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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year ended DECEMBER 31, 1998
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________________ to __________________
Commission File No. 0-13599
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OMEGA FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1420888
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
366 WALKER DRIVE
STATE COLLEGE, PA 16801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (814) 231-7680
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $5.00 8,959,319
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(Title of Class) (Number of shares outstanding
as of February 22, 1999)
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 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 22, 1999 was $251,722,268. (1)
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DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain portions of the Company's Annual Report to Shareholders for the
year ended December 31, 1998 are incorporated by reference in Parts II and IV of
this Report.
With the exception of the information incorporated by reference in Parts I,
II and IV of this Report, the Company's Annual Report to Shareholders for the
year ended December 31, 1998 is not to be deemed "filed" with the Securities and
Exchange Commission for any purpose.
Certain portions of the Company's Proxy Statement to be filed in connection
with its 1998 Annual Meeting of Shareholders are incorporated by reference in
Part III of this Report.
Other documents incorporated by reference are listed in the Exhibit Index.
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(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the Company's Common Stock outstanding, reduced by the amount
of Common Stock held by officers, directors, shareholders owning in excess
of 10% of the Company's Common Stock and the Company's employee benefit
plans multiplied by the last reported sale price for the Company's Common
Stock on February 22, 1999. The information provided shall in no way be
construed as an admission that any officer, director or 10% shareholder of
the Company, or any employee benefit plan, may be deemed an affiliate of
the Company or that such person or entity is the beneficial owner of the
shares reported as being held by such person or entity, and any such
inference is hereby disclaimed. The information provided herein is included
solely for record keeping purposes of the Securities and Exchange
Commission.
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PART I
Item 1: Business
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GENERAL
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Omega Financial Corporation ("Omega" or the "Company") is a Pennsylvania
business corporation which is registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended. Omega was formed, effective
December 31, 1986, as a result of the merger of Heritage Financial Services
Corporation ("Heritage") into Peoples National Bancorp, Inc. ("Peoples") and the
change of Peoples' name to Omega.
Peoples was incorporated on June 24, 1982 and became an active bank holding
company on December 7, 1982 through the acquisition of all of the outstanding
shares of Peoples National Bank of Central Pennsylvania ("Peoples Bank").
Heritage was incorporated on June 21, 1982 and became an active bank holding
company on December 31, 1982 through the acquisition of all of the outstanding
shares of The Russell National Bank ("Russell Bank"). As a result of the merger
of Heritage into Peoples, Omega became the holding company for both Peoples Bank
and Russell Bank. On January 28, 1994, Penn Central Bancorp, Inc. ("Penn
Central"), a bank holding company, merged into Omega. As a result of the merger
of Penn Central into Omega, Omega became the holding company for Penn Central's
five wholly-owned subsidiaries: Penn Central National Bank ("Penn Central
Bank"), Hollidaysburg Trust Company ("Hollidaysburg"), the First National Bank
of Saxton ("Saxton Bank"), Penn Central Bancorp Life Insurance Company and Penn
Central Bancorp Investment Company. On February 18, 1995, Saxton Bank merged
into Penn Central Bank and on March 18, 1995, Peoples Bank and Russell Bank
merged to form Omega Bank N.A. ("Omega Bank"). On August 1, 1995, Omega acquired
all of the outstanding shares of Montour Bank ("Montour"). On December 31, 1996,
Montour was merged into Omega Bank. The Company's current banking subsidiaries
consist of Omega Bank, Penn Central Bank and Hollidaysburg and its current
non-banking subsidiaries consist of Central Pennsylvania Life Insurance Company
and Central Pennsylvania Investment Company. Unless the context otherwise
requires, the "Company" refers to Omega Financial Corporation and its
consolidated subsidiaries and the "Banks" refers to the Company's banking
subsidiaries.
BANKING SERVICES
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The Banks currently provide retail and commercial banking services through
44 offices in Central Pennsylvania. Omega Bank operates 26 full service banking
offices in Centre, Clinton, Montour, Mifflin, and Juniata counties. Penn Central
Bank operates 8 full service banking offices in Huntingdon and Bedford counties,
and Hollidaysburg operates 10 full service banking offices in Blair County.
The Banks provide a full range of banking services including an automatic
teller machine network, checking accounts, NOW accounts, savings accounts, money
market certificates, investment certificates, fixed rate certificates of
deposit, club accounts, secured and unsecured commercial and consumer loans,
construction and mortgage loans, safe deposit facilities, credit loans with
overdraft checking protection and student loans. The Banks also provide a
variety of trust services.
As of December 31, 1998, the Banks operated an aggregate of 41 automated
teller machines (ATMs) at various locations. The Banks are members of the Money
Access Center ("MAC") System and the "Plus System." The MAC System operates
throughout Pennsylvania and the "Plus System" operates nationwide.
The Banks have a relatively stable deposit base with no major seasonal
depositor or group of depositors. Most of their commercial customers are small
and midsized businesses in Central Pennsylvania.
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OTHER ACTIVITIES
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On January 22, 1986, the Company formed Central Pennsylvania Life Insurance
Co., an Arizona corporation, for the purpose of underwriting credit life
insurance for the Company's bank subsidiaries.
On December 26, 1985, the Company formed Central Pennsylvania Investment
Co., a Delaware corporation, for the purpose of holding and managing certain
investments of the Company.
COMPETITION
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The Banks service areas are characterized by intense competition for
banking business among commercial banks, savings and loan associations, mutual
savings banks and other financial institutions. The Banks actively compete with
such banks and institutions for local retail and commercial accounts. The Banks
also are subject to competition from other banks and financial institutions in
central Pennsylvania, as well as other financial institutions outside their
service areas, for certain types of banking business. Many competitors have
substantially greater financial resources and larger branch systems than those
of the Banks.
In commercial transactions, the Banks' respective legal lending limits to a
single borrower (approximately $12,082,000 for Omega Bank, $4,061,000 for Penn
Central Bank, and $5,279,000 for Hollidaysburg Trust Company, as of December 31,
1998) enable them to compete effectively for the business of small and midsized
businesses. However, this legal lending limit is considerably lower than that of
various competing institutions and thus may act as a constraint on each Bank's
effectiveness in competing for financings in excess of the limit.
In consumer transactions, the Banks believe that they are able to compete
on a substantially equal basis with larger financial institutions because they
offer competitive interest rates on savings and time accounts and loans.
In competing with other banks, savings and loan associations and other
financial institutions, the Banks seek to provide personalized services through
management's knowledge and awareness of their service areas, customers and
borrowers. In management's opinion, larger institutions often do not provide
sufficient attention to the retail depositors and the relatively small
commercial borrowers that comprise the Banks' customer base.
Other competitors, including credit unions, consumer finance companies,
insurance companies, and money market mutual funds, compete with certain lending
and deposit gathering services offered by the Banks. The Banks also compete with
insurance companies, investment counseling firms, mutual funds and other
business firms and individuals in corporate and trust investment management
services.
SUPERVISION AND REGULATION
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The following discussion sets forth certain of the material elements of the
regulatory framework applicable to bank holding companies and their subsidiaries
and provides certain specific information relevant to the Company. The
regulatory framework is intended primarily for the protection of depositors,
other customers and the federal deposit insurance funds and not for the
protection of security holders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. A change in
applicable statutes, regulations or regulatory policy may have a material effect
on the business of the Company.
