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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, 1999
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 5, 1999:
Common Stock, $5.00 par value - 8,769,235 shares
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------ ------------
Cash and due from banks $ 40,596 $ 40,066
Interest bearing deposits with other banks 424 1,455
Federal funds sold 10,700 18,350
Commercial paper 4,961 -
Investment securities held to maturity
(Market value:
$4,954 and $117,954, respectively) 4,954 116,829
Investment securities available for sale 284,232 144,551
Total loans 696,652 723,485
Less: Unearned discount (353) (518)
Allowance for loan losses (11,812) (11,772)
------------ ------------
Net loans 684,487 711,195
Premises and equipment, net 14,887 16,816
Other assets 13,245 13,442
------------ ------------
TOTAL ASSETS $1,058,486 $1,062,704
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $122,232 $132,291
Interest bearing 735,207 738,369
------------ ------------
Total deposits 857,439 870,660
Short-term borrowings 27,381 17,638
Other liabilities 11,454 11,004
ESOP debt 3,669 3,837
Long-term debt 7,000 5,000
Other interest bearing liabilities 541 585
------------ ------------
TOTAL LIABILITIES 907,484 908,724
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 (2,689) (2,875)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares
Issued -
9,254,266 shares at September 30, 1999;
9,137,270 shares at December 31, 1998
Outstanding -
8,769,569 shares at September 30, 1999;
8,960,197 shares at December 31, 1998 46,271 45,686
Capital surplus 4,751 3,209
Retained earnings 111,644 104,285
Accumulated other comprehensive income 2,375 4,713
Cost of common stock in treasury
484,697 shares at September 30, 1999;
177,073 shares at December 31, 1998 (16,350) (6,038)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 151,002 153,980
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,058,486 $1,062,704
============ ============
<PAGE>
<TABLE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $14,359 $15,084 $44,291 $45,073
Interest and dividends on investment securities 3,739 3,553 10,639 10,587
Other interest income 511 220 1,191 849
---------- ---------- ---------- -----------
TOTAL INTEREST INCOME. 18,609 18,857 56,121 56,509
INTEREST EXPENSE:
Interest on deposits 6,608 7,015 19,656 20,954
Interest on short-term borrowings 298 204 771 633
Interest on long-term debt and
other interest bearing liabilities 107 5 249 18
---------- ---------- ---------- -----------
TOTAL INTEREST EXPENSE 7,013 7,224 20,676 21,605
---------- ---------- ---------- -----------
NET INTEREST INCOME 11,596 11,633 35,445 34,904
Provision for loan losses 265 332 870 817
---------- ---------- ---------- -----------
INCOME FROM CREDIT ACTIVITIES 11,331 11,301 34,575 34,087
OTHER INCOME:
Service fees 1,859 1,769 5,345 4,803
Trust fees 697 755 2,223 2,226
Gain (loss) on sale of loans and other assets (12) 191 1,499 288
Net gains on investment securities 156 260 260 930
---------- ---------- ---------- -----------
TOTAL OTHER INCOME 2,700 2,975 9,327 8,247
OTHER EXPENSE:
Salaries and employee benefits 4,656 4,556 13,904 13,494
Net occupancy expense 496 529 1,638 1,641
Equipment expense 564 517 1,624 1,549
Data processing service 380 375 1,151 1,172
Other 2,206 2,033 6,588 6,164
---------- ---------- ---------- -----------
TOTAL OTHER EXPENSE 8,302 8,010 24,905 24,020
---------- ---------- ---------- -----------
Income before taxes 5,729 6,266 18,997 18,314
Income tax expense 1,597 1,893 5,446 5,580
---------- ---------- ---------- -----------
NET INCOME $4,132 $4,373 $13,551 $12,734
========== ========== ========== ===========
NET INCOME PER COMMON SHARE:
Basic $0.46 $0.48 $1.50 $1.39
Diluted $0.44 $0.46 $1.44 $1.33
WEIGHTED AVERAGE SHARES AND EQUIVALENTS:
Basic 8,790,224 8,969,287 8,860,773 8,940,734
Diluted 9,268,325 9,485,694 9,340,578 9,478,371
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $13,551 $12,734
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,662 1,893
Provision for loan losses 870 817
Gain on sale of investment securities (104) (930)
Non-monetary exchange of cost-method investments (156) -
