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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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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 March 31, 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
incorporation of organization) Identification No.)
366 WALKER DRIVE
STATE COLLEGE, PENNSYLVANIA 16801
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(814) 231-7680
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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 May 13, 1999:
----------------------------------------------------------------------
Common Stock, $5.00 par value -- 8,836,317 shares
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
1999 1998
---------- ------------
ASSETS
Cash and due from banks ............................. $ 29,414 $ 40,066
Interest bearing deposits with other banks .......... 11,608 1,455
Federal funds sold .................................. 25,900 18,350
Investment securities held to maturity (Market value:
$108,070 and $117,954, respectively) ............. 107,418 116,829
Investment securities available for sale ............ 144,586 144,551
Total loans ......................................... 733,653 723,485
Less: Unearned discount ........................... (471) (518)
Allowance for loan losses ............... (11,899) (11,772)
---------- ----------
Net loans ........................................... 721,283 711,195
Premises and equipment, net ......................... 16,594 16,816
Other assets ........................................ 12,260 13,442
========== ==========
TOTAL ASSETS ........................................ $1,069,063 $1,062,704
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing .............................. $ 124,822 $ 132,291
Interest bearing .................................. 740,192 738,369
---------- ----------
Total deposits ...................................... 865,014 870,660
Short-term borrowings ............................... 29,912 17,638
Other liabilities ................................... 11,884 11,004
ESOP debt ........................................... 3,782 3,837
Long-term debt ...................................... 5,000 5,000
Other interest bearing liabilities .................. 532 585
---------- ----------
TOTAL LIABILITIES ................................... 916,124 908,724
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 .......... (2,814) (2,875)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares
Issued --
9,185,998 shares at March 31, 1999;
9,137,270 shares at December 31, 1998
Outstanding --
8,876,089 shares at March 31, 1999;
8,960,197 shares at December 31, 1998 ........... 45,930 45,686
Capital surplus ..................................... 3,995 3,209
Retained earnings ................................... 106,716 104,285
Accumulated other comprehensive income .............. 4,431 4,713
Cost of common stock in treasury
309,909 shares at March 31, 1999;
177,073 shares at December 31, 1998 ............. (10,319) (6,038)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY .......................... 152,939 153,980
========== ==========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $1,069,063 $1,062,704
========== ==========
<PAGE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Three Months Ended
March 31,
-----------------------
1999 1998
---------- ----------
INTEREST INCOME:
Interest and fees on loans ........................... $ 15,348 $ 14,928
Interest and dividends on investment securities ...... 3,453 3,410
Other interest income ................................ 205 357
---------- ----------
TOTAL INTEREST INCOME ................................ 19,006 18,695
INTEREST EXPENSE:
Interest on deposits ................................. 6,487 6,964
Interest on short-term borrowings .................... 188 140
Interest on long-term debt and
other interest bearing liabilities ................. 70 80
---------- ----------
TOTAL INTEREST EXPENSE ............................... 6,745 7,184
---------- ----------
NET INTEREST INCOME .................................. 12,261 11,511
Provision for loan losses ............................ 265 242
---------- ----------
INCOME FROM CREDIT ACTIVITIES ........................ 11,996 11,269
OTHER INCOME:
Service fees ......................................... 1,658 1,479
Trust fees ........................................... 759 753
Gain on sale of loans and other assets ............... 2 61
Gains on investment securities available for sale, net 201 289
---------- ----------
TOTAL OTHER INCOME ................................... 2,620 2,582
OTHER EXPENSE:
Salaries and employee benefits ....................... 4,614 4,425
Net occupancy expense ................................ 587 573
Equipment expense .................................... 514 511
Data processing service .............................. 381 402
Other ................................................ 2,161 2,046
---------- ----------
TOTAL OTHER EXPENSE .................................. 8,257 7,957
---------- ----------