The Company. The Company is registered as a "bank holding company" under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is
therefore subject to supervision and regulation by the Board of Governors of the
Federal Reserve System (the "FRB"). The Company is also regulated by the
Pennsylvania Department of Banking.
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Under the BHC Act, the Company is required to secure the prior approval of
the FRB before it can merge or consolidate with any other bank holding company
or acquire all or substantially all of the assets of any bank that is not
already majority owned by it or acquire direct or indirect ownership, or control
of, any voting shares of any bank that is not already majority owned by it, if
after such acquisition it would directly or indirectly own or control more than
5% of the voting shares of such bank. See "Interstate Banking".
The Company is generally prohibited under the BHC Act from engaging in, or
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company engaged in nonbanking activities unless the FRB, by order
or regulation, has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making such
determination, the FRB considers whether the performance of these activities by
a bank holding company can reasonably be expected to produce benefits to the
public which outweigh the possible adverse effects. The FRB has by regulation
determined that certain activities are closely related to banking within the
meaning of the BHC Act. These activities include, among others, operating a
mortgage, finance, credit card or factoring company; performing certain data
processing operations; providing investment and financial advice; acting as an
insurance agent for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; and certain stock brokerage and
investment advisory services.
Satisfactory financial condition, particularly with regard to capital
adequacy, and satisfactory Community Reinvestment Act ratings are generally
prerequisites to obtaining federal regulatory approval to make acquisitions. All
of the Company's subsidiary banks are currently rated "satisfactory" under the
Community Reinvestment Act.
Under the policy of the FRB with respect to bank holding company
operations, a bank holding company is deemed to serve as a source of financial
strength to its subsidiary depository institutions and to commit resources to
support such institutions in circumstances where it might not do so absent such
policy. Under the Federal Deposit Insurance Corporation Improvement Act of 1991
(the "1991 Act"), a bank holding company is required to guarantee that any
"undercapitalized" (as such term is defined in the statute) insured depository
institution subsidiary will comply with the terms of any capital restoration
plan filed by such subsidiary with its appropriate federal banking agency to the
lesser of (i) an amount equal to 5% of the institution's total assets at the
time the institution became undercapitalized, or (ii) the amount which is
necessary (or would have been necessary) to bring the institution into
compliance with all capital standards as of the time the institution failed to
comply with such capital restoration plan.
Under the BHC Act, the Company is required to file periodic reports and
other information of its operations with, and is subject to examination by, the
FRB. In addition, under the Banking Code of 1965, the Pennsylvania Department of
Banking has the authority to examine the books, records and affairs of any
Pennsylvania bank holding company or to require any documentation deemed
necessary to ensure compliance with the Banking Code.
The Company is under the jurisdiction of the Securities and Exchange
Commission and various state securities commissions for matters relating to the
offer and sale of its securities and is subject to the Securities and Exchange
Commission's rules and regulations relating to periodic reporting, reporting to
shareholders, proxy solicitation and insider trading.
There are various legal restrictions on the extent to which the Company and
its non-bank subsidiaries can borrow or otherwise obtain credit from its banking
subsidiaries. In general, these restrictions require that any such extensions of
credit must be secured by designated amounts of specified collateral and are
limited, as to any one of the Company or such non-bank subsidiaries, to ten
percent of the lending bank's capital stock and surplus, and as to the Company
and all such non-bank subsidiaries in the aggregate, to 20 percent of such
lending bank's capital stock and surplus. Further, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
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Omega Bank and Penn Central Bank. Omega Bank and Penn Central Bank, as
national banks, are subject to the National Bank Act. Such banks are also
subject to the supervision of, and are regularly examined by, the Office of the
Comptroller of the Currency (the "OCC") and are required to furnish quarterly
reports to the OCC. The approval of the OCC is required for the establishment of
additional branch offices by any national bank, subject to applicable state law
restrictions. Under current Pennsylvania law, banking institutions, such as the
Banks, may establish branches within any county in Pennsylvania, subject to
prior regulatory approval.
Omega Bank and Penn Central Bank are members of the Federal Deposit
Insurance Corporation (the "FDIC") and members of the Federal Reserve System
and, therefore, are subject to additional regulation by these agencies. Some of
the aspects of the lending and deposit business of these banks which are
regulated by these agencies include personal lending, mortgage lending and
reserve requirements.
Hollidaysburg Trust Company. Hollidaysburg Trust Company is a state
chartered non-member banking institution subject to regulation by the
Pennsylvania Department of Banking. As an insured bank under the Federal Deposit
Insurance Act, Hollidaysburg is also regulated by the FDIC. Some of the aspects
of the lending and deposit business of Hollidaysburg which are regulated include
personal lending, mortgage lending, and reserve requirements. Representatives of
the Pennsylvania Department of Banking and the FDIC regularly conduct
examinations of Hollidaysburg, and Hollidaysburg must furnish quarterly reports
to the Pennsylvania Department of Banking and the FDIC.
The operations of each of the Banks are also subject to numerous Federal,
state and local laws and regulations which set forth specific restrictions and
procedural requirements with respect to interest rates on loans, the extension
of credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions. The Banks also are subject to certain limitations on the
amount of cash dividends that they can pay. See Note 18 of Notes to the
Company's Consolidated Financial Statements, contained in Exhibit 13.1.
The OCC has authority under the Financial Institutions Supervisory Act to
prohibit national banks from engaging in any activity which, in the OCC's
opinion, constitutes an unsafe or unsound practice in conducting their
businesses. The FRB has similar authority with respect to the Company and the
Company's non-bank subsidiaries. The FDIC has similar authority with respect to
Hollidaysburg Trust.
Substantially all of the deposits of the banking subsidiaries are insured
up to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC and are
subject to deposit insurance assessments to maintain the BIF. The insurance
assessments are based upon a matrix that takes into account a bank's capital
level and supervisory rating. Effective January 1, 1996, the FDIC reduced the
insurance premiums it charged on bank deposits insured by the BIF to the
statutory minimum of $2,000 annually for "well capitalized" banks. On September
30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and
signed into law. DIFA reduced the amount of FDIC insurance premiums for savings
association deposits acquired by banks to the same levels assessed for deposits
insured by BIF. DIFA further provides for assessments to be imposed on all
insured depository institutions with respect to deposits to pay for the cost of
Financing Corporation bonds; however, banks are assessed for this purpose at
only one-fifth the rate of the assessment on savings associations until December
31, 1999. As a result of these changes, the deposit insurance assessment for
banks and for thrifts has been nearly equalized and will be identical for
comparably rated institutions after January 1, 2000, at which time banks will
share equally in the FICO assessment and the BIF and SAIF funds will be merged.
Capital Regulation. The Company and each of the Banks are subject to
risk-based capital standards by which all bank holding companies and banks are
evaluated in terms of capital adequacy. These standards relate a banking
company's capital to the risk profile of its assets. The risk-based capital
standards require that bank holding companies and banks must have Tier 1 capital
of at least 4% and total capital, including Tier 1 capital, equal to at least 8%
of its total risk-adjusted assets. Tier 1 capital includes common stockholders'
equity and qualifying perpetual preferred stock together with related surpluses
and retained earnings. The remaining portion of this capital standard, known as
Tier 2 capital, may be
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comprised of limited life preferred stock, qualifying subordinated debt
instruments, and the reserves for possible loan losses.
