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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 June 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 (IRS Employer Identification No.)
or incorporation of organization)
366 Walker Drive
State College, Pennsylvania 16801
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(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 sixty days.
Yes __X__ No ____
The number of shares outstanding of each of the Registrant's
classes of common stock as of August 10, 1999:
Common Stock, $5.00 par value -- 8,784,113 shares
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<PAGE>
PART I. Financial Information
Item 1. Financial Statements
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
---------- -------------
<S> <C> <C>
Cash and due from banks .................................................... $ 36,262 $ 40,066
Interest bearing deposits with other banks ................................. 7,679 1,455
Federal funds sold ......................................................... 34,550 18,350
Commercial paper ........................................................... 4,901 --
Investment securities held to maturity (Market value:
$4,957 and $117,954, respectively) ...................................... 4,957 116,829
Investment securities available for sale ................................... 278,419 144,551
Total loans ................................................................ 691,442 723,485
Less: Unearned discount .................................................. (375) (518)
Allowance for loan losses .......................................... (11,676) (11,772)
----------- -----------
Net loans .................................................................. 679,391 711,195
Premises and equipment, net ................................................ 15,412 16,816
Other assets ............................................................... 12,594 13,442
----------- -----------
TOTAL ASSETS ............................................................... $ 1,074,165 $ 1,062,704
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing ..................................................... $ 123,060 $ 132,291
Interest bearing ......................................................... 742,977 738,369
----------- -----------
Total deposits ............................................................. 866,037 870,660
Short-term borrowings ...................................................... 28,835 17,638
Other liabilities .......................................................... 16,624 11,004
ESOP debt .................................................................. 3,726 3,837
Long-term debt ............................................................. 7,000 5,000
Other interest bearing liabilities ......................................... 546 585
----------- -----------
TOTAL LIABILITIES .......................................................... 922,768 908,724
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 ................................. (2,752) (2,875)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares
Issued -
9,252,804 shares at June 30, 1999; 9,137,270 shares at December 31, 1998
Outstanding -
8,817,886 shares at June 30, 1999;
8,960,197 shares at December 31, 1998 .................................. 46,264 45,686
Capital surplus ............................................................ 4,716 3,209
Retained earnings .......................................................... 109,650 104,285
Accumulated other comprehensive income ..................................... 3,229 4,713
Cost of common stock in treasury
434,918 shares at June 30, 1999;
177,073 shares at December 31, 1998 .................................... (14,710) (6,038)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ................................................. 151,397 153,980
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................. $ 1,074,165 $ 1,062,704
=========== ===========
</TABLE>
<PAGE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans .............................. $14,584 $15,061 $29,932 $29,989
Interest and dividends on investment securities ......... 3,447 3,624 6,900 7,034
Other interest income ................................... 475 272 680 629
------- ------- ------- -------
TOTAL INTEREST INCOME ................................... 18,506 18,957 37,512 37,652
INTEREST EXPENSE:
Interest on deposits .................................... 6,561 6,975 13,048 13,939
Interest on short-term borrowings ....................... 285 215 473 429
Interest on long-term debt and
other interest bearing liabilities .................... 72 7 142 13
------- ------- ------- -------
TOTAL INTEREST EXPENSE .................................. 6,918 7,197 13,663 14,381
------- ------- ------- -------
NET INTEREST INCOME ..................................... 11,588 11,760 23,849 23,271
Provision for loan losses ............................... 340 243 605 485
------- ------- ------- -------
INCOME FROM CREDIT ACTIVITIES ........................... 11,248 11,517 23,244 22,786
OTHER INCOME:
Service fees ............................................ 1,828 1,555 3,486 3,034
Trust fees .............................................. 767 718 1,526 1,471
Gain on sale of loans and other assets .................. 1,509 36 1,511 97
Investment securities gains and losses, net:
Investment securities held to maturity
Investment securities available for sale .............. (97) 381 104 670
------- ------- ------- -------
TOTAL OTHER INCOME ...................................... 4,007 2,690 6,627 5,272
OTHER EXPENSE:
Salaries and employee benefits .......................... 4,634 4,513 9,248 8,938
