SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 0-13599
Omega Financial Corporation
(Exact name of registrant as
specified in its charter)
Pennsylvania 25-1420888
(State or other jurisdiction or (IRS Employer Identification No.)
incorporation of organization)
366 Walker Drive
State College, Pennsylvania 16801
(Address of principal executive (Zip Code)
offices)
(814) 231-7680
Registrant's Telephone Number,
Including Area Code
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 twelve months (or for such shorter
period that the registrant was requested to file such reports), and (2)
has been subject to such filing requirements for the past ninety days.
Yes __X__ No ____
The number of shares outstanding of each of the Registrant's classes of
common stock as of November 10, 1998:
Common Stock, $5.00 par value _ 8,974,760 shares
PART I. Financial Information
Item 1. Financial Statements
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
Cash and due from banks $33,256 $31,938
Interest bearing deposits with other banks 564 600
Federal funds sold 2,300 22,650
Investment securities held to maturity
(Market value:
$122,414 and $117,344, respectively) 120,674 116,802
Investment securities available for sale 140,224 133,015
Total loans 718,250 692,861
Less: Unearned discount (580) (968)
Allowance for loan losses (12,023) (11,793)
Net loans 705,647 680,100
Premises and equipment, net 17,000 17,589
Other assets 12,463 13,209
TOTAL ASSETS $1,032,128 $1,015,903
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $112,346 $114,777
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Interest bearing 730,675 725,998
Total deposits 843,021 840,775
Short-term borrowings 18,434 18,260
Other liabilities 12,995 9,816
ESOP debt 3,891 4,034
Other interest bearing liabilities 546 586
TOTAL LIABILITIES 878,887 873,471
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 (2,939) (3,125)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares
Issued -
9,125,754 shares at September 30, 1998;
9,050,730 shares at December 31, 1997
Outstanding -
8,971,981 shares at September 30, 1998;
8,879,257 shares at December 31, 1997 45,638 45,258
Capital surplus 2,996 1,822
Retained earnings 101,989 94,426
Cost of common stock in treasury
153,773 shares at September 30, 1998;
171,473 shares at December 31, 1997 (5,333) (5,947)
Net unrealized gain on securities available for sale 5,890 4,998
TOTAL SHAREHOLDERS' EQUITY 153,241 142,432
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,032,128 $1,015,903
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
INTEREST INCOME:
Interest and fees on loans $15,084 $15,521 $45,073 $45,954
Interest and dividends on investment securities 3,553 3,673 10,587 10,663
Other interest income 220 301 849 834
TOTAL INTEREST INCOME. 18,857 19,495 56,509 57,451
INTEREST EXPENSE:
Interest on deposits 7,015 7,487 20,954 21,909
Interest on short-term borrowings 204 83 633 217
Interest on long-term debt and
other interest bearing liabilities 5 81 18 233
TOTAL INTEREST EXPENSE 7,224 7,651 21,605 22,359
NET INTEREST INCOME 11,633 11,844 34,904 35,092
Provision for loan losses 332 258 817 773
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INCOME FROM CREDIT ACTIVITIES 11,301 11,586 34,087 34,319
OTHER INCOME:
Service fees 1,817 1,496 4,803 4,373
Trust fees 755 623 2,226 2,037
Gain on sale of loans and other assets 143 66 288 94
Investment securities gains and losses, net:
Investment securities held to maturity 2
Investment securities available for sale 260 202 930 712
TOTAL OTHER INCOME 2,975 2,387 8,247 7,218
OTHER EXPENSE:
Salaries and employee benefits 4,556 4,397 13,494 12,922
Net occupancy expense 529 554 1,641 1,622
Equipment expense 517 488 1,549 1,370
Data processing service 375 389 1,172 1,154
Other 2,033 2,169 6,164 6,510
TOTAL OTHER EXPENSE 8,010 7,997 24,020 23,578
Income before taxes 6,266 5,976 18,314 17,959
Income tax expense 1,893 1,808 5,580 5,529
NET INCOME $4,373 $4,168 $12,734 $12,430
NET INCOME PER COMMON SHARE:
Basic $0.48 $0.46 $1.39 $1.35
Diluted $0.46 $0.44 $1.33 $1.29
WEIGHTED AVERAGE SHARES AND EQUIVALENTS:
Basic 8,969,287 8,893,980 8,940,734 8,981,132
Diluted 9,485,694 9,452,968 9,478,371 9,503,970
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
Cash flows from operating activities:
Net income $12,734 $12,430
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,893 1,867
Provision for loan losses 817 773
Gain on sale of investment securities (930) (714)
Gain on sale of fixed assets
and other property owned (205) (51)
Gain on sale of loans (42) (1)
(Increase) decrease in deferred tax asset (229) 22
Increase in interest receivable and other assets (254) (1,117)
Decrease in interest payable (356) (170)
Increase in taxes payable (153) (625)