Additionally, banking organizations must maintain a minimum leverage ratio
of 3% measured as the ratio of Tier 1 capital to adjusted average assets. This
3% leverage ratio is a minimum for the top-rated banking organizations without
any supervisory, financial or operational weaknesses or deficiencies and other
banking organizations are expected to maintain leverage capital ratios 100 to
200 basis points above the minimum depending on their financial condition.
See Note 20 of Notes to the Company's Consolidated Financial Statements,
contained in the Company's Annual Report, for a table that provides a comparison
of Omega's and each of the Bank's risk based capital ratios and the leverage
ratio to minimum regulatory requirements.
Federal Banking Agencies have broad powers to take corrective action to
resolve problems of insured depository institutions. The extent of these powers
depends upon whether the institutions in question are "well capitalized,"
"adequately capitalized," "under capitalized", "significantly undercapitalized,"
or "critically undercapitalized."
The FDIC has issued a rule which sets the capital level for each of the
five capital categories established in the 1991 Banking Law. Under the rule a
bank is deemed to be "well capitalized" if the bank has a total risk-based
capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or
greater, has a leverage ratio of 5% or greater, and is not subject to any order
of final capital directive by the FDIC to meet and maintain a specific capital
level for any capital measure. A bank is deemed "adequately capitalized" if the
bank has a total risk-based capital ratio of 8% or greater, a Tier-1 risk-based
capital ratio of 4% or greater and a leverage capital ratio of 4% or greater (or
3% or greater for the most highly rated banks), and does not meet the definition
of a "well capitalized" bank. A bank that has total risk-based capital, Tier-1
risk-based capital and leverage capital that is less than 8%, 4% and 4%,
respectively, is deemed "undercapitalized." Under the regulation "significantly
undercapitalized" banks are those with total risk-based capital, Tier-1
risk-based capital and leverage capital that is less than 5%, 3% and 3%,
respectively. Finally, "critically undercapitalized" banks are defined as those
banks which have a ratio of tangible equity to total assets that is equal to or
less than 2%. A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
received an unsatisfactory examination rating.
All of the bank regulatory agencies have issued final rules that amend
their capital guidelines for interest rate risk and requires such agencies to
consider in their evaluation of a bank's capital adequacy the exposure of a
bank's capital and economic value to changes in interest rates. These final
rules do not establish an explicit supervisory threshold. The agencies intend,
at a subsequent date, to incorporate explicit minimum requirements for interest
rate risk into their risk based capital standards and have proposed a
supervisory model to be used together with bank internal models to gather data
and hopefully propose at a later date explicit minimum requirements.
INTERSTATE BANKING
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On September 29, 1994, the President signed into law the "Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994" (the "Interstate Act").
Among other things, the Interstate Act permits bank holding companies to acquire
banks in any state after September 29, 1995. Beginning June 1, 1997, a bank may
merge with a bank in another state so long as both states have not opted out of
interstate branching between the date of enactment of the Interstate Act and May
31, 1997. States may enact laws opting out of interstate branching before June
1, 1997, subject to certain conditions. States may also enact laws permitting
interstate merger transactions before June 1, 1997 and host states may impose
conditions on a branch resulting from an interstate merger transaction that
occurs before June 1, 1997, if the conditions do not discriminate against
out-of-state banks, are not preempted by Federal law and do not apply or require
performance after May 31, 1997. Pennsylvania has enacted a law opting in
immediately to interstate merger and interstate branching transactions.
Interstate acquisitions and mergers would both be subject, in general, to
certain concentration limits and state entry rules relating to the age of the
bank.
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Under the Interstate Act, the Federal Deposit Insurance Act is amended to
permit the responsible Federal regulatory agency to approve the acquisition of a
branch of an insured bank by an out-of-state bank or bank holding company
without the acquisition of the entire bank or the establishment of a "de novo"
branch only if the law of the state in which the branch is located permits
out-of-state banks to acquire a branch of a bank without acquiring the bank or
permits out-of-state banks to establish "de-novo" branches. Pennsylvania has
passed such a law.
NATIONAL MONETARY POLICY
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In addition to being affected by general economic conditions, the earnings
and growth of the Banks and, therefore, the earnings and growth of the Company,
are affected by the policies of regulatory authorities, including the OCC, the
FRB and the FDIC. An important function of the FRB is to regulate the money
supply and credit conditions. Among the instruments used to implement these
objectives are open market operations in U.S. government securities, setting the
discount rate and changes in reserve requirements against bank deposits. These
instruments are used in varying combinations to influence overall growth and
distribution of credit, bank loans, investments and deposits, and their use may
also affect interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the FRB have had a significant
effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future. The affects of such policies upon the future
businesses, earnings and growth of the Banks cannot be predicted.
EMPLOYEES
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As of December 31, 1998, the Company had a total of 468 full-time employees
and 89 part-time employees.
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INVESTMENT CONSIDERATIONS
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In analyzing whether to make or to continue an investment in the Company,
investors should consider, among other factors, the following:
ECONOMIC CONDITIONS AND RELATED UNCERTAINTIES. Commercial banking is
affected, directly and indirectly, by local, domestic, and international
economic and political conditions, and by governmental monetary and fiscal
policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, real estate values, international conflicts
and other factors beyond the Company's control may adversely affect the
potential profitability of the Company. Any future rises in interest rates,
while increasing the income yield on the Company's earnings assets, may
adversely affect loan demand and the cost of funds and, consequently, the
profitability of the Company. Any future decreases in interest rates may
adversely affect the Company's profitability because such decreases may reduce
the amounts which the Company may earn on its assets. Economic downturns could
result in the delinquency of outstanding loans. Management does not expect any
one particular factor to materially affect the Company's results of operations.
However, downtrends in several areas, including real estate, construction and
consumer spending, could have an adverse impact on the Company's ability to
remain profitable.
EFFECT OF INTEREST RATES ON THE BANKS AND THE COMPANY. The operations of
financial institutions such as the Company are dependent to a large degree on
net interest income, which is the difference between interest income from loans
and investments and interest expense on deposits and borrowings. An
institution's net interest income is significantly affected by market rates of
interest which in turn are affected by prevailing economic conditions, by the
fiscal and monetary policies of the federal government and by the policies of
various regulatory agencies. At December 31, 1998, total interest bearing
liabilities maturing or repricing within one year exceeded total interest
earning assets maturing or repricing during the same time period by $55.687
million, representing a cumulative one year sensitivity ratio of 0.87.
Simulation of interest rate changes indicates that if interest rates were
decreased, net interest income would likewise decrease over the next twelve
months. Like all financial institutions, the Company's balance sheet is affected
by fluctuations in interest rates. Volatility in interest rates can also result
in disintermediation, which is the flow of funds away from financial
institutions into direct investments, such as US Government and corporate
securities and other investment vehicles, including mutual funds, which, because
of the absence of federal insurance premiums and reserve requirements, generally
pay higher rates of return than financial institutions. See "Item 7:
Management's Discussion of Financial Condition and Results of Operations" and
Item 7a: Quantitative and Qualitative Disclosure about Market Risk".