Loss (gain) on sale of fixed assets
and other property owned 6 (205)
Gain on sale of loans (94) (42)
Gain on sale of branch (1,410) -
Increase in deferred tax asset (326) (229)
Decrease (increase) in interest receivable and other assets 1,488 (254)
Decrease in interest payable (50) (356)
Decrease in taxes payable (459) (153)
Amortization of deferred net loan costs 250 161
Deferral of net loan fees (costs) (392) 418
Increase in accounts payable
and accrued expenses 910 670
---------- -----------
Total adjustments 2,195 1,790
---------- -----------
Net cash provided by operating activities 15,746 14,524
Cash flows from investing activities:
Proceeds from the sale or maturity of:
Interest bearing deposits with other banks 38,737 1,274
Investment securities available for sale 56,866 52,373
Investment securities held to maturity 10,486 31,220
Purchase of:
Interest bearing deposits with other banks (37,706) (1,238)
Commercial paper (4,855) -
Investment securities available for sale (97,579) (54,104)
Investment securities held to maturity (1,212) (35,056)
Proceeds from sale of branch 1,000 -
Increase in loans (9,675) (27,900)
Gross proceeds from sale of loans 22,814 999
Capital expenditures (877) (879)
Sale of fixed assets and other property owned 582 794
Decrease in federal funds sold 7,650 20,350
---------- -----------
Net cash used in investing activities (13,769) (12,167)
Cash flows from financing activities:
Increase in deposits, net 1,101 2,246
Increase in short-term borrowings, net 9,743 174
Issuance of long-term debt 2,000 -
Net change in other interest bearing liabilities (44) (40)
Dividends paid (6,358) (5,293)
Tax benefit from preferred stock dividend
and stock option activity 296 320
Issuance of common stock 2,127 1,554
Acquisition of treasury stock (10,312) -
---------- -----------
Net cash used in financing activities (1,447) (1,039)
---------- -----------
Net increase in cash and due from banks $530 $1,318
========== ===========
Cash and due from banks at beginning of period $40,066 $31,938
Cash and due from banks at end of period 40,596 33,256
========== ===========
Net increase in cash and due from banks $530 $1,318
========== ===========
Interest paid $20,726 $21,961
Income taxes paid 5,647 5,639
</TABLE>
<PAGE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
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, 1999 are not necessarily indicative of the results that may
be experienced for the year ending December 31, 1999 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, 1998.
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. 133 (SFAS 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.
SFAS 133 is effective for fiscal years beginning after June 15, 2000 with
earlier adoption permitted. Upon adoption, SFAS 133 also allows an
institution to perform a one-time reclassification of securities from the
held to maturity portfolio into the available for sale or trading
portfolios without calling into question the intent of the company to hold
the remaining securities in the held to maturity category to maturity.
Omega adopted SFAS 133 on April 1, 1999. At the date of adoption, Omega
transferred investment securities with a cost basis of $102,672,000 from
the held to maturity to the available for sale portfolio. As a result of
this transfer, Omega realized an increase in accumulated other
comprehensive income of $425,000, which is reflected as a cumulative effect
of a change in accounting principle. See Note D. There was no other impact
on the financial statements of Omega, as Omega does not hold any
instruments that meet the definition of a derivative under SFAS 133.
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, 1999 and
December 31, 1998 standby letters of credit issued and outstanding amounted
to $17,686,000 and $18,289,000, 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.
<PAGE>
At September 30, 1999, the Corporation had $141,176,000 outstanding in
unused lines of credit commitments extended to its customers. Of this
amount, $38,122,000, or 27.0%, are commitments to consumers for home equity
and other lines of credit. The remainder, $103,054,000, are commercial
commitments.