Net occupancy expense ................................... 555 539 1,142 1,112
Equipment expense ....................................... 546 521 1,060 1,032
Data processing service ................................. 390 395 771 797
Other ................................................... 2,221 2,085 4,382 4,131
------- ------- ------- -------
TOTAL OTHER EXPENSE ..................................... 8,346 8,053 16,603 16,010
------- ------- ------- -------
Income before taxes ..................................... 6,909 6,154 13,268 12,048
Income tax expense ...................................... 1,969 1,903 3,849 3,687
------- ------- ------- -------
NET INCOME .............................................. $ 4,940 $ 4,251 $ 9,419 $ 8,361
======= ======= ======= =======
NET INCOME PER COMMON SHARE:
Basic ................................................. $ 0.55 $0.46 $ 1.04 $ 0.91
Diluted ............................................... $ 0.53 $0.44 $ 1.00 $ 0.87
WEIGHTED AVERAGE SHARES AND EQUIVALENTS:
Basic ................................................. 8,840,120 8,950,064 8,896,632 8,926,222
Diluted ............................................... 9,342,334 9,504,596 9,411,412 9,477,776
</TABLE>
<PAGE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 9,419 $ 8,361
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ............................. 1,174 1,259
Provision for loan losses ................................. 605 485
Gain on sale of investment securities ..................... (104) (670)
Gain on sale of fixed assets
and other property owned ............................... (2) (52)
Gain on sale of loans ..................................... (99) (48)
Gain on sale of branch .................................... (1,410) --
Increase in deferred tax asset ............................ (355) (170)
Decrease (Increase) in interest receivable and other
assets ................................................... 1,758 (856)
Decrease in interest payable .............................. (75) (301)
Decrease in taxes payable ................................. (402) (91)
Amortization of deferred net loan fees .................... 224 169
Deferral of net loan (costs) fees ......................... (282) 236
Increase in accounts payable
and accrued expenses ................................... 6,038 3,109
-------- --------
Total adjustments ....................................... 7,070 3,070
-------- --------
Net cash provided by operating activities ..................... 16,489 11,431
Cash flows from investing activities:
Proceeds from the sale or maturity of:
Interest bearing deposits with other banks ................ 17,340 891
Investment securities available for sale ................. 29,520 40,176
Investment securities held to maturity ................... 10,486 20,164
Purchase of:
Interest bearing deposits with other banks ................ (23,564) (968)
Commercial paper .......................................... (4,856) --
Investment securities held to maturity .................... (1,212) (30,121)
Investment securities available for sale .................. (63,205) (38,377)
Increase in loans .......................................... (4,303) (6,869)
Gross proceeds from sale of loans ........................... 22,725 703
Proceeds from sale of branch ................................ 1,000 --
Capital expenditures ........................................ (546) (580)
Sale of fixed assets and other property owned ............... 164 669
Increase in federal funds sold .............................. (16,200) (1,150)
-------- --------
Net cash used in investing activities ......................... (32,651) (15,462)
Cash flows from financing activities:
Increase in deposits, net ................................... 9,699 9,164
Increase in short-term borrowings, net ...................... 11,197 1,057
Issuance of long-term debt .................................. 2,000 --
Net change in other interest bearing liabilities ............ (39) (43)
Dividends paid .............................................. (4,141) (3,401)
Tax benefit from preferred stock dividend
and stock option activity ................................ 229 288
Issuance of common stock .................................... 2,085 1,442
Acquisition of treasury stock ............................... (8,672) --
-------- --------
Net cash provided by financing activities ..................... 12,358 8,507
-------- --------
Net (decrease) increase in cash and due from banks ............ $ (3,804) $ 4,476
-------- --------
Cash and due from banks at beginning of period ................ $ 40,066 $ 31,938
Cash and due from banks at end of period ...................... 36,262 36,414
-------- --------
Net (decrease) increase in cash and due from banks ............ $ (3,804) $ 4,476
======== ========
Interest paid ................................................. $ 13,738 $ 14,682
Income taxes paid ............................................. 4,090 3,650
</TABLE>
<PAGE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SIX AND THREE MONTHS ENDED JUNE 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
six months and three months ended June 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 in the
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 June 30, 1999 and
December 31, 1998 standby letters of credit issued and outstanding
amounted to $17,877,000 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 June 30, 1999, the Corporation had $137,553,000 outstanding in unused
lines of credit commitments extended to its customers. Of this amount,
$38,298,000, or 27.8%, are commitments to consumers for home equity and
other lines of credit. The remainder, $99,255,000, are commercial
commitments.
