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 June 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 August 7, 1998:
Common Stock, $5.00 par value _ 8,970,246 shares
PART I. Financial Information
Item 1. Financial Statements
<TABLE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION> JUNE 30, DECEMBER 31,
ASSETS 1998 1997
<S> <C>
Cash and due from banks $36,414 $31,938
Interest bearing deposits with other banks 677 600
Federal funds sold 23,800 22,650
Investment securities held to maturity
(Market value:
$127,492 and $117,344, respectively) 126,797 116,802
Investment securities available for sale 132,865 133,015
Total loans 697,891 692,861
Less: Unearned discount (662) (968)
Allowance for loan losses (11,805) (11,793)
Net loans 685,424 680,100
Premises and equipment, net 17,180 17,589
Other assets 13,108 13,209
TOTAL ASSETS $1,036,265 $1,015,903
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $119,122 $114,777
Interest bearing 730,817 725,998
Total deposits 849,939 840,775
Short-term borrowings 19,317 18,260
Other liabilities 12,116 9,816
ESOP debt 3,940 4,034
Other interest bearing liabilities 543 586
TOTAL LIABILITIES 885,855 873,471
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 (3,002) (3,125)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares
Issued -
9,119,079 shares at June 30, 1998;
9,050,730 shares at December 31, 1997
Outstanding -
8,965,306 shares at June 30, 1998;
8,879,257 shares at December 31, 1997 45,600 45,258
Capital surplus 2,922 1,822
Retained earnings 99,477 94,426
Cost of common stock in treasury
153,773 shares at June 30, 1998;
171,473 shares at December 31, 1997 (5,333) (5,947)
Net unrealized gain on securities available for sale 5,746 4,998
TOTAL SHAREHOLDERS' EQUITY 150,410 142,432
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,036,265 $1,015,903
</TABLE>
<TABLE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C>
INTEREST INCOME:
Interest and fees on loans $15,061 $15,373 $29,989 $30,433
Interest and dividends on investment securities 3,624 3,606 7,034 6,990
Other interest income 272 229 629 533
TOTAL INTEREST INCOME. 18,957 19,208 37,652 37,956
INTEREST EXPENSE:
Interest on deposits 6,975 7,270 13,939 14,422
Interest on short-term borrowings 289 68 429 134
Interest on long-term debt and
other interest bearing liabilities (67) 76 13 152
TOTAL INTEREST EXPENSE 7,197 7,414 14,381 14,708
NET INTEREST INCOME 11,760 11,794 23,271 23,248
Provision for loan losses 243 257 485 515
INCOME FROM CREDIT ACTIVITIES 11,517 11,537 22,786 22,733
OTHER INCOME:
Service fees 1,580 1,514 3,083 2,903
Trust fees 718 631 1,471 1,414
Gain on sale of loans 11 2 48 2
Investment securities gains and losses, net:
Investment securities held to maturity - 2 - 2
Investment securities available for sale 381 348 670 510
TOTAL OTHER INCOME 2,690 2,497 5,272 4,831
OTHER EXPENSE:
Salaries and employee benefits 4,513 4,287 8,938 8,525
Net occupancy expense 539 517 1,112 1,068
Equipment expense 521 448 1,032 882
Data processing service 395 375 797 765
Other 2,085 2,094 4,131 4,341
TOTAL OTHER EXPENSE 8,053 7,721 16,010 15,581
Income before taxes 6,154 6,313 12,048 11,983
Income tax expense 1,903 1,952 3,687 3,721
NET INCOME $4,251 $4,361 $8,361 $8,262
NET INCOME PER COMMON SHARE:
Basic $ 0.46 $0.47 $ 0.91 $ 0.89
Diluted $ 0.44 $0.45 $ 0.87 $ 0.85
WEIGHTED AVERAGE SHARES AND EQUIVALENTS:
Basic 8,950,064 8,999,438 8,926,222 9,025,431
Diluted 9,504,596 9,529,760 9,477,776 9,533,462
</TABLE>
<TABLE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
<S> <C>
Cash flows from operating activities:
Net income $8,361 $8,262
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,259 1,262
Provision for loan losses 485 515
Gain on sale of investment securities (670) (512)
Gain on sale of fixed assets
and other property owned (52) (25)
Gain on sale of loans (48) (2)
Increase in deferred tax asset (170) (15)
Increase in interest receivable and other assets (856) (1,251)
Decrease in interest payable (301) (214)
Decrease in taxes payable (91) (615)
Amortization of deferred net loan costs/(fees) 169 (112)
Deferral of net loan fees 236 120
Increase in accounts payable
and accrued expenses 3,109 1,137
Total adjustments 3,070 288
Net cash provided by operating activities 11,431 8,550
Cash flows from investing activities:
Proceeds from the sale or maturity of:
Interest bearing deposits with other banks 891 511
Investment securities available for sale 40,176 21,648
Investment securities held to maturity 20,164 16,814
Purchase of:
Interest bearing deposits with other banks (968) (736)
Investment securities held to maturity (30,121) (22,574)
Investment securities available for sale (38,377) (26,112)
(Increase) decrease in loans (6,869) 5,890
Gross proceeds from sale of loans 703 230
Capital expenditures (580) (1,053)
Sale of fixed assets and other property owned 669 178
(Increase) decrease in federal funds sold (1,150) 3,550
Net cash used in investing activities (15,462) (1,654)
Cash flows from financing activities:
Increase in deposits, net 9,164 7,152
Increase in short-term borrowings, net 1,057 1,003
Net change in other interest bearing liabilities (43) (54)
Dividends paid (3,401) (2,998)
Tax benefit from preferred stock dividend
and stock option activity 288 203
Issuance of common stock 1,442 164
Acquisition of treasury stock - (4,285)
Proceeds from reissuance of treasury stock - 1,604
Net cash provided by financing activities 8,507 2,789
Net increase in cash and due from banks $4,476 $9,685
Cash and due from banks at beginning of period $31,938 $30,380
Cash and due from banks at end of period 36,414 40,065
Net increase in cash and due from banks $4,476 $9,685
Interest paid $14,682 $14,922
Income taxes paid 3,650 3,925
</TABLE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX AND THREE MONTHS ENDED JUNE 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 six months and three months
ended June 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 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 six months ended June 30, 1998 and 1997 was $9,109,000 and
$8,883,000, respectively. For the three month period ended June 30, 1998
and 1997, total comprehensive income was $4,410,000 and $5,158,000. 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 June 30, 1998 and
December 31, 1997 standby letters of credit issued and outstanding amounted
to $16,907,000 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 June 30, 1998, the Corporation had $117,034,000 outstanding in unused
lines of credit commitments extended to its customers. Of this amount,
$37,070,000, or 31.7%, are commitments to consumers for home equity and
other lines of credit. The remainder, $79,964,000, 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.
<TABLE>
<CAPTION>
Computations of Earnings per Share
(In thousands, except per share amounts)
(Unaudited)
<S> <C>
Six Months Ended June 30, 1998 Six Months Ended June 30, 1997
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
Net income $8,361 $8,262
Less: Preferred stock dividends (198) (198)
BASIC EPS
Income available to common
shareholders 8,163 8,926 $0.91 8,064 9,025 $0.89
EFFECT OF DILUTIVE SECURITIES
Impact of :
Assumed conversion of preferred
to common stock 346 346
Assumed exercises of outstanding
options 205 162
Preferred stock dividends
available to common
shareholders 198 198
Elimination of tax benefit of
allocated preferred dividends (26) (22)
Additional expense required to fund
ESOP debt, net of tax impact (43) (59)
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $8,292 9,477 $0.87 $8,181 9,533 $0.85
Three Months Ended June 30, 1998 Three Months Ended June 30, 1997
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
Net income $4,251 $4,361
Less: Preferred stock dividends (99) (99)
BASIC EPS
Income available to common
shareholders 4,152 8,950 $0.46 4,262 8,999 $0.47
EFFECT OF DILUTIVE SECURITIES
Impact of :
Assumed conversion of preferred
to common stock 346 346
Assumed exercises of outstanding
options 208 184
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 $4,219 9,504 $0.44 $4,322 9,529 $0.45
</TABLE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1. Comparison of the Six and Three Months Ended June 30, 1998 and 1997
Operations Overview
A. Six months ended June 30, 1998 and 1997
For the first six months of 1998, income before taxes increased by $65,000,
or 0.5%, compared to the same period in 1997. Income from credit activities
was maintained at close to the same level in 1998 as in 1997. Non-interest
expenses increased by $429,000 while non-interest income increased by
$441,000, resulting in the modest increase in income before taxes.