FEDERAL AND STATE GOVERNMENT REGULATIONS. The operations of the Company and
the Banks are heavily regulated and will be affected by present and future
legislation and by the policies established from time to time by various federal
and state regulatory authorities. In particular, the monetary policies of the
Federal Reserve Board have had a significant effect on the operating results of
banks in the past, and are expected to continue to do so in the future. Among
the instruments of monetary policy used by the Federal Reserve Board to
implement its objectives are changes in the discount rate charged on bank
borrowings and changes in the reserve requirements on bank deposits. It is not
possible to predict what changes, if any, will be made to the monetary polices
of the Federal Reserve Board or to existing federal and state legislation or the
effect that such changes may have on the future business and earnings prospects
of the Company.
During the past several years, significant legislative attention has been
focused on the regulation and deregulation of the financial services industry.
Non-bank financial institutions, such as securities brokerage firms, insurance
companies and money market funds, have been permitted to engage in activities
which compete directly with traditional bank business.
COMPETITION. The Company faces strong competition from other banks, savings
institutions and other financial institutions which have branch offices or
otherwise operate in the Company's market area, as well as many other companies
now offering a range of financial services. Many of these competitors
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have substantially greater financial resources and larger branch systems than
the Company. In addition, many of the Banks' competitors have higher legal
lending limits than do the Banks. Particularly intense competition exists for
sources of funds including savings and retail time deposits and for loans,
deposits and other services that the Banks offer. See "Item 1: BUSINESS--
Competition."
ALLOWANCE FOR LOAN LOSSES. The Company has established an allowance for
loan losses which management believes to be adequate to offset potential losses
on the Company's existing loans. However, there is no precise method of
predicting loan losses. There can be no assurance that any future declines in
real estate market conditions, general economic conditions or changes in
regulatory policies will not require the Company to increase its allowance for
loan losses.
DIVIDENDS. While the Board of Directors expects to continue its policy of
regular quarterly dividend payments, this dividend policy will be reviewed
periodically in light of future earnings, regulatory restrictions and other
considerations. No assurance can be given, therefore, that cash dividends on
common stock will be paid in the future. See "Item 5: Market for the
Registrant's Common Stock and Related Shareholder Matters."
MARKET FOR COMMON STOCK. Although the Company's Common Stock is listed on
the NASDAQ National Market System, there has been only limited trading in the
Common Stock. There can be no assurance that a regular and active market for the
Common Stock will develop in the foreseeable future. See "Item 5: Market for the
Registrant's Common Stock and Related Stockholder Matters." Investors in the
shares of Common Stock must, therefore, be prepared to assume the risk of their
investment for an indefinite period of time.
"ANTI-TAKEOVER" AND "ANTI-GREENMAIL" PROVISIONS AND MANAGEMENT
IMPLICATIONS. The Articles of the Company presently contain certain provisions
which may be deemed to be "anti-takeover" and "anti-greenmail" in nature in that
such provisions may deter, discourage or make more difficult the assumption of
control of the Company by another corporation or person through a tender offer,
merger, proxy contest or similar transaction or series of transactions. The
overall effects of the "anti-takeover" and "anti-greenmail" provisions may be to
discourage, make more costly or more difficult, or prevent a future takeover
offer, prevent shareholders from receiving a premium for their securities in a
takeover offer, and enhance the possibility that a future bidder for control of
the Company will be required to act through arms-length negotiation with the
Company's Board of Directors. Copies of the Articles of the Company are on file
with the Securities and Exchange Commission and the Pennsylvania Secretary of
State.
INFORMATION SYSTEMS; YEAR 2000. The Company is currently in the process of
evaluating its information technology infrastructure to determine whether it is
Year 2000 compliant. The issue with respect to Year 2000 is whether systems will
properly recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause complete system failures. There can be no assurance that the Year
2000 problem will not have a material adverse effect on the financial condition
or results of operations of the Company. See "Item 7: Management's Discussion
and Analysis of Financial Condition and Results of Operations".
STOCK NOT AN INSURED DEPOSIT. Investments in the shares of the Company's
Common Stock are not deposits insured against loss by the FDIC or any other
entity.
BESPEAKS CAUTION DOCTRINE. Investors should be aware that the United States
Court of Appeals for the Third Circuit, in a case entitled In Re: Donald J.
Trump Casino Securities Litigation - Taj Mahal Litigation (No. 92-5350, filed
October 14, 1993), adopted a legal doctrine entitled the "Bespeaks Caution
Doctrine" which may prevent holders of the Company's Common Stock from
recovering from the Company based upon material misstatements and omissions
contained in the Annual Report on Form 10-K and the Company's other disclosure
documents to the extent that this Form 10-K or such other documents contained
cautionary statements to apprise investors of the risks of the Company's
securities. The foregoing investment considerations may have the effect of
bringing this Form 10-K, as well as other Company disclosure documents, within
the purview of the Bespeaks Caution Doctrine.
10
<PAGE>
Item 2: Properties
- -------------------
The Company's corporation headquarters are located at 366 Walker Drive,
State College, Pennsylvania. This building is owned by the Company, subject to a
mortgage in the original principal amount of $5,000,000 held by Mid-State Bank
and Trust Co. The Company occupies the first two floors and a portion of the
third floor of this building and is leasing office space on the third floor. In
addition, the Banks operate branch offices and/or automated teller machines,
indicated by (ATM), at the following locations which are owned by the Company.
Omega Bank
----------
117 South Allen Street, State College, PA (Main Office) (ATM)
222 South Allen Street, State College, PA
1480 East College Ave., State College, PA (ATM)
137 North Allegheny Street, Bellefonte, PA (ATM)
Fourth and Olive Streets, Snow Shoe, PA
Main Street, Rebersburg, PA
Main Street, Millheim, PA
400 East Boal Avenue, Boalsburg, PA (ATM)
100 High Street, Port Matilda, PA (ATM)
Main and Mill Streets, Loganton, PA
201 Mill Street, Milesburg, PA
32 East Market St., Lewistown, PA (Main Office) (ATM)
1250 West Fourth St., Lewistown, PA
111 North Logan Blvd., Burnham, PA
Main Street, Mifflin, PA
On the Square, Thompsontown, PA
10 Carriage House Lane, Reedsville, PA (ATM)
East Main Street, Allensville, PA
Route 522 North, Lewistown, PA (ATM only)
1519 Bloom Road, Danville, PA
Hollidaysburg Trust Company
---------------------------
218 - 224 Allegheny Street, Hollidaysburg, PA (Main Office)
113 West Allegheny Street, Martinsburg, PA (ATM)
215 High Street, Williamsburg, PA
1567 East Pleasant Valley Boulevard, Altoona, PA
430 East 25th Avenue, Altoona, PA (ATM)
Penn Central National Bank
--------------------------
431 Penn Street, Huntingdon, PA (Main Office)
16-20 East Shirley Street, Mount Union, PA
Main Street, Alexandria, PA
Route 26, James Creek, PA
911 Church Street, Saxton, PA
708 Main Street, Saxton, PA (ATM only)
14th and Moore Streets, Huntingdon, PA
The Banks operate branch offices and ATMs at the following locations which
are leased by the Company. The leases for these properties have expiration dates
ranging from 1999 to 2011.
Branches
--------
Westerly Parkway, State College, PA (ATM)
1811 South Atherton Street, State College, PA (ATM) building owned,
land leased.