Amortization of deferred net loan costs (fees) 161 (203)
Deferral of net loan fees (costs) 418 (55)
Increase in accounts payable
and accrued expenses 670 664
Total adjustments 1,790 390
Net cash provided by operating activities 14,524 12,820
Cash flows from investing activities:
Proceeds from the sale or maturity of:
Interest bearing deposits with other banks 1,274 550
Investment securities available for sale 52,373 35,571
Investment securities held to maturity 31,220 28,469
Purchase of:
Interest bearing deposits with other banks (1,238) (940)
Investment securities held to maturity (35,056) (40,225)
Investment securities available for sale (54,104) (40,310)
Increase in loans (27,900) (1,559)
Gross proceeds from sale of loans 999 298
Capital expenditures (879) (1,676)
Sale of fixed assets and other property owned 794 364
Decrease in federal funds sold 20,350 14,325
Net cash used in investing activities (12,167) (5,133)
Cash flows from financing activities:
Increase in deposits, net 2,246 4,723
Increase in short-term borrowings, net 174 3,623
Net change in other interest bearing liabilities (40) (60)
Dividends paid (5,293) (4,538)
Tax benefit from preferred stock dividend
and stock option activity 320 302
Issuance of common stock 1,554 462
Acquisition of treasury stock - (10,110)
Proceeds from reissuance of treasury stock - 1,682
Net cash used in financing activities (1,039) (3,916)
Net increase in cash and due from banks $1,318 $3,771
Cash and due from banks at beginning of period $31,938 $30,380
Cash and due from banks at end of period 33,256 34,151
Net increase in cash and due from banks $1,318 $3,771
Interest paid $21,961 $22,529
Income taxes paid 5,639 5,187
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
A. Basis of Presentation:
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, including
normal recurring accruals, considered necessary for a fair presentation
have been included. Operating results for the nine months and three months
ended September 30, 1998 are not necessarily indicative of the results that
may be experienced for the year ending December 31, 1998 or any other
interim period. For further information, refer to the Consolidated
Financial Statements and Footnotes included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
The accompanying Consolidated Financial Statements include Omega Financial
Corporation (Omega), a bank holding company, and the combined results of
its wholly owned banking and non-banking subsidiaries.
B. Current and Pending Accounting Changes
Statement of Financial Accounting Standards(SFAS) No. 130 - Reporting
Comprehensive Income
On January 1, 1998, Omega adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
establishes standards for reporting and displaying comprehensive income and
its components. Comprehensive income, as defined by SFAS 130, is the total
of net income and all other nonowner changes in equity. Total comprehensive
income for the nine months ended September 30, 1998 and 1997 was
$13,626,000 and $13,986,000, respectively. For the three month period ended
September 30, 1998 and 1997, total comprehensive income was $4,517,000 and
$5,103,000, respectively. The difference between net income and
comprehensive income for the above periods is due to unrealized gains and
losses on marketable securities.
Statement of Financial Accounting Standards No. 133 _ Accounting for
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". The
statement establishes accounting and reporting standards requiring that
every derivative be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must
formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
This statement is effective for fiscal years beginning after June 15, 1999.
Upon adoption, Omega expects no material impact on its financial
statements.
C. Commitments and Contingent Liabilities:
In the ordinary course of business, Omega and its subsidiaries make
commitments to extend credit to their customers. At September 30, 1998 and
December 31, 1997 standby letters of credit issued and outstanding amounted
to $17,566,000 and $14,827,000, respectively. These letters of credit are
not reflected in the accompanying financial statements. Management does
not anticipate any significant losses as a result of these transactions.
At September 30, 1998, the Corporation had $125,186,000 outstanding in
unused lines of credit commitments extended to its customers. Of this
amount, $37,349,000, or 29.8%, are commitments to consumers for home equity
and other lines of credit. The remainder, $87,837,000, are commercial
commitments.
D. Earnings Per Share Data:
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of 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 common stock.