D. Comprehensive Income:
Components of other comprehensive income (loss) consist of the following:
<TABLE>
<CAPTION>
Nine Months ended September 30, 1999
Before Tax (Expense)
Tax or Net-of-Tax
Amount Benefit Amount
----------- ----------- -----------
<S> <C> <C> <C>
Net income $18,997 $5,446 $13,551
Other comprehensive income:
Unrealized gains on available for sale
securities:
Unrealized holding gains (losses) arising
during the period Cumulative effect of
change in accounting principle (4,251) 1,488 (2,763)
653 (228) 425
----------- ----------- -----------
Other comprehensive income (loss) (3,598) 1,260 (2,338)
----------- ----------- -----------
Total comprehensive income $15,399 $6,706 $11,213
=========== =========== ===========
</TABLE>
E. 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.
<PAGE>
<TABLE>
<CAPTION>
Computations of Earnings per Share
(In thousands, except per share amounts)
(Unaudited)
Nine Months Ended September Nine Months Ended September
30, 1999 30, 1998
-------------------------------- -----------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
-------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 13,551 $ 12,734
Less: Preferred stock
dividends (297) (297)
-------- --------
BASIC EPS
Income available to common
shareholders 13,254 8,861 $ 1.50 12,437 8,941 $ 1.39
====== ======
EFFECT OF DILUTIVE SECURITIES
Impact of:
Assumed conversion of
preferred to common stock 346 346
Assumed exercises of
outstanding options 134 191
Preferred stock dividends
available to common
shareholders 297 297
Elimination of tax benefit
of allocated preferred
dividends (44) (39)
Additional expense required
to fund ESOP debt, net of
tax impact (35) (62)
-------- --------
DILUTED EPS
Income available to common
shareholders plus
assumed conversions $13,472 9,341 $ 1.44 $ 12,633 9,478 $ 1.33
======== ====== ====== ======== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September Three Months Ended September
30, 1999 30, 1998
------------------------------- ------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 4,132 $ 4,373
Less: Preferred stock
dividends (99) (99)
------- -------
BASIC EPS
Income available to common
shareholders 4,033 8,790 $ 0.46 4,274 8,969 $ 0.48
====== ======
EFFECT OF DILUTIVE SECURITIES
Impact of :
Assumed conversion of
preferred to common stock 346 346
Assumed exercises of
outstanding options 132 170
Preferred stock dividends
available to common
shareholders 99 99
Elimination of tax benefit
of allocated preferred
dividends (15) (13)
Additional expense required
to fund ESOP debt, net of
tax impact (10) (19)
------- ------
DILUTED EPS
Income available to common
shareholders plus
assumed conversions $ 4,107 9,268 $ 0.44 $ 4,341 9,485 $ 0.46
======= ===== ====== ======= ===== ======
</TABLE>
<PAGE>
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, 1998. 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 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 or as to trends or management's beliefs,
expectations or opinions and other statements other than historical
facts. 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, Omega's 1998
Annual Report or Omega's Annual Report on Form 10-K for the year ended
December 31, 1998. 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, 1999 and 1998
Operations Overview
-------------------
A. Nine months ended September 1999 and 1998
For the first nine months of 1999, income before taxes increased by
$683,000, or 3.7%, compared to the same period in 1998. Income from
credit activities increased $488,000, or 1.4%. Non-interest income
increased $1,080,000 or 13.1% while non-interest expense increased
$885,000, or 3.7%. Key events that occurred during the first nine months
of 1999 and 1998 are:
o The sale of a branch office in June 1999 with a pre-tax gain of
$1,410,000.
o The sale of a block of mortgage loans in June 1999 with a
pre-tax gain of $106,000.
o The collection of $430,000 of interest on a long-time non-accrual
loan in January 1999.
o The gains from securities transactions in 1998 exceeded
those in 1999 by $670,000.
Detailed analysis of these changes are included in the discussion
following.
The tax provision for the first nine months of 1999 decreased by
$134,000, or 2.4% when compared to the first nine months of 1998. The
effective tax rate fell to 28.7% in 1999 from 30.5% in 1998, as a result
of an increase in tax-exempt income due to higher levels of of
tax-exempt investments in 1999 than in 1998. Net income increased by
$817,000, or 6.4%, in the first nine months of 1999 as compared to the
same period in 1998.