The tax provision for the first six months of 1998 decreased by $34,000, or
0.9% when compared to the first six months of 1997. The effective tax rate
fell to 30.6% in 1998 from 31.1% in 1997, as a result of an increase in
tax-exempt income due to higher levels of of tax-exempt investments in 1998
than in 1997. Net income increased by $99,000, or 1.2%, in the first six
months of 1998 as compared to the same period in 1997.
B. Three months ended June 30, 1998 and 1997
The second quarter's income before income taxes decreased $159,000, or
2.5%, when compared to the same period in 1997. Although non-interest
income increased $193,000, income from credit activities decreased by
$20,000, or 0.2%, and non-interest expense increased by $332,000, or 4.3%.
After the income tax provision (which decreased by $49,000, or 2.5%
compared to the same period in 1997) was deducted from earnings, net income
was $110,000, or 2.5%, lower than the second quarter of 1997. The
effective tax rate for the second quarter of 1998 was 30.9%, the same as in
the second quarter of 1997.
Following are selected key ratios for the period:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
<S><C> 1998 1997 1998 1997
Return on average assets (annualized) 1.66% 1.72% 1.64% 1.64%
Return on average equity (annualized) 11.39 12.64 11.37 12.00
Dividend payout ratio (common) 42.18 33.04 40.67 34.22
Average equity to average assets 14.57 13.62 14.46 13.65
</TABLE>
Net Interest Income
A. Six months ended June 30, 1998 and 1997
Omega's net interest income for the first six months of 1998 improved by
$23,000, or 0.1%. Average earning assets grew by $3,803,000 since June
1997. The 0.4% increase in average earning assets resulted primarily from
growth in the real estate loan portfolio, which increased by $4,814,000, or
1.4% and the tax-free commercial loan portfolio which increased by
$7,165,000, or 105.1%. This was partially offset by a decline in the
personal loan average outstanding balances of $10,817,000. The net result
is that outstanding total loans have increased by $1,283,000. Average
deposits decreased by $8,242,000, or 1.0%, in 1998 as compared to the
previous year. Total cost to fund earning assets was 3.03% in 1998,
compared to 3.11% in 1997, while earning assets yielded 7.89% in 1998
compared to 7.99% in 1997, resulting in a 2 basis point decrease in net
interest margin.
B. Three months ended June 30, 1998 and 1997
The net interest margin, at 4.88% for the second quarter of 1998, was 6
basis points lower than the second quarter of 1997, with a $7,101,000 or
0.7% increase in average earning assets resulting in a 0.3% decrease in net
interest income.
Following are key net interest margin ratios (annualized):
<TABLE>
<CAPTION>
<S><C>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Yield on average earning assets................ 7.87% 8.04% 7.89% 7.99%
Cost to fund earning assets.................... 2.99 3.10 3.03 3.11
Net interest margin............................ 4.88 4.94 4.86 4.88
Net interest margin - tax equivalent........... 5.08 5.11 5.05 5.04
</TABLE>
At June 30, 1998, Omega had $395,840,000 of earning assets scheduled to
reprice over the next twelve months as compared to $424,409,000 in interest
bearing liabilities, resulting in a negative gap of $28,569,000, or 2.8% of
assets. In order to predict 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. 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 1.3%, or $593,000. 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 $599,000, or 1.3% over a twelve-month period. These
simulations assume no volume or mix changes in the balance sheet.
Other Income and Expense
A. Six months ended June 30, 1998 and 1997
Other income increased $441,000, or 9.1% in the first six months of 1998 as
compared to the same period in 1997. As a direct result of a new product
initiated in July of 1997 and a new transaction fee starting in June 1998,
service fee income increased by $142,000. Trust fee income increased by
$57,000, or 4.0%, through June 30, 1998, as compared to 1997. Additionally,
net gains from the sale of investment securities and loans was $204,000
greater in 1998 than in 1997.
As a percentage of average assets, annualized other income net of security
gains and losses was .90% for the first half of 1998 as compared to .86% in
1997.