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Computations of Earnings per Share
(In thousands, except per share amounts)
(Unaudited)
Nine Months Ended September Nine Months Ended September
30, 1998 30, 1997
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
Net income $ 12,734 12,430
Less: Preferred stock dividend (297) (297)
BASIC EPS
Income available to common
shareholders 12,437 8,941 $1.39 12,133 8,981 $1.35
EFFECT OF DILUTIVE SECURITIES
Impact of :
Assumed conversion of preferred 346
to common stock 346
Assumed exercises of outstanding 177
options 191
Preferred stock dividends
available to common
shareholders 297
297
Elimination of tax benefit of (34)
allocated preferred dividends (39)
Additional expense required to fund
ESOP debt, net of tax impact (62) (87)
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $ 12,633 9,478 $1.33 $12,309 9,504 $1.29
Three Months Ended September Three Months Ended September
30, 1998 30, 1997
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
Net income $ 4,373 $ 4,168
Less: Preferred stock dividends (99) (99)
BASIC EPS
Income available to common
shareholders $ 4,274 8,969 $ 0.48 $4,069 8,894 $ 0.46
EFFECT OF DILUTIVE SECURITIES
Impact of :
Assumed conversion of preferred
to common stock 346 346
Assumed exercises of outstanding
options 170 213
Preferred stock dividends
available to common
shareholders 99 99
Elimination of tax benefit of
allocated preferred dividends (13) (11)
Additional expense required to fund
ESOP debt, net of tax impact (19) (28)
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $ 4,341 9,485 $ 0.46 $ 4,129 9,453 $ 0.44
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Investment Considerations
In analyzing whether to make, or to continue to make, an investment in
Omega, investors should consider, among other factors, certain investment
considerations more particularly described in "Item 1: Business -
Investment Considerations" in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. A copy of this report can be obtained
from David N. Thiel, Senior Vice President, Omega Financial Corporation,
366 Walker Drive, State College, Pennsylvania 16801.
Forward Looking Statements
The information in this Report on Form 10-Q 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, statements concerning Year 2000 compliance and other
statements other than historical facts or 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. In addition to the factors discussed in this
report, certain risks, uncertainties and other factors, including without
limitation, risks arising from economic conditions and related
uncertainties, changes in interest rates, federal and state regulation,
competition, the adequacy of the allowance and provision for loan losses,
and Year 2000 compliance are discussed in this Report on Form 10-Q, the
Corporation's 1997 Annual Report or in Omega's Annual Report on Form 10-K
for the year ended December 31, 1997. Copies of these reports may be
obtained from Omega upon request and without charge (except for the
exhibits thereto) as described above.
1. Comparison of the Nine and Three Months Ended September 30, 1998 and 1997
Operations Overview
A. Nine months ended September 30, 1998 and 1997
For the first nine months of 1998, income before taxes increased by
$355,000, or 2.0%, compared to the same period in 1997. Income from credit
activities was decreased in 1998 by $232,000, or 0.7%. Non-interest
expenses increased by $442,000 while non-interest income increased by
$1,029,000.
The tax provision for the first nine months of 1998 increased by $51,000,
or 0.9% when compared to the first nine months of 1997. The effective tax
rate fell to 30.5% in 1998 from 30.8% in 1997, as a result of an increase
in tax-exempt income due to higher levels of of tax-exempt investments and
loans in 1998 than in 1997. Net income increased by $304,000, or 2.4%, in
the first nine months of 1998 as compared to the same period in 1997.
B. Three months ended September 30, 1998 and 1997
The third quarter's income before income taxes increased $290,000, or 4.9%,
when compared to the same period in 1997. Although non-interest income
increased $588,000, income from credit activities decreased by $285,000, or
2.5%, and non-interest expense increased by only $13,000.
After the income tax provision (which increased by $85,000, or 4.7%
compared to the same period in 1997) was deducted from earnings, net income
was $205,000, or 4.9%, higher than the third quarter of 1997. The
effective tax rate for the third quarter of 1998 was 30.2%, compared to an
effective rate of 30.3% in 1997.
Following are selected key ratios for the period:
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
Return on average assets (annualized). 1.69% 1.63% 1.66% 1.64%
Return on average equity (annualized). 11.44 12.10 11.39 12.03
Dividend payout ratio (common)........ 41.02 33.97 40.79 34.14
Average equity to average assets...... 14.81 13.47 14.58 13.59
Net Interest Income
A. Nine months ended September 30, 1998 and 1997
Omega's net interest income for the first nine months of 1998 was
$34,904,000, $188,000 or 0.5% less than the same period in 1997. On a fully
tax equivalent basis, however net interest income improved by $70,000.
Average earning assets grew by $4,386,000 since September 1997. The 0.5%
increase in average earning assets resulted primarily from growth in the
real estate loan portfolio, which increased by $7,387,000, or 2.2% and the
tax-free commercial loan portfolio which increased by $7,905,000, or
111.9%. This was partially offset by a decline in the personal loan average
outstanding balances of $11,067,000. The net result is that outstanding
total loans have increased by $5,425,000, or 0.8%. Average deposits
decreased by $8,847,000, or 1.0%, in 1998 as compared to the previous year.