<PAGE>
B. Three months ended September 30, 1999 and 1998
The third quarter's income before income taxes decreased $537,000, or
8.6%, when compared to the same period in 1998. Non-interest income
decreased $275,000, or 9.2%, income from credit activities increased by
$30,000, or 0.3%, and non-interest expense increased by $292,000, or
3.6%.
After the income tax provision (which decreased by $296,000, or 15.6%
compared to the same period in 1998) was deducted from earnings, net
income was $241,000 or 5.5% lower than the third quarter of 1998. The
effective tax rate for the third quarter of 1999 was 27.9%, as compared
to the third quarter of 1998 of 30.2%.
Following are selected key ratios for the period:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Return on average assets
(annualized) ....................... 1.55% 1.69% 1.70% 1.66%
Return on average equity
(annualized) ....................... 10.82 11.44 11.73 11.39
Dividend payout ratio (common)....... 50.96 41.02 45.68 40.79
Average equity to average assets..... 14.29 14.81 14.48 14.58
</TABLE>
Net Interest Income
-------------------
A. Nine months ended September 30, 1999 and 1998
Omega's net interest income for the first nine months of 1999 improved
by $541,000, or 1.5%. Of the $541,000 increase, $430,000 was attributed
to the collection of previously unaccrued interest on a large loan.
Average earning assets grew by $44,404,000 since September 1998. The
4.6% increase in average earning assets resulted primarily from growth
in both the real estate and commercial loan portfolios, as well as
tax-exempt investments. This was partially offset by a decline in the
personal loan average outstanding balances. In total, average
outstanding loans have increased by $12,876,000 and investments by
$19,653,000. Average deposits increased by $23,457,000, or 2.8%, in 1999
as compared to the previous year. Total cost to fund earning assets was
2.74% in 1999, compared to 3.00% in 1998, while earning assets yielded
7.44% in 1999 compared to 7.83% in 1998, resulting in a 13 basis point
decrease in net interest margin. On a fully tax-equivalent basis, the
net interest margin decreased by only 8 basis points, as average
tax-exempt assets increased by $30,326,000, or 41.6%.
B. Three months ended September 30, 1999 and 1998
The net interest margin, at 4.57% for the third quarter of 1999, was 21
basis points lower than the third quarter of 1998, with a $42,451,000 or
4.4% increase in average earning assets resulting in a 0.3% decrease in
net interest income. Yield on earning assets in the third quarter of
1999 declined by 42 basis points when compared to 1998's third quarter,
while cost of funding dropped by only 21 basis points.
Following are key net interest margin ratios (annualized):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- --------------------
1999 1998 1999 1998
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Yield on average earning assets.. 7.31% 7.73% 7.44% 7.83%
Cost to fund earning assets...... 2.74 2.95 2.74 3.00
Net interest margin.............. 4.57 4.78 4.70 4.83
Net interest margin -- tax
equivalent ..................... 4.82 5.00 4.95 5.03
</TABLE>
At September 30, 1999, Omega had $371,939,000 of earning assets
scheduled to reprice over the next twelve months as compared to
$456,547,000 in interest bearing liabilities, resulting in a negative
gap of $84,608,000, or 8.0% of assets. In order to predict net interest
income at risk over the next twelve months
<PAGE>
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 0.7%, or $334,000.
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 $340,000, or 0.8% 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, 1999 and 1998
Other income increased $1,080,000, or 13.1% in the first nine months of
1999 as compared to the same period in 1998. Excluding gains resulting
from sales of investment securities and other assets, normal operating
non-interest income rose by $539,000, or 7.7%. This represents increases
in service fees, primarily on deposits and loans, while trust fees were
level with last year. The gains resulting from the sale of a branch
office and a block of mortgage loans were responsible for the increase
in gains on the sale of loans and other assets in 1999 as compared to
1998. In 1999, the branch sale resulted in gains of $1,410,000 while the
sale of loans added $94,000. In 1998, gain on sale of the credit card
portfolio was $38,000, while gains from the transfer of servicing rights
on government funded loans added $149,000. Investment security gains in
1998 exceeded those in 1999 by $670,000, or 72.0%, offsetting part of
the effect of the large gains from the sale of the branch office and
mortgage loans.
