225 302 (41)
Income before income taxes .......... 5,450 5,720 5,847 2,785
Applicable income taxes ............. 1,622 1,745 1,766 600
Net income .......................... 3,828 3,975 4,081 2,185
Primary earnings per share .......... $ .41 $ .43 $ .44 $ .47
Fully diluted earnings per share .... .40 .41 .43 .45
</TABLE>
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
20. 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, 1997 and 1996, that Omega and its bank subsidiaries meet all
capital adequacy requirements to which they are subject.
As of December 31, 1997, 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.
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, 1997:
Total Capital (to Risk Weighted Assets) ........ $143,673 21.1% $54,418 8.0% $68,023 10.0%
Tier I Capital (to Risk Weighted Assets) ....... 135,127 19.9 27,209 4.0 40,814 6.0
Tier I Capital (to Average Assets) ............. 135,127 13.3 40,584 4.0 50,730 5.0
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
Omega Bank
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) ........ $74,430 19.5% $30,557 8.0% $38,196 10.0%
Tier I Capital (to Risk Weighted Assets) ....... 69,648 18.2 15,278 4.0 22,918 6.0
Tier I Capital (to Average Assets) ............. 69,648 12.3 22,621 4.0 28,276 5.0
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) ........ $73,644 18.9% $31,177 8.0% $38,971 10.0%
Tier I Capital (to Risk Weighted Assets) ....... 68,732 17.6 15,588 4.0 23,383 6.0
Tier I Capital (to Average Assets) ............. 68,732 12.0 22,902 4.0 28,627 5.0
</TABLE>
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<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>
Hollidaysburg Trust Company
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) ....... $31,059 18.3% $13,604 8.0% $17,005 10.0%
Tier I Capital (to Risk Weighted Assets) ...... 28,920 17.0 6,802 4.0 10,203 6.0
Tier I Capital (to Average Assets) ............ 28,920 11.7 9,849 4.0 12,311 5.0
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
Penn Central National Bank
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) ....... $24,460 22.4% $8,754 8.0% $10,943 10.0%
Tier I Capital (to Risk Weighted Assets) ...... 23,070 21.1 4,377 4.0 6,566 6.0
Tier I Capital (to Average Assets) ............ 23,070 12.3 7,474 4.0 9,343 5.0
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
</TABLE>
55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders of Omega Financial Corporation:
We have audited the accompanying consolidated balance sheets of Omega Financial
Corporation (a Pennsylvania corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
- ---------------------------
Lancaster, Pa.
January 23, 1998
56
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>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 23, 1998, 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, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 31,938
<INT-BEARING-DEPOSITS> 600
<FED-FUNDS-SOLD> 22,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 133,015
<INVESTMENTS-CARRYING> 116,802
<INVESTMENTS-MARKET> 117,344
<LOANS> 691,893
<ALLOWANCE> 11,793
<TOTAL-ASSETS> 1,015,903
<DEPOSITS> 840,775
<SHORT-TERM> 18,260
<LIABILITIES-OTHER> 14,436
<LONG-TERM> 0
140,557
0
<COMMON> 1,875
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,015,903
<INTEREST-LOAN> 61,683
<INTEREST-INVEST> 14,241
<INTEREST-OTHER> 1,074
<INTEREST-TOTAL> 76,998
<INTEREST-DEPOSIT> 29,222
<INTEREST-EXPENSE> 29,877
<INTEREST-INCOME-NET> 47,121
<LOAN-LOSSES> 1,030
<SECURITIES-GAINS> 1,218
<EXPENSE-OTHER> 31,782
<INCOME-PRETAX> 24,465
<INCOME-PRE-EXTRAORDINARY> 16,968
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,968
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 1.77
<YIELD-ACTUAL> 4.91
<LOANS-NON> 4,762
<LOANS-PAST> 2,103
<LOANS-TROUBLED> 47
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,820
<CHARGE-OFFS> 1,402
<RECOVERIES> 345
<ALLOWANCE-CLOSE> 11,793
<ALLOWANCE-DOMESTIC> 11,793
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
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