D. Comprehensive Income:
Components of other comprehensive income (loss) consist of the
following:
<TABLE>
<CAPTION>
Six Months ended June 30, 1999
-----------------------------------------------
Before Tax (Expense)
Tax or Net-of-Tax
Amount Benefit Amount
--------- ------------------ ------------
<S> <C> <C> <C>
Unrealized gains on available for sale securities:
Unrealized holding gains (losses) arising during the period $(2,938) $ 1,029 $(1,909)
Cumulative effect of change in accounting principle ....... $ 653 $ (228) $ 425
======= ======= =======
Other comprehensive income (loss) ......................... $(2,285) $ 801 $(1,484)
======= ======= =======
</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>
Computations of Earnings per Share
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 Six Months Ended June 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 ................................ $9,419 $8,361
Less: Preferred stock dividends ........... (198) (198)
BASIC EPS
Income available to common
shareholders .......................... 9,221 8,897 $ 1.04 8,163 8,926 $0.91
EFFECT OF DILUTIVE SECURITIES
Impact of:
Assumed conversion of preferred
to common stock ..................... 346 346
Assumed exercises of outstanding
options ............................. 168 205
Preferred stock dividends
available to common
shareholders ............................ 198 198
Elimination of tax benefit of
allocated preferred dividends ........... (29) (26)
Additional expense required to fund
ESOP debt, net of tax impact ............ (25) (43)
DILUTED EPS
Income available to common
shareholders plus assumed
conversions ............................. $9,365 9,411 $ 1.00 $8,292 9,477 $0.87
<CAPTION>
Three Months Ended June 30, 1999 Three Months Ended June 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 $4,941 $4,251
Less: Preferred stock dividends ........... (99) (99)
BASIC EPS
Income available to common
shareholders .......................... 4,842 8,840 $ 0.55 4,152 8,950 $0.46
EFFECT OF DILUTIVE SECURITIES
Impact of:
Assumed conversion of preferred
to common stock ....................... 346 346
Assumed exercises of outstanding
options ............................... 156 208
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 ......................... $4,916 9,342 $ 0.53 $4,219 9,504 $0.44
</TABLE>
<PAGE>
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
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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,
Omega'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 Six and Three Months Ended June 30, 1999 and 1998
Operations Overview
-------------------
A. Six months ended June 1999 and 1998
For the first six months of 1999, income before taxes increased by $1,220,000,
or 10.1%, compared to the same period in 1998. Income from credit activities
increased $458,000, or 2.0%. Non-interest income increased $1,355,000 or 25.7%
while non-interest expense increased $593,000, or 3.7%. Key events that occurred
during the first six months of 1999 and 1998 are:
o The sale of a branch office in June 1999 with a pre-tax gain of
$1,395,000.
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 $566,000.
Detailed analysis of these changes are included in the discussion following.
The tax provision for the first six months of 1999 increased by $162,000, or
4.4% when compared to the first six months of 1998. The effective tax rate fell
to 29.0% in 1999 from 30.6% in 1998, as a result of an increase in tax-exempt
income due to higher levels of tax-exempt investments in 1999 than in 1998.
Net income increased by $1,058,000, or 12.7%, in the first six months of 1999 as
compared to the same period in 1998.
<PAGE>
B. Three months ended June 30, 1999 and 1998
The second quarter's income before income taxes increased $755,000, or 12.3%,
when compared to the same period in 1998. Non-interest income increased
$1,317,000, or 49.0%, income from credit activities decreased by $269,000, or
2.3%, and non-interest expense increased by $293,000, or 3.6%.
After the income tax provision (which increased by $66,000, or 3.5% compared to
the same period in 1998) was deducted from earnings, net income was $689,000, or
16.2%, higher than the second quarter of 1998. The effective tax rate for the
second quarter of 1999 was 28.5%, as compared to the second quarter of 1998 of
30.9%.