As a percentage of average assets, annualized other income net of
security gains and losses was 1.14% for the first nine months of 1999 as
compared to .95% in 1998. Exclusive of the gains resulting from the sale
of the branch office, this ratio would have been .96% in 1999.
Other expenses were $885,000, or 3.7% higher for the first nine months
of 1999 than for the same period in 1998. Salaries and employee benefits
were $410,000, or 3.0% higher in 1999 than in 1998. Occupancy and
equipment expenses have increased by $72,000, or 2.3% . Other expense
increased by $403,000, or 5.5% in the first nine months of 1999 as
compared to 1998. This is due primarily to increased expense for
customer MAC transactions and higher Pennsylvania tax liabilities.
As a percentage of average assets, annualized expenses for the period
ended September 30, 1999 were 3.12% and were 3.13% for the same period
in 1998.
B. Three months ended September 30, 1999 and 1998
Other income decreased $275,000, or 9.2% in the third quarter of 1999 as
compared to the same period in 1998. While service fee income increased
by $90,000, or 5.1%, trust fees were $58,000 or 7.7% lower in the third
quarter of 1999 as compared to the same period in 1998. Gains on loans
and other assets were $203,000 lower in 1999 than in 1998. During the
third quarter of 1998 servicing rights for certain government-funded
loans were transferred by Omega, resulting in most of these recorded
gains. Additionally, in the third quarter of 1998, gains from the sale
of investment securities was $104,000, or 40% higher than during the
same timeframe in 1999.
As a percentage of average assets, annualized other income net of
security gains and losses was .95% for the third quarter of 1999 as
compared to 1.05 % in 1998.
Other expenses were $292,000, or 3.6% higher for the third quarter of
1999 than for the same period in 1998. Salaries and employee benefits
were $100,000, or 2.2% higher in 1999 than in 1998. A decrease in
occupancy expense has generally offset the increase in equipment
expense, while data processing expense remained flat. Other non-interest
expenses have increased by 8.5%.
As a percentage of average assets, annualized expenses for the quarter
ended September 30, 1999 were 3.11% and were 3.10% for the same period
in 1998.
<PAGE>
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, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
September 30, 1999 Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
Govern ment agencies and
corporations $126,228 $86 ($509) $125,805
Obligations of state and
political subdivisions 82,766 211 (741) 82,236
Corporate securities 48,921 128 (247) 48,802
Mortgage backed securities 15,360 39 (36) 15,363
Equity securities 7,316 4,827 (117) 12,026
-------- ------ ------- --------
Total $280,591 $5,291 ($1,650) $284,232
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Securities Classified as Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
September 30, 1999 Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Investment in low-income
housing $ 595 -- -- $ 595
Equity securities (non-
marketable) 4,359 -- -- 4,359
-------- ------ ------- -------
Total $4,954 $-- $-- $4,954
======== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1998 Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations $58,207 $294 ($16) $58,485
Obligations of state and
political subdivisions 73,331 1,233 (51) 74,513
Equity securities 5,773 5,812 (32) 11,553
-------- ------ ------- -------
Total $137,311 $7,339 ($99) $144,551
======== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Securities Classified as Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1998 Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations $ 26,491 $ 284 ($10) $ 26,765
Obligations of state and
political subdivisions 4,984 178 -- 5,162
Corporate securities 53,051 528 (19) 53,560
Mortgage backed securities 27,554 175 (11) 27,718
Investment in low-income housing 541 -- -- 541
Equity securities (non-marketable) 4,208 -- -- 4,208
-------- ------ ------- --------
Total $116,829 $1,165 ($40) $117,954
======== ====== ======= ========
</TABLE>
<PAGE>
Pursuant to the adoption of SFAS 133, Omega reclassified certain held to
maturity securities to available for sale on April 1, 1999.
Total investment securities as a percentage of total assets at September
30, 1999 and December 31, 1998 were 27.3% and 24.6%, respectively.
Securities maturing or repricing in one year or less comprised 32.3% of
the total investment securities of $289,186,000 as of September 30,
1999, as compared to 29.3% of total investment securities of
$261,380,000 as of December 31, 1998. There was $215,000 in investments
in instruments of foreign countries on September 30, 1999.