Average short-term borrowings, which include retail repurchase agreements,
increased by $6,494,000, or 95.5%. Total cost to fund earning assets was
3.00% in 1998, compared to 3.11% in 1997, while earning assets yielded
7.83% in 1998 compared to 8.00% in 1997, resulting in a 6 basis point
decrease in net interest margin, and a 3 basis point decrease in the fully
tax equivalent net interest margin.
B. Three months ended September 30, 1998 and 1997
The net interest margin, at 4.78% for the third quarter of 1998, was 11
basis points lower than the third quarter of 1997, with a $4,852,000 or
0.5% increase in average earning assets resulting in a 1.78% decrease in
net interest income.
Following are key net interest margin ratios (annualized):
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Yield on average earning assets. 7.73% 8.03% 7.83% 8.00%
Cost to fund earning assets..... 2.95 3.14 3.00 3.11
Net interest margin............. 4.78 4.89 4.83 4.89
Net interest margin - tax
equivalent...................... 5.00 5.06 5.03 5.06
At September 30, 1998, Omega had $366,019,000 of earning assets scheduled
to reprice over the next twelve months as compared to $430,069,000 in
interest bearing liabilities, resulting in a negative gap of $64,050,000,
or 6.2% of assets. Economic simulation is a tool used by management to
measure and manage interest rate risk, including repricing, basis and yield
curve risk. Possible economic conditions and interest rate scenarios are
simulated 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. In order to determine
the approximate amount of net interest income at risk over the next twelve
months based on hypothetical rate movements, a rate shock simulation was
performed on the balance sheet as of September 30, 1998. In the event that
interest rates would decrease immediately by 100 basis points, results of
the rate shock simulation indicate that Omega's net interest income over
the next twelve months would decrease by approximately 0.6%, or $286,000.
Conversely, the results of a rate shock simulation of an immediate 100
basis point increase in interest rates indicates an increase in net
interest income of approximately $287,000, or 0.6% over a twelve-month
period. These simulations assume no volume or mix changes in the balance
sheet.
Other Income and Expense
A. Nine months ended September 30, 1998 and 1997
Other income increased $1,029,000, or 14.3% in the first nine months of
1998 as compared to the same period in 1997. As a direct result of a new
product initiated in July 1997 and a new ATM transaction fee starting in
June 1998, service fee income increased by $346,000. Trust fee income
increased by $189,000, or 9.3%, through September 30, 1998, as compared to
1997. Additionally, net gains from the sale of investment securities, loans
and other assets was $218,000 greater in 1998 than in 1997.
As a percentage of average assets, annualized other income net of security
gains and losses was .95% for the first nine months of 1998 as compared to
.86% in 1997.
Other expenses were $442,000, or 1.9% higher for the first nine months of
1998 than for the same period in 1997. Salaries and employee benefits were
$572,000, or 4.4% higher in 1998 than in 1997, as average full time
equivalent staffing increased by 1.6%. Occupancy and equipment expenses
have increased by $198,000, or 6.6% as the full impact of renovations and
technology advances related to the consolidation of the credit
administration support group to corporate headquarters is being realized.
Other expense was reduced by $328,000, or 4.3% in the first nine months of
1998 as compared to 1997. This is primarily due to a one-time $200,000 loss
recorded in 1997.
As a percentage of average assets, annualized expenses for the period ended
September 30, 1998 were 3.13% and were 3.10% for the same period in 1997.
B. Three months ended September 30, 1998 and 1997
Other income increased $588,000, or 24.6% in the third quarter of 1998 as
compared to the same period in 1997. Service fee income in 1998 outpaced
that in 1997 by $321,000, or 21.5%, with new fee income contributing
$204,000 of the increase. Trust fee income was $132,000, or 21.2% greater
in the third quarter of 1998 as compared to the third quarter of 1997. Net
gains from the sale of investment securities, loans and other assets
increased by $135,000 in 1998, or 50.4%.
As a percentage of average assets, annualized other income net of security
gains and losses was 1.05% for the third quarter of 1998 as compared to
.85% in 1997.
Other expenses were $13,000, or 0.2% higher for the third quarter of 1998
than for the same period in 1997. Salaries and employee benefits were
$159,000, or 3.6% higher in 1998 than in 1997. Occupancy and equipment
expense has remained constant, while data processing expense decreased by
3.6%. Other non-interest expenses have decreased by $136,000, or 6.3%, with
lower reinsurance claims of $62,000 responsible for 46% of the decrease.
Start-up costs of the debit card program introduced in 1997 had caused
expenses to be about $31,000 greater in the third quarter of 1997 as
compared to the same period in 1998.
As a percentage of average assets, annualized expenses for the quarter
ended September 30, 1998 were 3.10% and were 3.13% for the same period in
1997.