11
<PAGE>
1667 North Atherton Street, State College, PA (ATM)
building owned, land leased.
Routes 45 and 144, Centre Hall, PA
366 East College Avenue, State College, PA (ATM)
520 Third Avenue, Duncansville, PA (ATM)
3014 Pleasant Valley Boulevard, Altoona, PA (ATM)
300 Spring Plaza, Roaring Spring, PA (ATM)
5812 Sixth Avenue, Altoona, PA (ATM) building owned, land leased.
Danville State Hospital, Rt. 11, Danville, PA
Morrison's Cove Home, 429 South Market Street, Martinsburg, PA
Westminster Woods, 360 Westminster Woods Drive, Huntingdon, PA
Foxdale Village, 500 Marylyn Avenue, State College, PA
ATMs
----
Weis Shopping Plaza, Mifflintown, PA
Penn State University Campus, State College, PA (2)
414 East College Avenue, State College, PA
2844 West College Avenue, State College, PA
110 1/2 Burrowes Street, State College, PA
Centre Community Hospital, 1800 East Park Avenue, State College, PA
116 W. College Ave., State College, PA
135 S. Pugh Street, State College, PA
I80 Exit 22 and Rt 144, Snow Shoe, PA
Sheetz Store, 1671 East Pleasant Valley Boulevard, Altoona, PA
Martin General Store, Route 22, Alexandria, PA
JC Blair Memorial Hospital, Warm Springs Avenue, Huntingdon, PA
Ames Store, Route 22 Plaza, Huntingdon, PA
Sheetz Store, 4th Street and Rt. 22, Huntingdon, PA
Sheetz Store, Jefferson Street, Mount Union, PA
Sheetz Store, 14th and Moore Streets, Huntingdon, PA
Martin General Store, 300 High Street, Williamsburg, PA
Service Mart of Mifflin, 2 Mowery Street, Mifflin, PA
Warm Springs Avenue, Huntingdon, PA
12
<PAGE>
Item 3: Legal Proceedings
- --------------------------
The Company and the Banks are involved in various legal proceedings
incidental to their business. Neither the Company, the Banks nor any of their
properties is subject to any material legal proceedings, nor are any such
proceedings known to be contemplated by any governmental authority.
Item 4: Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None
Item 4.1: Executive Officers of the Registrant
- -----------------------------------------------
Set forth below is certain information concerning the executive officers of
the Company who are not also directors.
On March 18, 1995, Omega's banking subsidiaries, Peoples National Bank of
Central Pennsylvania ("Peoples Bank") and The Russell National Bank ("Russell
Bank"), merged to form Omega Bank. Any reference below to service with Omega
Bank includes service with Omega Bank's predecessors prior to such merger.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Daniel L. Warfel .............. 52 Executive Vice President and Chief Financial Officer of the Company since 1987;
Executive Vice President and Director of Omega Bank since 1983.
David N. Thiel ................ 55 Senior Vice President and Secretary of the Company since 1987; Vice President,
Secretary and Cashier of Omega Bank since 1973.
JoAnn N. McMinn ............... 46 Senior Vice President and Controller of the Company since 1988; Vice President
and Controller of Omega Bank since 1976.
Donita R. Koval ............... 38 Senior Vice President of the Company since 1995.
</TABLE>
13
<PAGE>
PART II
Item 5: Market for the Registrant's Common Stock and Related Stockholder Matters
- --------------------------------------------------------------------------------
Incorporated by reference from the section entitled "Common Stock Market
Prices and Dividends" in the Company's Annual Report to Shareholders for the
year ended December 31, 1998. As of February 22, 1999, the number of
shareholders of the Company's common stock was 2,811.
The company did not sell any equity securities during 1998 which were not
registered under the Securities Act.
Item 6: Selected Financial Data
- --------------------------------
Incorporated by reference from the section entitled "Selected Financial
Data" in the Company's Annual Report to Shareholders for the year ended December
31, 1998.
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Incorporated by reference from the sections entitled "Management's
Discussion and Analysi--Results of Operations" and "Financial Condition" in
the Company's Annual Report to Shareholders for the year ended December 31,
1998.
Item 7A: Quantitative and Qualitative Disclosure about Market Risk
- -------------------------------------------------------------------
Incorporated by reference from the sections entitled "Management's
Discussion and Analysis--Financial Condition" in the Company's Annual Report to
Shareholders for the year ended December 31, 1998.
Item 8: Financial Statements and Supplementary Data
- ---------------------------------------------------
Incorporated by reference from the Company's Consolidated Financial
Statements and the Notes to Consolidated Financial Statements thereto included
in the Company's Annual Report to Shareholders for the year ended December 31,
1998.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ----------------------------
None
14
<PAGE>
PART III
Item 10: Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Incorporated by reference from the Company's Proxy Statement relating to
the 1999 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K, except information concerning certain Executive
Officers of the Company which is set forth in Item 4.1 hereof.
Item 11: Executive Compensation
- -------------------------------
Incorporated by reference from the Company's Proxy Statement relating to
the 1999 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
Item 12: Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
Incorporated by reference from the Company's Proxy Statement relating to
the 1999 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
Item 13: Certain Relationships and Related Transactions
- -------------------------------------------------------
Incorporated by reference from the Company's Proxy Statement relating to
the 1999 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
15
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------------------------------------------------------------------------
(a) Documents filed as part of this report:
(1) Financial Statements. The following consolidated financial
statements and the notes thereto of the Company, which are included in the
Company's Annual Report to Shareholders for the year ended December 31,
1997, and the report of independent public accountants which is also
included in such Annual Report, are incorporated herein by reference into
Item 8 of this Report:
Consolidated Balance Sheets--
December 31, 1998 and 1997
Consolidated Statements of Income
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity--
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
(2) Financial Statement Schedules. Financial statement schedules are
omitted because they are not applicable or the required information is shown in
the financial statements or notes thereto.
Exhibits filed pursuant to Item 601 of Regulation S-K
- -----------------------------------------------------
Number Title
- ------ -----
3.1(1) Amended and Restated Articles of Incorporation of Omega
3.2(6) Articles of Amendment to the Amended and Restated Articles
of Incorporation.
3.3(13) Articles of Amendment to the Amended and Restated Articles
of Incorporation
3.4(8) Amended and Restated By-Laws of Omega, as amended.
10.1 Intentionally Omitted
10.2 Intentionally Omitted
16
<PAGE>
Number Title
- ----- -----
*10.3(7) Severance Agreement by and among David B. Lee, the Company, and
Peoples Bank dated March 15, 1990.
*10.4(7) Severance Agreement by and among Daniel L. Warfel and the Company
dated December 18, 1990.
*10.5(2) Peoples (now Omega) Employee Stock Purchase Plan.
*10.6(2) Peoples (now Omega) Stock Option Plan (1986).
*10.7(7) Amendment No. 1 to Stock Option Plan (1986).
*10.8(7) Omega Amended and Restated Employee Stock Ownership Plan.
*10.8.1(7) ESOP Trust Agreement
*10.9(4) Peoples (now Omega) Employee Retirement Plan.
*10.10(4) Second Amendment to Peoples (now Omega) Employee Retirement Plan.
*10.11(7) TRA '86 Amendments to Peoples (now Omega) Employee
Retirement Plan.