3. Interest Bearing Deposits with Other Financial Institutions
As of September 30, 1999, Omega had $424,000 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, 1999
consolidated balance sheet.
4. Loans
Net loans in the first nine months of 1999 decreased by $26,708,000, or
3.8% from the balance at December 31, 1998, bringing the total to
$684,487,000 at September 30, 1999. The decrease in loan balances was
due to the sale, late in the second quarter of 1999, of $34,152,000 in
loans, of which $12,935,000 was part of the branch sale. Exclusive of
these sales, loans grew by $7,444,000, or 1.0%.
Changes in the allowance for loan losses for the nine months ended
September 30, 1999 and 1998 were as follows (in thousands):
1999 1998
----------- -----------
Balance at January 1.................... $11,772 $11,793
Charge-offs............................. (933) (854)
Recoveries.............................. 103 267
------- -------
Net charge-offs..................... (830) (587)
Provision for loan losses............... 870 817
------- -------
Balance at September 30................. $11,812 $12,023
======= =======
The allowance for loan losses is considered adequate by management to
cover probable losses on 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, 1999 and 1998 represented 1.70% and 1.68%, 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, 1999 as compared to December 31, 1998.
<TABLE>
<CAPTION>
Non-performing Loans
-----------------------------
(In thousands)
September 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Non-accrual loans............................. $2,514 $5,627
Accruing loans past due 90 days or more....... 719 682
Restructured loans............................ 326 213
------ ------
Total non-performing loans.................... $3,559 $6,522
====== ======
Non-performing loans as percent of allowance.. 30.13% 55.40%
</TABLE>
<PAGE>
The decrease in non-performing loans from December 31, 1998 to September
30, 1999 is primarily due to the full payoff of one large commercial
loan, eliminating it from the non-accrual category, and the charge-off
of another non-accrual loan.
5. Deposits and Other Sources of Funds
Deposits provide the primary source of funding for loans and investment
securities. As September 30, 1999, total deposits decreased by
$13,221,000 or 1.5%, as compared to December 31, 1998. The June 4, 1999
branch office sale resulted in a reduction of $14,322,000 in deposits.
Exclusive of this sale, deposits grew by $1,101,000 or 0.1%.
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>
MINIMUM REQUIREMENT MINIMUM REGULATORY
FOR CAPITAL REQUIREMENTS TO BE
ACTUAL ADEQUACY PURPOSES "WELL CAPITALIZED"
------------------------ ------------------------ ------------------------
OMEGA FINANCIAL CORPORATION AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Total Capital $156,753 22.8% $54,991 8.0% $68,739 10.0%
(to Risk Weighted Assets)
Tier I Capital 148,117 21.5% 27,495 4.0% 41,243 6.0%
(to Risk Weighted Assets)
Tier I Capital 148,117 13.9% 42,523 4.0% 53,154 5.0%
(to Average Assets)
As of December 31, 1998:
Total Capital $158,160 22.1% $57,334 8.0% $71,668 10.0%
(to Risk Weighted Assets)
Tier I Capital 149,162 20.8% 28,667 4.0% 43,001 6.0%
(to Risk Weighted Assets)
Tier I Capital 149,162 14.5% 41,067 4.0% 51,334 5.0%
(to Average Assets)
OMEGA BANK
As of September 30, 1999:
Total Capital $83,808 22.0% $30,468 8.0% $38,084 10.0%
(to Risk Weighted Assets)
Tier I Capital 79,039 20.8% 15,234 4.0% 22,851 6.0%
(to Risk Weighted Assets)
Tier I Capital 79,039 13.4% 23,566 4.0% 29,458 5.0%
(to Average Assets)
As of December 31, 1998:
Total Capital $80,438 19.9% $32,333 8.0% $40,416 10.0%
(to Risk Weighted Assets)
Tier I Capital 75,385 18.7% 16,166 4.0% 24,250 6.0%
(to Risk Weighted Assets)
Tier I Capital 75,385 13.2% 22,798 4.0% 28,498 5.0%
(to Average Assets)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MINIMUM REQUIREMENT MINIMUM REGULATORY
FOR CAPITAL REQUIREMENTS TO BE
ACTUAL ADEQUACY PURPOSES "WELL CAPITALIZED"
------------------------ ------------------------ ------------------------
OMEGA FINANCIAL CORPORATION AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
HOLLIDAYSBURG TRUST COMPANY