2. Investment Securities
Management of the investment portfolio entails evaluation and realignment
of the size and mix of the portfolio in order to balance various
characteristics of the balance sheet, including asset quality, liquidity,
yield relationships, maturity and tax planning. The following schedule
details characteristics of the investment portfolio as of September 30,
1998 and December 31, 1997.
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Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
September 30, 1998 Cost Gains Losses Value
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $58,565 $502 $ - $59,067
Obligations of state and
political subdivisions 66,775 1,266 (31) 68,010
Equity securities 5,834 7,326 (13) 13,147
Total $131,174 $9,094 $(44) $140,224
Securities Classified as Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
September 30, 1998 Cost Gains Losses Value
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $25,494 $ 429 $ - $25,923
Obligations of state and
political subdivisions 5,002 219 - 5,221
Corporate securities 53,913 809 (13) 54,709
Mortgage backed securities 31,514 307 (11) 31,810
Investment in low-income housing 543 - - 543
Equity securities (non-marketable) 4,208 - - 4,208
Total $120,674 $1,764 $(24) $122,414
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1997 Cost Gains Losses Value
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $79,143 $176 $(78) $79,241
Obligations of state and
political subdivisions 40,781 515 (14) 41,282
Equity securities 5,414 7,078 - 12,492
Total $125,338 $7,769 $(92) $133,015
Securities Classified as Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1997 Cost Gains Losses Value
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $24,007 $196 $(3) $24,200
Obligations of state and
political subdivisions 5,799 71 - 5,870
Corporate securities 37,105 202 (22) 37,285
Mortgage backed securities 45,207 206 (108) 45,368
Investment in low-income housing 489 - - 489
Equity securities (non-marketable) 4,132 - - 4,132
Total $116,802 $675 $(133) $117,344
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Total investment securities as a percentage of total assets at September
30, 1998 and December 31, 1997 were 25.3% and 24.6%, respectively.
Securities maturing or repricing in one year or less comprised 32.6% of the
total investment securities of $260,898,000 as of September 30, 1998, as
compared to 42.1% of total investment securities of $249,817,000 as of
December 31, 1997. There was $215,000 in investments in instruments of
foreign countries on September 30, 1998.
3. Interest Bearing Deposits with Other Financial Institutions
As of September 30, 1998, Omega had $564,000 in interest bearing deposits
with other banks. There were no investments in instruments issued by U.S.
branches of banks of foreign countries or deposits in banks of foreign
countries included in the September 30, 1998 balance sheet.
4. Loans
Net loans in the first nine months of 1998 increased by $25,547,000, or
3.8% from the balance at December 31, 1997, bringing the total to
$705,647,000 at September 30, 1998. Continued competitive pressure in the
indirect lending market has resulted in limited growth in consumer lending,
however, there has been an increase in tax-exempt commercial loans, most
specifically tax revenue anticipation notes since December 31, 1997, of
$12,048,000. There has been an overall increase of $12,529,000 in
outstanding real estate loans, including commercial and residential, with a
noticable switch from variable rate loans to fixed rate.
Changes in the allowance for loan losses for the nine months ended
September 30, 1998 and 1997 were as follows (in thousands):
1998 1997
Balance at January 1.................... $11,793 $11,820
Charge-offs............................. (854) (948)
Recoveries.............................. 267 130
Net charge-offs..................... (587) (818)
Provision for loan losses............... 817 773
Balance at September 30................ $12,023 $11,775
The allowance for loan losses is considered adequate by management to cover
possible uncollectible loans, as shown in the following table depicting
non-performing loans. Management is also of the opinion that the level of
loan loss provision is adequate to maintain the allowance at an acceptable
level. The allowance for loan losses at September 30, 1998 and 1997
represented 1.68% and 1.69%, respectively, of the total loans outstanding,
net of unearned interest.
Set forth below is an analysis of Omega's non-performing loans as of
September 30, 1998 as compared to December 31, 1997.
Non-performing Loans
(In thousands)
September 30, December 31,
1998 1997
Non-accrual loans....................... $5,151 $4,762
Accruing loans past due 90 days or more. 1,821 2,103
Restructured loans...................... 256 47
Total non-performing loans.............. $7,228 $6,912
Non-performing loans as
percent of allowance................ 60.1% 58.6%
The increase in non-performing loans from December 31, 1997 to September
30, 1998 is primarily due to the addition of one large commercial loan with
a total outstanding balance of $612,000 to the non-accrual category,
partially offset by reductions in other non-accrual loans.
5. Deposits and Other Sources of Funds
Deposits provide the primary source of funding for loans and investment
securities. As September 30, 1998, total deposits increased by $2,246,000
or 0.3%, as compared to December 31, 1997, with all of the increase due to
increases in interest bearing deposits.