Income before taxes .................................. 6,359 5,894
Income tax expense ................................... 1,880 1,784
---------- ----------
NET INCOME ........................................... $ 4,479 $ 4,110
========== ==========
NET INCOME PER COMMON SHARE:
Basic ............................................. $ .49 $ .45
Diluted ........................................... $ .47 $ .43
WEIGHTED AVERAGE SHARES AND EQUIVALENTS:
Basic ............................................. 8,953,772 8,902,114
Diluted ........................................... 9,445,046 9,455,354
<PAGE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
---------------------
1999 1998
-------- ---------
Cash flows from operating activities:
Net income ........................................... $ 4,479 $ 4,110
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ...................... 613 614
Provision for loan losses .......................... 265 242
Gain on sale of investment securities .............. (201) (289)
Gain on sale of fixed assets
and other property owned ........................ (11) (25)
Loss (gain) on sale of loans ....................... 9 (37)
Increase in deferred tax asset ..................... (437) (153)
Decrease (increase) in interest receivable
and other assets ................................. 1,719 (787)
Decrease in interest payable ....................... (132) (127)
Increase in taxes payable .......................... 1,992 1,630
Amortization of deferred net loan costs ............ 202 164
Deferral of net loan (costs) fees .................. (106) 99
(Decrease) increase in accounts payable
and accrued expenses ............................ (981) 389
-------- --------
Total adjustments ................................ 2,932 1,720
-------- --------
Net cash provided by operating activities .............. 7,411 5,830
Cash flows from investing activities:
Proceeds from the sale or maturity of:
Interest bearing deposits with other banks ......... 2,875 135
Investment securities available for sale .......... 12,715 24,079
Investment securities held to maturity ............ 10,512 13,234
Purchase of:
Interest bearing deposits with other banks ......... (13,028) (334)
Investment securities available for sale ........... (13,096) (18,294)
Investment securities held to maturity ............. (1,113) (21,751)
(Increase) decrease in loans ........................ (11,540) 585
Gross proceeds from sale of loans .................... 1,082 370
Capital expenditures ................................. (311) (263)
Sale of fixed assets and other property owned ........ 115 400
(Increase) decrease in federal funds sold ............ (7,550) 700
-------- --------
Net cash used in investing activities .................. (19,339) (1,139)
Cash flows from financing activities:
Decrease in deposits, net ............................ (5,646) (3,099)
Increase in short-term borrowings, net ............... 12,274 1,692
Net change in other interest bearing liabilities ..... (53) (49)
Dividends paid ....................................... (2,068) (1,695)
Tax benefit from preferred stock dividend
and stock option activity ......................... 20 21
Issuance of common stock ............................. 1,030 1,141
Acquisition of treasury stock ........................ (4,281) --
-------- --------
Net cash provided by (used in) financing activities .... 1,276 (1,989)
======== ========
Net (decrease) increase in cash and due from banks ..... $(10,652) $ 2,702
======== ========
Cash and due from banks at beginning of period ......... $ 40,066 $ 31,938
Cash and due from banks at end of period ............... 29,414 34,640
======== ========
Net (decrease) increase in cash and due from banks ..... $(10,652) $ 2,702
======== ========
Interest paid .......................................... $ 6,877 $ 7,311
Income taxes paid ...................................... 298 175
<PAGE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 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 three months ended March 31, 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. SFAS 133 also 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.
Omega plans to adopt this statement during the second quarter of 1999 and
expects no material impact on its financial statements upon adoption.
C. COMMITMENTS AND CONTINGENT LIABILITIES:
In the ordinary course of business, Omega and its subsidiaries make
commitments to extend credit to their customers. At March 31, 1999 and
December 31, 1998 standby letters of credit issued and outstanding amounted
to $19,258,000 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.
At March 31, 1999, the Corporation had $129,143,000 outstanding in unused
lines of credit commitments extended to its customers. Of this amount,
$37,843,000, or 29.3%, are commitments to consumers for home equity and
other lines of credit. The remainder, $91,300,000, 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
<PAGE>
shares outstanding are adjusted to assume the conversion of all potentially
dilutive securities into common stock.