As of September 30, 1999:
Total Capital $34,118 19.0% $14,366 8.0% $17,958 10.0%
(to Risk Weighted Assets)
Tier I Capital 34,118 19.0% 7,183 4.0% 10,775 6.0%
(to Risk Weighted Assets)
Tier I Capital 34,118 12.7% 10,761 4.0% 13,451 5.0%
(to Average Assets)
As of December 31, 1998:
Total Capital $34,168 18.9% $14,478 8.0% $18,098 10.0%
(to Risk Weighted Assets)
Tier I Capital 31,893 17.6% 7,239 4.0% 10,859 6.0%
(to Risk Weighted Assets)
Tier I Capital 31,893 12.5% 10,206 4.0% 12,757 5.0%
(to Average Assets)
PENN CENTRAL NATIONAL BANK
As of September 30, 1999:
Total Capital $25,378 23.5% $8,632 8.0% $10,790 10.0%
(to Risk Weighted Assets)
Tier I Capital 24,010 22.3% 4,316 4.0% 6,474 6.0%
(to Risk Weighted Assets)
Tier I Capital 24,010 13.1% 7,345 4.0% 9,182 5.0%
(to Average Assets)
As of December 31, 1998:
Total Capital $25,169 22.8% $8,837 8.0% $11,046 10.0%
(to Risk Weighted Assets)
Tier I Capital 23,764 21.5% 4,418 4.0% 6,628 6.0%
(to Risk Weighted Assets)
Tier I Capital 23,764 13.0% 7,297 4.0% 9,121 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, 1999, 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. Share Repurchase Program
During the first quarter of 1999, Omega announced a board-approved share
repurchase program. Omega is authorized to buy back up to 5% of its
common stock over a twelve-month period. The program may be discontinued
at any time. On February 22, 1999, when the repurchase program was
initiated, there were 8,959,319 common shares outstanding, with 447,966
shares eligible to be repurchased through this program. As of September
30, 1999, 296,008 shares had been repurchased under this program,
representing 66% of the approved level.
8. Year 2000 Compliance
The Year 2000 (Y2K) 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. 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.
<PAGE>
In 1997, a committee was formed to:
1. Identify all of the date-dependent systems at Omega that could be
impacted by the Y2K issue. In addition, the committee was charged
with analyzing the impact of the Y2K issue on key customers and
vendors
2. Test all internal information systems and obtain certifications
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.
5. Formulate a contingency plan for unexpected failures.
The committee is comprised of executive officers and operations
personnel from all major divisions of Omega. 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 Omega's regulators). As of September 30, 1999 all critical PC
software has been tested.
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 was identified as
not being Y2K compliant. As of September 30, 1999 this piece of hardware
has been replaced. The new hardware is being tested to ensure it will
not be affected by any Y2K issues.
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 addressing their Y2K issues, and in most
cases, had their testing completed by December 31, 1998. Omega's testing
with all critical outside vendors is substantially complete.
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 Omega's operation. The provider has
successfully completed all testing of its internally developed software
along with any systems which have been partnered with other third party
vendors. Since 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 continue to issue quarterly reports to the clients through the end
of 1999. To date, this independent firm has reported that the service
providers' Y2K process is well organized and properly managed. With
regard to the most critical testing phase, the audit firm gave the
service provider high marks.
Omega has also taken steps to ensure that internal hardware is Y2K
compliant. As of March 31, 1999, all PCs had been tested, with 298 or
61% passing all Y2K tests, 175 or 36% requiring a manual date change on
January 1, 2000, and 16 or 3% failing at least one test. All failed PCs
are being systematically upgraded or replaced first in Omega's ongoing
PC upgrade process in 1999. All other IT hardware (check sorters and
printers) have been tested in conjunction with various software or items
processing testing and have proven to function while using dates into
the Year 2000.