6. Regulatory Capital Compliance
Risk-based capital standards are issued by bank regulatory authorities in
the United States. These capital standards relate a banking company's
capital to the risk profile of its assets and provide the basis by which
all banking companies and banks are evaluated in terms of capital adequacy.
The risk-based capital standards require all banks to have Tier 1 capital
of at least 4% and total capital, including Tier 1 capital of at least 8%
of risk-adjusted assets. Tier 1 capital includes common stockholders'
equity and qualifying perpetual preferred stock together with related
surpluses and retained earnings. Total capital is comprised of Tier 1
capital, limited life preferred stock, qualifying debt instruments, and the
reserves for possible loan losses. Banking regulators have also issued
leverage ratio requirements. The leverage ratio requirement is measured as
the ratio of Tier 1 capital to adjusted average assets. The table below
provides a comparison of Omega's and its bank subsidiaries' risk-based
capital ratios and leverage ratio to the minimum regulatory requirements
for the periods indicated.
<TABLE>
<CAPTION>
<S>
<C>
MINIMUM REQUIREMENT MINIMUM REGULATORY
FOR CAPITAL REQUIREMENTS TO BE
ACTUAL ADEQUACY PURPOSES "WELL CAPITALIZED"
OMEGA FINANCIAL CORPORATION AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
As of September 30, 1998:
Total Capital $154,012 22.0% $55,905 8.0% $69,882 10.0%
(to Risk Weighted Assets)
Tier I Capital 145,206 20.8% 27,953 4.0% 41,929 6.0%
(to Risk Weighted Assets)
Tier I Capital 145,206 14.2% 40,899 4.0% 51,124 5.0%
(to Average Assets)
As of December 31, 1997:
Total Capital $143,673 21.1% $54,418 8.0% $68,023 10.0%
(to Risk Weighted Assets)
Tier I Capital 135,127 19.9% 27,209 4.0% 40,814 6.0%
(to Risk Weighted Assets)
Tier I Capital 135,127 13.3% 40,584 4.0% 50,730 5.0%
(to Average Assets)
OMEGA BANK
As of September 30, 1998:
Total Capital $78,440 20.0% $31,341 8.0% $39,176 10.0%
(to Risk Weighted Assets)
Tier I Capital 73,537 17.2% 15,671 4.0% 23,506 6.0%
(to Risk Weighted Assets)
Tier I Capital 73,537 13.0% 22,690 4.0% 28,363 5.0%
(to Average Assets)
As of December 31, 1997:
Total Capital $74,430 19.5% $30,557 8.0% $38,196 10.0%
(to Risk Weighted Assets)
Tier I Capital 69,648 18.2% 15,278 4.0% 22,918 6.0%
(to Risk Weighted Assets)
Tier I Capital 69,648 12.3% 22,621 4.0% 28,276 5.0%
(to Average Assets)
HOLLIDAYSBURG TRUST COMPANY
As of September 30, 1998:
Total Capital $33,400 18.5% $14,449 8.0% $18,061 10.0%
(to Risk Weighted Assets)
Tier I Capital 31,129 17.2% 7,224 4.0% 10,837 6.0%
(to Risk Weighted Assets)
Tier I Capital 31,129 12.3% 10,124 4.0% 12,655 5.0%
(to Average Assets)
As of December 31, 1997:
Total Capital $31,059 18.3% $13,604 8.0% $17,005 10.0%
(to Risk Weighted Assets)
Tier I Capital 28,920 17.0% 6,802 4.0% 10,203 6.0%
(to Risk Weighted Assets)
Tier I Capital 28,920 11.7% 9,849 4.0% 12,311 5.0%
(to Average Assets)
PENN CENTRAL NATIONAL BANK
As of September 30, 1998:
Total Capital $25,054 23.1% $8,689 8.0% $10,862 10.0%
(to Risk Weighted Assets)
Tier I Capital 23,672 21.8% 4,345 4.0% 6,517 6.0%
(to Risk Weighted Assets)
Tier I Capital 23,672 13.0% 7,298 4.0% 9,122 5.0%
(to Average Assets)
As of December 31, 1997:
Total Capital $24,460 22.4% $8,754 8.0% $10,943 10.0%
(to Risk Weighted Assets)
Tier I Capital 23,070 21.1% 4,377 4.0% 6,566 6.0%
(to Risk Weighted Assets)
Tier I Capital 23,070 12.3% 7,474 4.0% 9,343 5.0%
(to Average Assets)
</TABLE>
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the FDIC has issued a rule which sets the capital level
for each of the five capital categories established in FDICIA. As required
by FDICIA, the regulations specify the levels at which an insured
institution would be considered "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", or
"critically undercapitalized". At September 30, 1998, Omega and each of
its banking subsidiaries met the regulatory definition of a "well
capitalized" financial institution, i.e., a leverage ratio exceeding 5%,
Tier 1 capital exceeding 6% and total capital exceeding 10%.