Other expenses were $429,000, or 2.8% higher for the first half of 1998
than for the same period in 1997. Salaries and employee benefits were
$413,000, or 4.8% higher in 1998 than in 1997, as average full time
equivalent staffing increased by 1.8%. Occupancy and equipment expenses
have increased by $194,000, or 9.9% 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 $210,000, or 4.8% in the first half 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
June 30, 1998 were 3.15% and were 3.09% for the same period in 1997.
B. Three months ended June 30, 1998 and 1997
Other income increased $193,000, or 7.7% in the second quarter of 1998 as
compared to the same period in 1997. Service fee income in 1998 outpaced
that in 1997 by $66,000, or 4.4%, while trust fee income was $87,000, or
13.8% greater in the second quarter of 1998 as compared to the second
quarter of 1997. Net gains from the sale of investment securities increased
by $31,000 in 1998, or 8.9%.
As a percentage of average assets, annualized other income net of security
gains and losses was .90% for the second quarter of 1998 as compared to
.85% in 1997.
Other expenses were $332,000, or 4.3% higher for the second quarter of 1998
than for the same period in 1997. Salaries and employee benefits were
$226,000, or 5.3% higher in 1998 than in 1997. Occupancy and equipment
expense has increased by 9.8%, while data processing expense increased by
5.3%. Other non-interest expenses have decreased by 0.4%.
As a percentage of average assets, annualized expenses for the quarter
ended June 30, 1998 were 3.14% and were 3.05% 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 June 30, 1998 and
December 31, 1997.
<TABLE>
<CAPTION>
<S><C>
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
June 30, 1998 Cost Gains Losses Value
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $66,175 $128 $(38) $66,265
Obligations of state and
political subdivisions 52,203 499 (28) 52,674
Equity securities 5,658 8,268 - 13,926
Total $124,036 $8,895 $(66) $132,865
Securities Classified as Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
June 30, 1998 Cost Gains Losses Value
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $26,497 $ 200 $(3) $26,694
Obligations of state and
political subdivisions 6,044 90 - 6,134
Corporate securities 54,157 279 (34) 54,402
Mortgage backed securities 35,345 196 (32) 35,509
Investment in low-income housing 546 - - 546
Equity securities (non-marketable) 4,208 - - 4,208
Total $126,797 $765 $(69) $127,493
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
</TABLE>
Total investment securities as a percentage of total assets at June 30,
1998 and December 31, 1997 were 25.1% and 24.6%, respectively. Securities
maturing or repricing in one year or less comprised 31.6% of the total
investment securities of $259,662,000 as of June 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 June 30, 1998.
3. Interest Bearing Deposits with Other Financial Institutions
As of June 30, 1998, Omega had $677,000 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 June 30, 1998 balance sheet.
4. Loans
Net loans in the first six months of 1998 increased by $5,324,000, or 0.8%
from the balance at December 31, 1997, bringing the total to $685,424,000
at June 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 $7,821,000. There
has been an overall increase of $4,030,000 in outstanding real estate
loans, including commercial and residential, with a noticeable switch from
variable rate loans to fixed rate.
Changes in the allowance for loan losses for the six months ended June 30,
1998 and 1997 were as follows (in thousands):
1998 1997
Balance at January 1.................... $11,793 $11,820
Charge-offs............................. (710) (671)
Recoveries.............................. 237 75
Net charge-offs..................... (473) (596)
Provision for loan losses............... 485 515
Balance at June 30...................... $11,805 $11,739
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 June 30, 1998 and 1997 represented
1.69% and 1.70%, respectively, of the total loans outstanding, net of
unearned interest.
Set forth below is an analysis of Omega's non-performing loans as of June
30, 1998 as compared to December 31, 1997.
Non-performing
Loans
(In thousands)
June 30, December 31,
1998 1997
Non-accrual loans....................... $5,273 $4,762
Accruing loans past due 90 days or more. 1,587 2,103
Restructured loans...................... 165 47
Total non-performing loans.............. $7,025 $6,912
Non-performing loans as % of allowance.. 59.5% 58.6%
The increase in non-performing loans from December 31, 1997 to June 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, offset
by a decrease in delinquent loan balances of $516,000.