Following are selected key ratios for the period:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------
1999 1998 1999 1998
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Return on average assets (annualized)......... 1.85% 1.66% 1.78% 1.64%
Return on average equity (annualized)......... 12.88 11.39 12.19 11.37
Dividend payout ratio (common)................ 42.83 42.18 43.37 40.67
Average equity to average assets.............. 14.33 14.57 14.58 14.46
</TABLE>
Net Interest Income
A. Six months ended June 30, 1999 and 1998
Omega's net interest income for the first six months of 1999 improved by
$578,000, or 2.5%. Of the $578,000 increase, $430,000 was attributed to the
collection of previously unaccrued interest on a large loan. Average earning
assets grew by $45,444,000 since June 1998. The 4.7% 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 $26,348,000 and investments by $19,096,000.
Average deposits increased by $25,238,000, or 3.0%, in 1999 as compared to the
previous year. Total cost to fund earning assets was 2.74% in 1999, compared to
3.03% in 1998, while earning assets yielded 7.50% in 1999 compared to 7.89% in
1998, resulting in a 10 basis point decrease in net interest margin. On a fully
tax-equivalent basis, the net interest margin decreased by only 4 basis points,
as average tax-exempt assets increased by $34,773,000, or 51.4%.
B. Three months ended June 30, 1999 and 1998
The net interest margin, at 4.57% for the second quarter of 1999, was 31 basis
points lower than the second quarter of 1998, with a $49,517,000 or 5.1%
increase in average earning assets resulting in a 1.5% decrease in net interest
income. Yield on earning assets in the second quarter of 1999 declined by 57
basis points when compared to 1998's second quarter, while cost of funding
dropped by only 26 basis points.
Following are key net interest margin ratios (annualized):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
------ ------ ------ -----
<S> <C> <C> <C> <C>
Yield on average earning assets ........... 7.30% 7.87% 7.50% 7.89%
Cost to fund earning assets ............... 2.73 2.99 2.74 3.03
Net interest margin ....................... 4.57 4.88 4.76 4.86
Net interest margin -- tax equivalent ..... 4.82 5.08 5.01 5.05
</TABLE>
At June 30, 1999, Omega had $415,220,000 of earning assets scheduled to reprice
over the next twelve months as compared to $469,493,000 in interest bearing
liabilities, resulting in a negative gap of
<PAGE>
$54,273,000, or 5.1% of assets. In order to predict net interest income at risk
over the next twelve months based on hypothetical rate movements, a rate shock
simulation was performed on the balance sheet. In the event that interest rates
would decrease immediately by 100 basis points, results of the rate shock
simulation indicate that Omega's net interest income over the next twelve months
would decrease by approximately 1.4%, or $657,000. 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 $664,000, or 1.5%
over a twelve-month period. These simulations assume no volume or mix changes in
the balance sheet.
Other Income and Expense
A. Six months ended June 30, 1999 and 1998
Other income increased $1,355,000, or 25.7% in the first six 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 $507,000, or 11.3%. This represents increases in service fees on
deposits, loans and trust relationships. The gains resulting from the sale of a
branch office and a block of mortgage loans was responsible for all of the
$1,414,000 increase in gains on the sale of loans and other assets in 1999 as
compared to 1998. Additionally, investment security gains in 1998 exceeded those
in 1999 by $566,000, or 84.5%, 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 1.23% for the first six months of 1999 as compared to .90% 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 $593,000, or 3.7% higher for the first six months of 1999
than for the same period in 1998. Salaries and employee benefits were $310,000,
or 3.5% higher in 1999 than in 1998. Occupancy and equipment expenses have
increased by $58,000, or 2.7%. Other expense increased by $251,000, or 6.1% in
the first six months of 1999 as compared to 1998. This is due in part to
increased expense for customer MAC transactions.
As a percentage of average assets, annualized expenses for the period ended June
30, 1999 were 3.13% and were 3.15% for the same period in 1998.
B. Three months ended June 30, 1999 and 1998
Other income increased $1,317,000, or 50.0% in the second quarter of 1999 as
compared to the same period in 1998. Of the increase, $995,000 resulted from the
sale of the branch office and loans, offset by the decrease in security gains.
Increases in fee income on deposits, loans and trust services were $322,000, or
14.2% in the second quarter of 1999 when compared to 1998. This was due to a
modification in fee structures.
As a percentage of average assets, annualized other income net of security gains
and losses was 1.53% for the second quarter of 1999 as compared to .90% in 1998.
Exclusive of the gains resulting from the sale of the branch office, this ratio
would have been 1.00% in the second quarter of 1999.