<TABLE>
COMPUTATIONS OF EARNINGS PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Quarter Ended March 31, 1999 Quarter Ended March 31, 1998
----------------------------------- ----------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income .............................. $4,479 $4,110
Less: Preferred stock dividends ......... (99) (99)
------ ------
BASIC EPS
Income available to common
shareholders .......................... 4,380 8,954 $0.49 4,011 8,902 $0.45
===== =====
EFFECT OF DILUTIVE SECURITIES
Impact of :
Assumed conversion of preferred
to common stock ..................... 346 346
Assumed exercises of outstanding
options ............................. 145 207
----- -----
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 ..... (15) (24)
------- ------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions ........................... $4,449 9,445 $0.47 $4,073 9,455 $0.43
====== ===== ===== ======= ===== =====
</TABLE>
E. PENDING TRANSACTIONS:
In March 1999 Omega entered into an agreement to sell the fixed assets,
along with substantially all the loans and deposits of its Danville branch
to an unrelated third party. The carrying value of these loans and deposits
at March 31, 1999 is $14,845,000 and $14,661,000 respectively. The sale is
to be settled during the second quarter of 1999.
<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 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 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, the
Corporation's 1998 Annual Report or in 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 Three Months Ended March 31, 1999 and 1998
OPERATIONS
Three months ended March 31, 1999 and 1998
The first quarter's income before income taxes increased $465,000, or 7.9%,
when compared to the same period in 1998. A $430,000 payment of interest on
a large non-accrual loan in January 1999 was primarily responsible for the
increase. This was part of the settlement and total satisfaction of a loan
that had been in non-accrual status since April 1997. Service fee income
increased by $179,000, or 12.1%, offset by decreases in securities gains
and higher personnel costs.
After the income tax provision (which increased by $96,000, or 5.4%
compared to the same period in 1998) was deducted from earnings, net income
improved $369,000, or 9.0%, over the first quarter of 1998. The effective
tax rate for the first quarter of 1999 was 29.6%, compared to 30.3% in the
first quarter of 1998.
Following are selected key ratios for the period:
Three Months Ended
March 31,
-------------------
1999 1998
------ ------
Return on average assets (annualized)............... 1.71% 1.63%
Return on average equity (annualized)............... 11.50 11.35
Dividend payout ratio (common)...................... 43.96 39.10
Average equity to average assets.................... 14.83 14.34
<PAGE>
NET INTEREST INCOME
Three months ended March 31, 1999 and 1998
The net interest margin, at 4.94% for the first quarter of 1999, was 9
basis points higher than the first quarter of 1998, with a $41,344,000 or
4.3% increase in average earning assets resulting in a 6.5% increase in net
interest income. Of the 9 basis point increase in net interest margin, 4
basis points is attributed to the $430,000 collection of previously
unaccrued interest as discussed in the previous secion.
Following are key net interest margin ratios (annualized):
Three Months Ended
March 31,
--------------------
1999 1998
---- -----
Yield on average earning assets......... 7.69% 7.91%
Cost to fund earning assets............. 2.75 3.06
Net interest margin..................... 4.94 4.85
Net interest margin -- tax equivalent... 5.19 5.03
At March 31, 1999, Omega had $387,131,000 of earning assets scheduled to
reprice over the next twelve months as compared to $443,795,000 in interest
bearing liabilities, resulting in a negative gap of $56,664,000, or 5.4% of
total 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 1.5%, or $694,000. 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 $702,000, or 1.5% over a twelve-month period. These
simulations assume no volume or mix changes in the balance sheet.
OTHER INCOME AND EXPENSE
Three months ended March 31, 1999 and 1998
Total other income increased $38,000, or 1.5% in the first quarter of 1999
as compared to the same period in 1998. Excluding gains on sales of assets
which was $147,000 less in the first quarter of 1999 than in the first
quarter of 1998, other income increased by $185,000, or 8.3%. Trust fees
remained flat while service fee income grew $179,000, or 12.1%. New fee
structures on deposits and ATMs were put into place during 1998 which are
driving the improvement in service fees.
As a percentage of average assets, annualized other income net of security
gains and losses was .92% for the first quarter of 1999 as compared to .91%
in 1998.
Other expenses were $300,000, or 3.8% higher for the first quarter of 1999
than for the same period in 1998. Salaries and employee benefits were
$189,000, or 4.3% higher in 1999 than in 1998. All other expenses increased
by a total of $111,000, or 3.1%.
As a percentage of average assets, annualized expenses for the quarters
ended March 31, 1999 and 1998 were 3.15%.