*10.12(5) Form of Peoples Bank Executive Supplemental Income Agreement.
*10.13(1) Form of Russell Bank Deferred Compensation Agreement
for Directors.
10.14(1) Credit Agreement, dated December 6, 1985, between the Company and
Pittsburgh National Bank.
*10.15 Intentionally omitted.
*10.16 Intentionally omitted.
*10.17(4) Omega Executive Incentive Compensation Plan.
10.18 Intentionally omitted.
10.19 Intentionally omitted.
10.20(7) Purchase Agreement (with Exhibits) between Omega and Mid-State
Bank & Trust Company ("Mid-State").
10.21(7) Assignment of Promissory Note from Omega to Mid-State together
with $5,000,000 Secured Promissory Note of Omega Financial
Corporation Employee Stock Ownership Plan Trust ("ESOP Trust").
10.22(7) Pledge and Security Agreement between Omega and the ESOP Trust.
10.23(7) Mortgage from Omega to Mid-State.
17
<PAGE>
Number Title
- ----- -----
*10.24(10) Severance Agreement, as amended, with D. Stephen Martz.
*10.25(10) Severance Agreement, as amended, with Robert T. Gentry
*10.26(11) 1994 Stock Option Plan for Non-Employee Directors
10.27 Intentionally omitted.
*10.28(13) Directors Deferred Compensation Agreements for Peoples National
Bank and Omega Financial Corporation
*10.29(14) 1996 Employee Stock Option Plan
10.30(15) Second Amendment to Omega Amended and Restated Employee Stock
Ownership Plan
13.1 Annual Report to Shareholders for the year ended December 31, 1998
(such reports, except for those portions expressly incorporated
by reference in this Annual Report on Form 10-K, is furnished
for the information of the Commission and is not to be deemed
filed as part of this Report).
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Arthur Andersen LLP (filed herewith)
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
- -------------
* Indicates management contract or compensatory plan, contract or
arrangement.
(1) Incorporated by reference from Omega's (formerly Peoples') Annual Report on
Form 10-K for the year ended December 31, 1986.
(2) Incorporated by reference from Omega's (formerly Peoples' Registration
Statement on Form S-4 (File No. 33-9045).
(3) Incorporated by reference from Omega's Annual Report on Form 10-K for the
year ended December 31, 1987.
(4) Incorporated by reference from Omega's Annual Report on Form 10-K for the
year ended December 31, 1988.
(5) Incorporated by reference from Omega's Annual Report on Form 10-K for the
year ended December 31, 1989.
(6) Incorporated by reference from Omega's Quarterly Report on Form 10-Q for
the period ended June 30, 1990.
(7) Incorporated by reference from Omega's Annual Report on Form 10-K for the
year ended December 31, 1990.
(8) Incorporated by reference from Omega's Annual Report on Form 10-K for the
year ended December 31, 1992.
(9) Incorporated by reference from Omega's Registration Statement on Form S-4
(File No. 33-71070).
(10) Incorporated by reference from Omega's Annual Report on Form 10-K for the
year ended December 31, 1993.
18
<PAGE>
(11) Incorporated by reference from Omega's Registration Statement on Form S-8
(Registration No. 33-82214).
(12) Incorporated by reference from Omega's Registration Statement on Form S-4
(Registration No. 33-91472).
(13) Incorporated by reference from Omega's Annual Report on Form 10-K for the
year ended December 31, 1994.
(14) Incorporated by reference from Omega's Annual Report on Form 10-K for the
year ended December 31, 1995.
(15) Incorporated by reference from Omega's Annual Report on Form 10-K for the
year ended December 31, 1996.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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
By: ________________________________________
David B. Lee, Chairman of the Board and
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
______________________ Chairman of the Board, and __________________
David B. Lee Chief Executive Officer and
Director (Principal Executive)
Officer
______________________ President and Chief __________________
D. Stephen Martz Operating Officer and Director
______________________ Director __________________
Robert T. Gentry
______________________ Executive Vice President and __________________
Daniel L. Warfel Chief Financial Officer (Principal
Financial Officer)
_______________________ Senior Vice President and Controller __________________
JoAnn N. McMinn (Principal Accounting Officer)
_______________________ Director __________________
Raymond F. Agostinelli
_______________________ Director __________________
Merle K. Evey
_______________________ Director __________________
Philip E. Gingerich
_______________________ Director __________________
Robert N. Oliver
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
_______________________ Director __________________
James W. Powers, Sr.
_______________________ Director __________________
Stanton R. Sheetz
_______________________ Director __________________
Robert A. Szeyller
</TABLE>
21
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF OMEGA FINANCIAL CORPORATION
<TABLE>
<CAPTION>
State or Jurisdiction Trade Name
Name of Subsidiary of Incorporation (if any)
- ------------------ --------------------- ----------
<S> <C> <C>
Omega Bank, N.A. United States --
P.O. Box 298
State College, PA 16804
Hollidaysburg Trust Company Pennsylvania --
224 Allegheny Street
Hollidaysburg, PA 16648
Penn Central National Bank United States --
431 Penn Street
Huntingdon, PA 16652
Central Pennsylvania Investment Company Delaware --
1105 N. Market Street
Wilmington, DE 19899
Central Pennsylvania Life Insurance Company Arizona --
1421 E. Thomas Road
Phoenix, AZ 85014
Central Pennsylvania Leasing, Inc. Pennsylvania --
Central Pennsylvania Real Estate, Inc. Pennsylvania --
</TABLE>
22
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN L.L.P.
23
<PAGE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated January 22, 1999, incorporated by reference in this Form
10-K, into the Company's previously filed Form S-8 Registration Statements File
No. 33-15780 and 33-82214.
Arthur Andersen LLP
Lancaster, Pa.
March 24, 1999
24
Omega Financial Corporation
1998 ANNUAL REPORT [LOGO]
<PAGE>
TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS,
-------------------------------------------
[PHOTO]
In a year of narrowing interest spreads, we are pleased to report that
Omega Financial Corporation's earnings for 1998 are up 0.7% over 1997. 1998's
net income figure of $17.092 million was $124,000 higher than 1997's $16.968
million, and the Corporation's return on average assets of 1.66% was in line
with last year's 1.67%.
Our net interest margin and income from credit activities figures for 1998
did reflect the declining rate environment. Omega's net interest margin for the
year declined by 5 basis points from 5.08% to 5.03% on a fully tax equivalent
basis, while income from credit activities was down 1.2% to $45.558 million from
$46.091 million in 1997.
Nevertheless, earnings per share were up. The Corporation reported diluted
earnings per share of $1.79 for the year, 1.1% over the $1.77 reported in 1997.
As a result, average shareholders' equity increased 8.8% over 1997.
Our increased profitability and our growth in capital affected return on
equity. Our return on average equity (ROE) was 11.35%, compared to 1997's figure
of 12.26%. In a move to reduce the impact of rising capital on ROE, we pushed up
our annual cash dividend again in 1998. We increased the dividend to $0.80 from
$0.65 last year, a 23.1% increase.
On the expense side, despite being faced with technology upgrades, the
Corporation did well. The item that had a significant impact on non-interest
expenses for the year was the Corporation's decision to write off the remaining
goodwill and core deposit intangible from a previous acquisition. The related
charge to earnings of $1.9 million before tax was largely offset by our
securities gains, minimizing any effect on overall earnings.