7. Year 2000 Compliance
The Year 2000 problem is a source of concern worldwide for businesses that
rely upon computer and software systems. Many software programs record
dates as six digit fields, eliminating the first two digits of the year.
When the Year 2000 arrives, it is possible that these systems will
recognize it as the year 1900, creating failures in systems. The effects
could be far reaching. It is important for every company to assess and
address potential problems prior to the event. Management is currently in
the process of evaluating Omega's readiness to address the Year 2000
problem (Y2K). An in-depth analysis of the Information Technology (IT)
infrastructure as well as its non-IT systems that include embedded
technology is necessary to assess the extent of risk.
In 1997, a committee was formed to:
1. Identify all of the date-dependent systems at the Company that could be
impacted by the Year 2000 issue. In addition, the committee was charged
with analyzing the impact of the Year 2000 issue on key customers and
vendors
2.Test all internal information systems and obtain certification of
compliance from all external information service providers
3. Formulate and execute a plan to minimize risk for customer and vendor
Y2K failure
4. Determine the cost of and plan for replacement of non-compliant systems
5. Formulate a contingency plan for unexpected failures.
The committee is comprised of executive officers and operations personnel
from all major divisions of the Corporation. It has not been necessary to
hire external consultants. The Y2K evaluation process has not hindered
progress on other planned IT projects.
The committee has developed a plan to analyze the readiness of all internal
software. A testing site was developed where PC software could be loaded
and tested via prescribed test scripts for performance as dates were
modified. (Certain key dates have been recommended for testing by the
Corporation's regulators). As of September 30, 1998, about 20% of the
critical PC software applications have been tested with the remainder to be
tested over the next six months.
Major internal system processing software such as Items Processing, which
is critical to our business has been tested at the Company's "Hot Site",
where backup hardware and software are maintained for continued operations
in any crisis. This software (and most related hardware) has been found to
be reliable when tested for all critical dates. As a result of testing thus
far, one major hardware item will be replaced in 1999.
All external software service providers have been contacted and have been
asked to provide certification and validation that their systems have been
thoroughly tested and are Y2K compliant. If the provider is not currently
Y2K compliant we have requested a timetable of planned system upgrades to
achieve required compliance. All critical vendors have indicated that they
are dealing with their Year 2000 issues, and in most cases, plan to have
their testing completed by December 31, 1998. Omega's testing with all
critical outside vendors will be completed by March 31, 1999.
Most of the processing of Omega's core financial services are out-sourced.
Omega's primary information service provider processes all application
systems, as well as the company's general ledger, and is the source of all
data inquiry and the data warehouse function. This service is absolutely
critical to our operation. The provider has completed the identification
phase of its Y2K process and is currently in the testing phase which is
scheduled to be completed by December 31, 1998. Proxy testing with their
bank clients will be conducted through the first quarter of 1999. As this
provider is a large servicing operation, it has many other financial
institutions as clients. These clients have come together as a group to
finance a third party review of their entire Y2K process, including testing
and remediation. This independent third party will issue quarterly reports
to the clients through the end of 1999.
The Company has also taken steps to ensure that internal hardware is Year
2000 compliant. The testing of all PC's is nearly complete, with 476 of
493, or 97% completed. Twelve PC's failed and are to be replaced in 1999,
while 166, or 34% have been identified as needing to have the system date
changed manually on 1/1/2000. These PC's will be systematically replaced
first in Omega's ongoing PC upgrade process in 1999. Major hardware (used
in the Data Processing area) has been tested as well. Both the mainframe
and backup computers have passed the tests.
Non IT systems that are micro-chip driven are also used throughout the
Corporation. These include such items as proof machines, HVAC, vaults,
security systems, elevators, telephones and fax machines, and ATM's. All of
these vendors have been contacted. We have been assured that our vaults,
elevators and ATM's are Y2K compliant. As of September 30, 1998, the
control system for the HVAC system at the Administration Center has been
tested and found to be compliant. Proof machines (equipment that micr-
encodes all documents to prepare for processing) have already been upgraded
for year 2000 compliance. All remaining testing is scheduled to be
completed by December 31, 1998.