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 March 31, 1999
and December 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
Securities Classified as Available for Sale
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 1999 Cost Gains Losses Value
- -------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations ..................... $ 55,802 $ 172 $ (75) $ 55,899
Obligations of state and
political subdivisions ........................ 75,838 1,069 (58) 76,849
Equity securities ................................. 6,141 5,851 (154) 11,838
-------- -------- -------- --------
Total ............................................. $137,781 $ 7,092 $ (287) $144,586
======== ======== ======== ========
<CAPTION>
Securities Classified as Held to Maturity
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 1999 Cost Gains Losses Value
- -------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations ..................... $ 25,485 $ 182 $ (17) $ 25,650
Obligations of state and
political subdivisions ........................ 4,982 97 -- 5,079
Corporate securities .............................. 50,747 355 (108) 50,994
Mortgage backed securities ........................ 21,458 157 (14) 21,601
Investment in low-income housing .................. 538 -- -- 538
Equity securities (non-marketable) ................ 4,208 -- -- 4,208
-------- -------- -------- --------
Total ............................................. $107,418 $ 791 $ (139) $108,070
======== ======== ======== --------
<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
======== ======== ======== --------
<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>
Total investment securities as a percentage of total assets at March 31,
1999 and December 31, 1998 were 23.6% and 24.6%, respectively. Securities
maturing or repricing in one year or less comprised 32.6% of the total
investment securities of $252,004,000 as of March 31, 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 March 31, 1999.
3. Interest Bearing Deposits with Other Financial Institutions
As of March 31, 1999, Omega had $11,608,000 in interest bearing deposits
with other financial institutions. 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 March 31, 1999 Consolidated Balance
Sheet.
4. Loans
Net loans in the first three months of 1999 increased by $10,088,000, or
1.4% from the balance at December 31, 1998, bringing the total to
$721,283,000 at March 31, 1999. The commercial loan portfolio has been
responsible for the increase, while consumer loans outstanding have
declined.
Changes in the allowance for loan losses for the three months ended March
31, 1999 and 1998 were as follows (in thousands):
1999 1998
------- -------
Balance at January 1 ....................... $11,772 $11,793
Charge-offs ................................ (174) (232)
Recoveries ................................. 36 175
------- -------
Net charge-offs ........................ (138) (57)
Provision for loan losses .................. 265 242
------- -------
Balance at March 31 ........................ $11,899 $11,978
======= =======
Management believes that the allowance for loan losses is adequate, based
upon its analysis of the loans, current economic conditions and certain
risk characteristics of the loan portfolio. This determination is made
through a structured review of impaired loans, non-performing loans and
certain performing loans designated as potential problems. The allowance
for loan losses at March 31, 1999 and 1998 represented 1.62% and 1.73%,
respectively, of the total loans outstanding, net of unearned interest.
Set forth below is an analysis of Omega's non-performing loans as of March
31, 1999 as compared to December 31, 1998.
NON-PERFORMING LOANS
(In thousands)
March 31, December 31,
1999 1998
--------- ------------
Non-accrual loans............................. $2,335 $5,627
Accruing loans past due 90 days or more....... 1,276 682
Restructured loans............................ 227 213
------ ------
Total non-performing loans.................... $3,838 $6,522
====== ======
Non-performing loans as percent of allowance.. 32.3% 54.4%
The decrease in non-performing loans from December 31, 1998 to March
31, 1999 is primarily due to the full payoff of one large commercial
loan, eliminating it from the non-accrual category.
<PAGE>
5. Deposits and Other Sources of Funds
Deposits provide the primary source of funding for loans and investment
securities. As of March 31, 1999, total deposits decreased by $5,646,000 or
0.6%, as compared to December 31, 1998. Interest bearing deposits have
increased by $1,823,000,offset by a $7,469,000 decrease in non-interest
bearing accounts. For additional funding, short term borrowings have been
increased by $12,274,000. Of this amount, $10,000,000 was used to fund one
specific short-term commercial loan.