As to our Year 2000 preparedness, by the end of the third quarter of 1998,
Omega had achieved the goal of completing the first three phases of our plan. At
the end of December, Omega and its vendors had completed more than 75% of the
required testing on our mission critical systems. We anticipate that testing
should be complete by the end of March 1999. To date, we are very satisfied and
believe that the results of our testing assure us a successful transition into
the Year 2000.
With the year-end came the news that Omega's reputation for good
performance is again being heralded across the country. Based in Portland,
Oregon, The Red Chip Review covers small-cap stocks. Its
- --------------------------------------------------------------------------------
2
<PAGE>
analysts are regularly quoted in the financial press.
We were very pleased to learn that Omega was profiled in the Review.
Characterizing Omega as a Corporation with stringent credit standards, a solid
loan strategy, a strong capital ratio and a history of good dividend yields, the
article noted that Omega held a tighter rein on expenses than most of the banks
the Review follows.
The Red Chip Review's headline "Happy Valley Bank...Central Pennsylvania
worships at the shrine of Penn State football -- while trusting Omega Financial
Corporation with a good bit of its money" hints at another secret of our
success...service to our communities.
With Penn State being only one of several fine schools in the market area,
the eight central Pennsylvania counties we serve are part of Pennsylvania's
academic heartland. Because of the opportunity the area presents, we square off
with some of the nation's largest financial institutions.
To compete and succeed, we must prove to customers each day that being the
hometown bank equates to responsiveness and exceptional service. Among the many
initiatives in 1998 to support this commitment, we marketed special low-rate
residential mortgages and aggressively promoted home equity loans. We expanded
our limited-service office locations and added online benefits access for our
Club account and Golden Choice Advantage members.
Through these sorts of initiatives and with the contributions of our
directors and of our staff members to our mission, we deliver on our commitment
to service. In pursuing our mission, we believe that we will continue to
solidify the foundation of our continued strong performance for next year and
the years to come.
Sincerely,
/s/David B. Lee /s/D. Stephen Martz
David B. Lee D. Stephen Martz
Chairman and Chief President and Chief
Executive Officer Operating Officer
- --------------------------------------------------------------------------------
3
<PAGE>
CORPORATE DIRECTORS AND OFFICERS
--------------------------------
The lists on this page and the following two pages present the directors and
officers of Omega Financial Corporation as of December 31, 1998.
BOARD OF DIRECTORS
Raymond F. Agostinelli
President and owner
McLanahan Drug Store Management Co., Inc.
Merle K. Evey, Esq.
Attorney at Law
Robert T. Gentry
President of Penn Central National Bank
Philip E. Gingerich
Self employed Real Estate Appraiser and Consultant
David B. Lee, Chairman
Chief Executive Officer of Omega Financial Corporation
D. Stephen Martz
President and Chief Operating Officer of Omega
Financial Corporation
Robert N. Oliver
Owner, Oliver Farms
James W. Powers, Sr.
Retired president, Polestar Plastics
Manufacturing Company
Stanton R. Sheetz
President and C.E.O.
Sheetz, Inc.
Retail Convenience Stores
Robert A. Szeyller
Managing partner, Pennsylvania Financial Group, Inc.
Pension and Insurance Consulting Firm
DIRECTORS EMERITI
Ned C. Cummings
William E. Henry, O.D.
Albert N. Masood
Don C. Meyer
John R. Miller, Jr., Esq.
Samuel D. Zeiders, Jr., D.D.S.
David K. Goodman, Sr.
OFFICERS
David B. Lee ...............................Chairman and Chief Executive Officer
D. Stephen Martz ..........................President and Chief Operating Officer
Daniel L. Warfel, CPA ......Executive Vice President and Chief Financial Officer
David N. Thiel ..............................Senior Vice President and Secretary
JoAnn N. McMinn ..................Senior Vice President and Corporate Controller
Donita R. Koval ....................Senior Vice President, Credit Administration
Teresa M. Ciambotti ............................Vice President, Funds Management
Ronald A. Donaldson .......................Vice President and Operations Officer
Robert A. Frederick ....................Vice President and Director of Marketing
William F. Frey ...........................Vice President and Compliance Officer
Faye L. Maring ...................Vice President and Director of Human Resources
Lowell I. Rohrer ..................Vice President and Manager of Data Processing
R. Keith Sipe ..................................Vice President and Chief Auditor
Robin R. Weikel ..........................Vice President and Regional Controller
CORPORATE ADDRESS
366 Walker Drive
P.O. Box 619
State College, Pennsylvania 16804-0619
PRINCIPAL SUBSIDIARIES OF OMEGA FINANCIAL CORPORATION
Omega Bank, N.A.
P.O. Box 298
State College, PA 16804
Hollidaysburg Trust Company
224 Allegheny Street
Hollidaysburg, PA 16648
Penn Central National Bank
431 Penn Street
Huntingdon, PA 16652
Central Pennsylvania Investment Company
1409 Foulk Rd., Suite 102
Wilmington, DE 19803
Central Pennsylvania Life Insurance Company
1421 E. Thomas Road
Phoenix, AZ 85014
- --------------------------------------------------------------------------------
4
<PAGE>
BANK DIRECTORS AND OFFICERS
---------------------------
OMEGA BANK, N.A.
- ----------------------------
Board of Directors
- ------------------
Raymond F. Agostinelli Stephen M. Krentzman
Richard L. Campbell, Esq. David B. Lee
Mary Jane Crain James W. Powers, Sr.
Philip E. Gingerich Richard B. Roush
Frederick J. Kissinger Robert A. Szeyller
Charles H. Zendt, Jr.
Directors Emeriti
- -----------------
David D. Borland H. Richard Ishler, M.D.
J. Harold Boyer Jonas B. Kauffman, Jr.
Ned C. Cummings Nathan H. Krauss
Herbert C. Graves Don C. Meyer
Darl H. Heller John R. Miller, Jr., Esq.
William E. Henry, O.D. George R. Smith
Samuel D. Zeiders, Jr., D.D.S.
Officers
- --------
David B. Lee ..........................................Chairman, President and
Chief Executive Officer
Charles H. Zendt, Jr. ................................Executive Vice President
C. Leonard Eby, Jr. ............................Senior Vice President, Lending
Dennis E. Hampton ................................Senior Vice President, Trust
William D. Karch ...............................Senior Vice President, Lending
David N. Thiel ............................Senior Vice President and Secretary
Kimberly A. Benner ......................................Vice President, Trust
John E. Gravish ..............................Vice President, Regional Lending
Ann K. Guss ..................................Vice President, Mortgage Lending
Steven W. Grim .............................Vice President, Commercial Lending
Ronald S. Haring ...........................Vice President, Commercial Lending
Susan Kratzer .................................................Vice President,
Regional Branch Administration
Eric F. Kraytz .............................Vice President, Commercial Lending
Thomas C. Landis ......................................Vice President, Lending
Mary Grace Kudey ..............................................Vice President,
Commercial Lending
Francis C. Moyer ...............................Vice President, Branch Manager
Robert C. Snyder ..............................................Vice President,
Branch Administration
Jesse Weaver ............................................Vice President, Trust
Thomas D. Weldon ........................................Vice President, Trust
Regional Bank Boards
- --------------------
Centre/Clinton Region
Larry R. Breon C. Guy Rudy
Charles L. Frazier Daniel C. Schrack
Jay R. Montgomery William E. Young, D.O.