5. Deposits and Other Sources of Funds
Deposits provide the primary source of funding for loans and investment
securities. As June 30, 1998, total deposits increased by $9,164,000 or
1.1%, as compared to December 31, 1997, with 53% 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 June 30, 1998:
Total Capital $151,182 21.9% $55,337 8.0% $69,171 10.0%
(to Risk Weighted Assets)
Tier I Capital 142,466 20.6% 27,668 4.0% 41,503 6.0%
(to Risk Weighted Assets)
Tier I Capital 142,466 14.0% 40,690 4.0% 50,863 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 June 30, 1998:
Total Capital $77,064 19.7% $31,362 8.0% $39,203 10.0%
(to Risk Weighted Assets)
Tier I Capital 72,160 18.4% 15,681 4.0% 23,522 6.0%
(to Risk Weighted Assets)
Tier I Capital 72,160 12.8% 22,539 4.0% 28,173 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 June 30, 1998:
Total Capital $32,490 19.1% $13,618 8.0% $17,022 10.0%
(to Risk Weighted Assets)
Tier I Capital 30,348 17.8% 6,809 4.0% 10,213 6.0%
(to Risk Weighted Assets)
Tier I Capital 30,348 12.1% 10,026 4.0% 12,532 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 June 30, 1998:
Total Capital $24,894 22.6% $8,800 8.0% $10,999 10.0%
(to Risk Weighted Assets)
Tier I Capital 23,495 21.4% 4,400 4.0% 6,600 6.0%
(to Risk Weighted Assets)
Tier I Capital 23,495 12.9% 7,320 4.0% 9,150 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 June 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
Omega is currently in the process of evaluating its information technology
infrastructure for Year 2000 compliance. This involves both an analyses 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.
8. 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.
9. 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.
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
The Annual Meeting of Shareholders of Omega was held on April 28, 1998. At
the Annual Meeting, the shareholders elected a class of directors for a
term of three years, as described below.
Withhold
Name For Authority
Robert N. Oliver 7,365,717 39,396
Stanton R. Sheetz 7,303,176 62,540
Robert A. Szeyller 7,298,118 67,599
The terms of the following directors continued after the annual meeting:
Raymond F. Agostinelli, Robert T. Gentry, Philip E. Gingerich, Sr., Merle
K. Evey, David B. Lee, D. Stephen Martz and James W. Powers, Sr.
Item 5. Other Information
Pursuant to recent amendments to the proxy rules under the Securities
Exchange Act of 1934, as amended, the Omega's shareholders are notified
that the deadline for providing the Company timely notice of any
shareholder proposal to be submitted for consideration at the Company's
1999 Annual Meeting of Shareholders will be March 15, 1999. As to all such
matters which the Company 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 the Company'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)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summaary financial information extracted from Omega
Financial Corporation's 2nd Quarter 1998 10Q and is qualified in its entirety by
reference to such 10Q.
</LEGEND>
<CIK> 0000705671
<NAME> OMEGA FINANCIAL CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 36,414
<INT-BEARING-DEPOSITS> 677
<FED-FUNDS-SOLD> 23,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 126,797
<INVESTMENTS-MARKET> 132,865
<LOANS> 697,229
<ALLOWANCE> 11,805
<TOTAL-ASSETS> 1,036,265
<DEPOSITS> 849,939
<SHORT-TERM> 19,317
<LIABILITIES-OTHER> 16,599
<LONG-TERM> 0
0
1,998
<COMMON> 148,412
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,036,265
<INTEREST-LOAN> 29,989
<INTEREST-INVEST> 7,034
<INTEREST-OTHER> 629
<INTEREST-TOTAL> 37,652
<INTEREST-DEPOSIT> 13,939
<INTEREST-EXPENSE> 14,381
<INTEREST-INCOME-NET> 23,471
<LOAN-LOSSES> 485
<SECURITIES-GAINS> 670
<EXPENSE-OTHER> 16,010
<INCOME-PRETAX> 12,048
<INCOME-PRE-EXTRAORDINARY> 12,048
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,361
<EPS-PRIMARY> .91
<EPS-DILUTED> .87
<YIELD-ACTUAL> 4.86
<LOANS-NON> 5,273
<LOANS-PAST> 1,587
<LOANS-TROUBLED> 165
<LOANS-PROBLEM> 7,025
<ALLOWANCE-OPEN> 11,793
<CHARGE-OFFS> 710
<RECOVERIES> 237
<ALLOWANCE-CLOSE> 11,805
<ALLOWANCE-DOMESTIC> 11,805
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