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"
----------------------- ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
OMEGA FINANCIAL CORPORATION
As of March 31, 1999:
Total Capital ........................ 157,509 21.7% $58,201 8.0% $72,751 10.0%
(to Risk Weighted Assets)
Tier I Capital ....................... 148,376 20.4% 29,100 4.0% 43,650 6.0%
(to Risk Weighted Assets)
Tier I Capital ....................... 148,376 14.1% 41,986 4.0% 52,483 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 March 31, 1999:
Total Capital ........................ 81,502 19.7% $33,065 8.0% $41,331 10.0%
(to Risk Weighted Assets)
Tier I Capital ....................... 76,334 18.5% 16,532 4.0% 24,798 6.0%
(to Risk Weighted Assets)
Tier I Capital ....................... 76,334 13.1% 23,334 4.0% 29,167 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)
HOLLIDAYSBURG TRUST COMPANY
As of March 31, 1999:
Total Capital ........................ 32,804 17.9% $14,641 8.0% $18,302 10.0%
(to Risk Weighted Assets)
Tier I Capital ....................... 32,804 17.9% 7,321 4.0% 10,981 6.0%
(to Risk Weighted Assets)
Tier I Capital ....................... 32,804 12.5% 10,458 4.0% 13,073 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 March 31, 1999:
Total Capital ........................ 25,358 22.6% $8,963 8.0% $11,203 10.0%
(to Risk Weighted Assets)
Tier I Capital ....................... 23,935 21.4% 4,481 4.0% 6,722 6.0%
(to Risk Weighted Assets)
Tier I Capital ....................... 23,935 13.1% 7,298 4.0% 9,122 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%
</TABLE>
<PAGE>
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 March 31, 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. Shares 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, 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 March 31, 1999, 121,220 shares had
been repurchased under this program, representing 27% 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. Management is currently in
the process of evaluating Omega's readiness to address the Y2K problem. 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. 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 March 31, 1999, 95% of the critical PC
software applications have been tested with the remainder to be tested over
the next three 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 later 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 addressing their Y2K issues, and in most cases, had their testing
completed by December 31, 1998. Omega's testing with all critical outside
vendors was substantially 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 Omega's operation. The provider has completed all testing
except internal and external interfaces. Proxy testing with this provider's
bank clients will continue to be conducted through the second quarter of
1999. 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 issue
quarterly reports to the clients through the end of 1999.
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. As of March 31, 1999, 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 micr-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 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
<PAGE>
aware of the potential problems with Y2K 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 Y2K issues are being expensed as incurred and have
been insignificant through March 31, 1999. The current projections of costs
to complete the Y2K remediation are estimated to be approximately $750,000.
Included in this estimate is the amount of $175,000, which will be
capitalized for replacement of major hardware. The remaining costs
(currently projected at $575,000 will be expensed as incurred over the next
nine 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.
Omega is currently in the process of developing business resumption
contingency plans in preparation for dealing with any critical issues,
which fail in spite of all testing. These plans should be substantially
complete by the end of the second quarter of 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 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.
<PAGE>
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:
- ------------------------- ----------------------------------
Date David B. Lee
Chairman and
Chief Executive Officer
- ------------------------- ----------------------------------
Date JoAnn N. McMinn
Senior Vice President and
Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
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<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> MAR-31-1999
<CASH> 29,414
<INT-BEARING-DEPOSITS> 11,608
<FED-FUNDS-SOLD> 25,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 107,418
<INVESTMENTS-MARKET> 144,586
<LOANS> 733,182
<ALLOWANCE> 11,899
<TOTAL-ASSETS> 1,069,063
<DEPOSITS> 865,014
<SHORT-TERM> 29,912
<LIABILITIES-OTHER> 16,198
<LONG-TERM> 5,000
<COMMON> 150,753
0
2,186
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,069,063
<INTEREST-LOAN> 15,348
<INTEREST-INVEST> 3,453
<INTEREST-OTHER> 205
<INTEREST-TOTAL> 19,006
<INTEREST-DEPOSIT> 6,487
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<INTEREST-INCOME-NET> 12,261
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<EXPENSE-OTHER> 8,257
<INCOME-PRETAX> 6,359
<INCOME-PRE-EXTRAORDINARY> 4,479
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,479
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.47
<YIELD-ACTUAL> 4.94
<LOANS-NON> 2,335
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