Other expenses were $293,000, or 3.6% higher for the second quarter of 1999 than
for the same period in 1998. Salaries and employee benefits were $121,000, or
2.7% higher in 1999 than in 1998. Occupancy and equipment expenses have
increased by 3.9%, while data processing expense remained flat. Other
non-interest expenses have increased by 6.5%.
As a percentage of average assets, annualized expenses for the quarter ended
June 30, 1999 were 3.12% and were 3.14% 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 June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Securities Classified as Available for Sale
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
June 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 ............... $110,058 $ 146 $ (371) $109,833
Obligations of state and
political subdivisions ....................... 84,340 324 (540) 84,124
Corporate securities ........................... 52,980 166 (182) 52,964
Mortgage backed securities ..................... 19,208 48 (55) 19,201
Equity securities .............................. 6,878 5,512 (93) 12,297
-------- ------ ------- --------
Total .......................................... $273,464 $6,196 $(1,241) $278,419
======== ====== ======= ========
<CAPTION>
Securities Classified as Held to Maturity
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
June 30, 1999 Cost Gains Losses Value
- ------------------------------------------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Investment in low-income housing ............... 598 -- -- 598
Equity securities (non-marketable) ............. 4,359 -- -- 4,359
------ ---- ---- ------
Total .......................................... $4,957 $ -- $ -- $4,957
====== ==== ==== ======
<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. Govern-
ment 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. Govern-
ment 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 held to maturity
securities to available to sale on April 1, 1999.
Total investment securities as a percentage of total assets at June 30, 1999 and
December 31, 1998 were 26.4% and 24.6%, respectively. Securities maturing or
repricing in one year or less comprised 38.7% of the total investment securities
of $283,376,000 as of June 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 June 30, 1999.
3. Interest Bearing Deposits with Other Financial Institutions
As of June 30, 1999, Omega had $7,679,000 in interest bearing deposits with
other banks. There were no investments in instruments issued by U.S. branches of
banks of foreign countries or deposits in banks of foreign countries included in
the June 30, 1999 consolidated balance sheet.
4. Loans
Net loans in the first six months of 1999 decreased by $31,804,000, or 4.5% from
the balance at December 31, 1998, bringing the total to $679,391,000 at June 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 $2,338,000, or 0.3%.
Changes in the allowance for loan losses for the six months ended June 30, 1999
and 1998 were as follows (in thousands):
1999 1998
----------- ----------
Balance at January 1................. $11,772 $11,793
Charge-offs.......................... (764) (710)
Recoveries........................... 63 237
------- -------
Net charge-offs.................. (701) (473)
Provision for loan losses............ 605 485
------- -------
Balance at June 30................... $11,676 $11,805
======= =======
The allowance for loan losses is considered adequate by management to cover
probable uncollectible loans, as shown in the following table depicting
non-performing loans. Management is also of the opinion that the level of loan
loss provision is adequate to maintain the allowance at an acceptable level. The
allowance for loan losses at June 30, 1999 and 1998 represented 1.69% of the
total loans outstanding, net of unearned interest.
Set forth below is an analysis of Omega's non-performing loans as of June 30,
1999 as compared to December 31, 1998.
Non-performing Loans
--------------------
(In thousands)
June 30, December 31,
1999 1998
-------- ------------
Non-accrual loans..................................... $3,360 $5,627
Accruing loans past due 90 days or more............... 509 682
Restructured loans.................................... 185 213
------ ------
Total non-performing loans............................ $4,054 $6,522
------ ------
Non-performing loans as percent of allowance.......... 34.72% 54.4%
<PAGE>
The decrease in non-performing loans from December 31, 1998 to June 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 June 30, 1999, total deposits decreased by $4,623,000 or 0.5%, 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
$9,699,000 or 1.1%.