Omega's financial results are dependent upon the solvency of its customer
base; their ability to repay loans and maintain deposits. Therefore, a
process has begun in which business customers with existing levels of
aggregate loans in excess of a designated amount are contacted, reviewed,
and rated as to credit risk. 74% of the credit relationships reviewed were
deemed to be low risk, as these borrowers are aware of the potential
problems with the Year 2000 and are taking steps to analyze and correct any
deficiencies. The remaining 26% of the credit relationships reviewed were
deemed to be moderate risk. Management will continue to closely monitor
their compliance activity on an ongoing basis. Since June 1998, all
business loan applicants have been asked to demonstrate Y2K compliance as a
requirement for loan approval.
Portions of the Corporation's investment portfolio could be at risk in the
event that an issuer of a security is not Y2K compliant. An evaluation
process is in place to assess the potential impact that this could have on
Omega's financial results and operations. The analysis includes segmenting
the portfolio by risk rating (based on the type of security and the
potential exposure to any negative impact as a result of the Y2K issue). If
by September 30, 1999, the analysis does not indicate that the issuer of a
security has properly addressed the Y2K issue and the investment is
determined to be at risk, then the security will be sold, leaving the
investment portfolio with little or no investment risk.
Costs to address Omega's Year 2000 issues are being expensed as incurred
and have been insignificant through September 30, 1998. The current
projections of costs to complete the Y2K remediation are estimated to be in
the range of $645,000 to $873,000. Included in this estimate is the amount
of between $162,000 and $390,000 which will be capitalized for replacement
of major hardware. The remaining costs (currently projected at $482,000
will be expensed as incurred over the next fifteen months. The source of
funds will come from Omega's IT budget. These expenditures are not expected
to be material to the financial condition or results of operations of
Omega.
Upon completion of the testing phase, Omega intends to create contingency
plans for issues that fail the Y2K compliance test. By December 31, 1998,
those issues requiring contingency plans will have been identified. These
contingency plans will address procedures to follow in a most likely worst
case scenario and are expected to be completed by March 31, 1999.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omega is impacted by market risks, and has procedures in place to evaluate
and mitigate these risks. These market risks and Omega's procedures are
described in the Management's Discussion and Analysis section of the 1997
Annual Report to Shareholders and in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations". There have been
no material changes in the market risks that impact Omega or their
procedures relative to these risks, since December 31, 1997.
PART II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Pursuant to recent amendments to the proxy rules under the Securities
Exchange Act of 1934, as amended, Omega's shareholders are notified that
the deadline for providing Omega timely notice of any shareholder proposal
to be submitted for consideration at Omega's 1999 Annual Meeting of
Shareholders will be March 15, 1999. As to all such matters which Omega
does not have notice on or prior to March 15, 1999, the proxy solicited on
behalf of the Board of Directors in connection with the matters to be
considered at the 1999 Annual Meeting of Shareholders will confer
discretionary voting authority on the persons designated in such proxy.
Shareholder proposals for the 1999 Annual Meeting of Shareholders must
still be submitted to the Company by December 2, 1998 to receive
consideration for inclusion in Omega's Proxy Statement relating to the 1999
Annual Meeting of Shareholders.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly
caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMEGA FINANCIAL CORPORATION
(Registrant)
By
:
Date David B. Lee
Chairman and
Chief Executive Officer
Date JoAnn N. McMinn
Senior Vice President and
Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000705671
<NAME> OMEGA FINANCIAL CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 33,256
<INT-BEARING-DEPOSITS> 564
<FED-FUNDS-SOLD> 2,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 120,674
<INVESTMENTS-MARKET> 140,224
<LOANS> 718,250
<ALLOWANCE> 12,023
<TOTAL-ASSETS> 1,032,128
<DEPOSITS> 843,021
<SHORT-TERM> 18,434
<LIABILITIES-OTHER> 17,432
<LONG-TERM> 0
0
2,061
<COMMON> 151,180
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,032,128
<INTEREST-LOAN> 45,073
<INTEREST-INVEST> 10,587
<INTEREST-OTHER> 849
<INTEREST-TOTAL> 56,509
<INTEREST-DEPOSIT> 20,954
<INTEREST-EXPENSE> 21,605
<INTEREST-INCOME-NET> 34,904
<LOAN-LOSSES> 817
<SECURITIES-GAINS> 930
<EXPENSE-OTHER> 24,020
<INCOME-PRETAX> 18,314
<INCOME-PRE-EXTRAORDINARY> 12,734
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,734
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.33
<YIELD-ACTUAL> 4.83
<LOANS-NON> 5,151
<LOANS-PAST> 1,821
<LOANS-TROUBLED> 256
<LOANS-PROBLEM> 7,228
<ALLOWANCE-OPEN> 11,793
<CHARGE-OFFS> 854
<RECOVERIES> 267
<ALLOWANCE-CLOSE> 12,023
<ALLOWANCE-DOMESTIC> 12,023
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