Non-IT systems that are micro-chip driven are also used throughout
Omega. 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. The control system for
the HVAC system at the Administration Center has been tested and found
to be compliant and steps have been taken to install a system of manual
controls as a contingency. Proof machines (equipment that encodes all
documents to prepare for processing) have already been upgraded for Y2K
compliance.
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 were
contacted, reviewed, and rated as to
<PAGE>
credit risk. As of September 30, 1999, 85% of the credit relationships
reviewed were deemed to be low risk, as these borrowers are aware of
the potential problems with Y2K and are taking steps to analyze and
correct any deficiencies. The remaining 15% 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 September 1998, all new business loan applicants
have been asked to demonstrate Y2K compliance as a requirement for
loan approval.
Portions of Omega'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). Omega's plan included a provision that if by September 30, 1999,
the analysis did not indicate that the issuer of a security had properly
addressed the Y2K issue and the investment is determined to be at risk,
then if it is available for sale, the security may be sold, leaving the
investment portfolio with little or no investment risk. As of September
30, 1999, there are just three municipal issuers held in the investment
portfolio that have not responded to our questions concerning their Y2K
readiness. If their status can still not be determined by November 30,
1999, those securities may be sold to reduce risk. Otherwise, based upon
Omega's research, the remainder of the investment portfolio appears to
have a low level of risk.
Costs to address Omega's Y2K issues are being expensed as incurred and
have been insignificant through September 30, 1999. The current
projections of total costs to complete the Y2K remediation are estimated
to be approximately $750,000. Included in this estimate is the amount of
$175,000, which has been capitalized for replacement of major hardware.
Through September 30, 1999, we have expensed an additional $457,000 and
anticipate very little additional expense other than employee expenses
associated with the final transition into the year 2000. The source of
these funds, as with all previous Y2K expenditures 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.
Omega has developed business resumption contingency plans in preparation
for dealing with any critical issues, which fail in spite of all
testing. These plans were substantially complete by the end of the
second quarter of 1999 and are in the process of being validated and
refined. As we proceed through the fourth quarter of 1999, these
contingency plans will be modified to ensure that Omega is prepared for
all possible failures.
<PAGE>
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 1998 Annual Report to Shareholders. There have been no
material changes in the market risks that impact Omega or their
procedures relative to these risks, since December 31, 1998.
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
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule
<PAGE>
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: /s/ DAVID B. LEE
- ----------------------------------- --------------------------------------
Date David B. Lee
Chairman and
Chief Executive Officer
By: /s/ JOANN N. MCMINN
- ----------------------------------- --------------------------------------
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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 40,596
<INT-BEARING-DEPOSITS> 424
<FED-FUNDS-SOLD> 10,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 4,954
<INVESTMENTS-MARKET> 284,232
<LOANS> 696,299
<ALLOWANCE> 11,812
<TOTAL-ASSETS> 1,058,486
<DEPOSITS> 857,439
<SHORT-TERM> 27,381
<LIABILITIES-OTHER> 15,664
<LONG-TERM> 7,000
<COMMON> 148,691
0
2,311
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,058,486
<INTEREST-LOAN> 44,291
<INTEREST-INVEST> 10,639
<INTEREST-OTHER> 1,191
<INTEREST-TOTAL> 56,121
<INTEREST-DEPOSIT> 19,656
<INTEREST-EXPENSE> 20,676
<INTEREST-INCOME-NET> 35,445
<LOAN-LOSSES> 870
<SECURITIES-GAINS> 260
<EXPENSE-OTHER> 24,905
<INCOME-PRETAX> 18,997
<INCOME-PRE-EXTRAORDINARY> 13,551
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,551
<EPS-BASIC> 1.50
<EPS-DILUTED> 1.44
<YIELD-ACTUAL> 4.57
<LOANS-NON> 2,514
<LOANS-PAST> 719
<LOANS-TROUBLED> 326
<LOANS-PROBLEM> 3,559
<ALLOWANCE-OPEN> 11,772
<CHARGE-OFFS> 933
<RECOVERIES> 103
<ALLOWANCE-CLOSE> 11,812
<ALLOWANCE-DOMESTIC> 11,812
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