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 June 30, 1999:
Total Capital ............................... 156,952 22.2% $56,460 8.0% $70,576 10.0
(to Risk Weighted Assets)
Tier I Capital .............................. 148,090 21.0% 28,230 4.0% 42,345 6.0%
(to Risk Weighted Assets)
Tier I Capital .............................. 148,090 14.0% 42,405 4.0% 53,006 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 June 30, 1999:
Total Capital ............................... 82,987 21.3% $31,181 8.0% $38,977 10.0%
(to Risk Weighted Assets)
Tier I Capital .............................. 78,108 20.0% 15,591 4.0% 23,386 6.0%
(to Risk Weighted Assets)
Tier I Capital .............................. 78,108 13.3% 23,546 4.0% 29,432 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)
<PAGE>
HOLLIDAYSBURG TRUST COMPANY
As of June 30, 1999:
Total Capital ............................... 33,444 17.9% $14,948 8.0% $18,685 10.0%
(to Risk Weighted Assets)
Tier I Capital .............................. 33,444 17.9% 7,474 4.0% 11,211 6.0%
(to Risk Weighted Assets)
Tier I Capital .............................. 33,444 12.5% 10,672 4.0% 13,340 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 June 30, 1999:
Total Capital ............................... 25,389 23.2% $ 8,766 8.0% $10,957 10.0%
(to Risk Weighted Assets)
Tier I Capital .............................. 24,001 21.9% 4,383 4.0% 6,574 6.0%
(to Risk Weighted Assets)
Tier I Capital .............................. 24,001 13.1% 7,322 4.0% 9,152 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>
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the FDIC has issued a rule which sets the capital level for each of
the five capital categories established in FDICIA. As required by FDICIA, the
regulations specify the levels at which an insured institution would be
considered "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized", or "critically undercapitalized". At June 30,
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 June 30, 1999, 246,229 shares had been
repurchased under this program, representing 55% 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 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 June 30, 1999 all critical PC software has been tested leaving only a few
minor issues yet to be 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 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 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 completed all testing except internal and external
interfaces. Proxy testing with this provider's bank clients will continue to be
conducted through the third 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. 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
<PAGE>
levels of aggregate loans in excess of a designated amount are contacted,
reviewed, and rated as to credit risk. 74% of the credit relationships reviewed
were deemed to be low risk, as these borrowers are aware of the potential
problems with 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 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). 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 if it is available for sale,
the security may 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 June 30, 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 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
second half 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
The Annual Meeting of Shareholders of Omega was held on April 19, 1999.
At the Annual Meeting, the shareholders elected a class of directors
for a term of three years, as described below.
----------------------------------------------------------------------
Name For Withhold Authority
----------------------------------------------------------------------
Robert T. Gentry 7,064,206 75,505
----------------------------------------------------------------------
Philip E. Gingerich, Sr. 7,090,443 1,523
---------------------------------------------------------------------
D. Stephen Martz 7,078,082 49,489
----------------------------------------------------------------------
James W. Powers, Sr. 7,099,324 39,931
----------------------------------------------------------------------
The terms of the following directors continued after the annual
meeting:
Raymond F. Agostinelli, Merle K. Evey, David B. Lee, Robert N. Oliver,
Stanton R. Sheetz, and Robert A. Szeyller.
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
/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> JUN-30-1999
<CASH> 36,262
<INT-BEARING-DEPOSITS> 7,679
<FED-FUNDS-SOLD> 34,550
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 4,957
<INVESTMENTS-MARKET> 278,419
<LOANS> 691,067
<ALLOWANCE> 11,676
<TOTAL-ASSETS> 1,074,165
<DEPOSITS> 866,037
<SHORT-TERM> 28,835
<LIABILITIES-OTHER> 16,624
<LONG-TERM> 7,000
<COMMON> 149,149
0
2,248
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,074,165
<INTEREST-LOAN> 29,932
<INTEREST-INVEST> 6,900
<INTEREST-OTHER> 680
<INTEREST-TOTAL> 37,512
<INTEREST-DEPOSIT> 13,048
<INTEREST-EXPENSE> 13,663
<INTEREST-INCOME-NET> 23,849
<LOAN-LOSSES> 605
<SECURITIES-GAINS> 104
<EXPENSE-OTHER> 16,603
<INCOME-PRETAX> 13,268
<INCOME-PRE-EXTRAORDINARY> 9,419
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,419
<EPS-BASIC> 1.04
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 4.76
<LOANS-NON> 3,360
<LOANS-PAST> 509
<LOANS-TROUBLED> 185
<LOANS-PROBLEM> 4,054
<ALLOWANCE-OPEN> 11,772
<CHARGE-OFFS> 764
<RECOVERIES> 83
<ALLOWANCE-CLOSE> 11,676
<ALLOWANCE-DOMESTIC> 11,676
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