Mifflin/Juniata Region
Thomas G. Clark Steven L. Palm
Jeffrey K. Creighton Ronald C. Shearer
Ralph A. Germak Kenneth O. Stuck, D. Ed.
Jerry Leach William S. Taylor, III
Roy A. Leister Mervin R. Zendt
Montour Region
James P. Garman Thomas N. Mertz
Carol Linnet
Directors Emeriti
- -----------------
William Bamat Lee E. Sausman
Miles X. Clevenstine E. J. Straley, V.M.D.
James G. Corman Jay Struble
C. Richard Dimm Peter Swistock, Sr.
Robert L. Homan Elwood A. Way
Lawrence L. Hoverter Warren K. Zook
- --------------------------------------------------------------------------------
5
<PAGE>
BANK DIRECTORS AND OFFICERS
---------------------------
HOLLIDAYSBURG TRUST COMPANY
- ----------------------------
Board of Directors
- ------------------
Ralph W. Arthur, Jr. D. Stephen Martz
Merle K. Evey, Esq. Stanton R. Sheetz
Rex W. Hershberger Joseph Tanner
David C. Hileman Vincent C. Turiano
John P. Kinney
Directors Emeriti
- -----------------
Charles I. Kreider Dorothea D. Nelson
Joseph R. Good Lester E. Plank
James J. Madden Roy F. Rumbaugh
Officers
- --------
D. Stephen Martz ...........................................Chairman, President,
Chief Executive Officer
Rex W. Hershberger ................................................Vice Chairman
Vincent C. Turiano ....................................Executive Vice President,
Chief Operating Officer
Bruce R. Erb .......................................Senior Vice President, Trust
Richard A. Scholton ..............................Senior Vice President, Lending
Steven C. Lewis .......................................Vice President, Community
Banking, Treasurer
Dennis C. O'Connor ...................................Vice President, Commercial
Services
Roger W. Oswald ............................Vice President, Agricultural Manager
PENN CENTRAL NATIONAL BANK
- ----------------------------
Board of Directors
- ------------------
Edward J. Anderson Robert T. Gentry
Phyllis J. Bard Samuel L. Hinish
Carl H. Baxter Robert N. Oliver
Ralph B. Everhart
Directors Emeriti
- -----------------
Harry M. Enyeart J. Melvin Isett
John R. Gates Albert N. Masood
David K. Goodman, Sr. William E. Swigart, Jr.
Officers
- --------
Samuel L. Hinish .....................................................Chairman
Robert T. Gentry ...........................President, Chief Executive Officer
John R. Franks ......................................Executive Vice President,
Chief Operating Officer
William J. Bishop ..............................................Vice President
Ronald A. Casner ...............................................Vice President
Judith G. Fleming .......................................Vice President, Trust
Daniel P. Nead ........................................Vice President, Lending
- --------------------------------------------------------------------------------
6
<PAGE>
COMMON STOCK MARKET PRICES AND DIVIDENDS
----------------------------------------
The common stock of Omega Financial Corporation is traded on The Nasdaq Stock
Market under the symbol OMEF. As of December 31, 1998, the number of
shareholders of record of the Corporation's common stock was 2,811.
The following table sets forth, for the periods indicated (1) the high and low
sale prices and (2) cash dividends:
1998 1997
------------------------ ------------------------
Cash Cash
Dividends Dividends
Quarter Ended High Low Paid High Low Paid
------- ------- ------ ------- ------- ------
March 31 ............. $ 39.00 $ 34.25 $ 0.18 $ 28.00 $ 23.33 $ 0.15
June 30 .............. 39.50 33.75 0.20 35.50 27.00 0.16
September 30 ......... 37.00 29.63 0.20 36.88 34.75 0.16
December 31 .......... 34.00 28.63 0.22 36.75 33.13 0.18
While the Corporation expects to continue its policy of regular quarterly
dividend payments, no assurance of future dividend payments can be given. Future
dividend payments will depend upon maintenance of a strong financial condition,
future earnings and capital and regulatory requirements. See "Shareholders'
Equity and Capital Requirements" and Note 18 of the Notes to Consolidated
Financial Statements. Dividends on the common stock are also subject to the
prior payment of dividends on the Corporation's Series A Preferred Stock. See
Note 15 of the Notes to Consolidated Financial Statements.
The following firms have chosen to make a market in the stock of the
Corporation. Inquiries concerning their services should be directed to:
Legg Mason Wood Walker, Inc. Janney Montgomery Scott, Inc.
141 West Beaver Avenue 1801 Market Street
State College, PA 16801 Philadelphia, PA 19103
(814-234-7300) (800-526-6397)
F. J. Morrissey & Co. Ryan Beck & Co.
1700 Market St. Suite 1420 80 Main Street
Philadelphia, PA 19103-3913 West Orange, NJ 07052
(800-842-8928) (800-342-2325)
Ferris, Baker Watts, Inc. ABN AMRO Chicago Corporation
6 Bird Cage Walk 208 S. LaSalle Street
Hollidaysburg, PA 16648 Chicago, IL 60604
(800-343-5149) (800-621-0686)
FORM 10-K
A copy of the Corporation's Annual Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1998 will be supplied
without charge (except for exhibits) upon written request. Please direct all
inquiries to Mr. David N. Thiel, 366 Walker Drive, State College, PA 16801.
INVESTMENT CONSIDERATIONS
In analyzing whether to make, or to continue, an investment in Omega Financial
Corporation, investors should consider, among other factors, the information
contained in this Annual Report and certain investment considerations and other
information more particularly described in Omega's Annual Report on Form 10-K
for the year ended December 31, 1998, a copy of which can be obtained as
described above.
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of Omega Financial Corporation will be held
at 10:00 a.m., Monday, April 19, 1999 at The Penn Stater, 215 Innovation Blvd.,
Penn State Research Park, State College, Pennsylvania.
REGISTRAR AND TRANSFER AGENT
Omega Bank, N.A., Trust Department, P.O. Box 298, State College, PA 16804-0298
(814-237-7641)
INFORMATION AVAILABILITY
Omega Financial Corporation news releases are available by fax 24 hours a day
from Company News On-Call at (800) 758-5804, extension 653250. Quarterly and
annual reports, a corporate profile, stock quotes and other financial data can
be accessed through the Omega Financial Corporation web site at
www.omegafinancial.com.
- --------------------------------------------------------------------------------
7
<PAGE>
SELECTED FINANCIAL DATA
-----------------------
The following selected financial data of Omega Financial Corporation and
subsidiaries for the five years ended December 31, 1998 should be read in
conjunction with the consolidated financial statements of Omega Financial
Corporation and the notes thereto, which are set forth elsewhere in the Annual
Report.
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
BALANCE SHEET INFORMATION 1998 1997 1996 1995 1994
--------------------------------------------------------------------------
at December 31 (In thousands of dollars, except share data)
<S> <C> <C> <C> <C> <C>
Assets ............................................. $1,062,704 $1,015,903 $1,007,345 $ 994,840 $ 939,953
Deposits ......................................... 870,660 840,775 846,030 850,182 801,736
Loans, net ....................................... 722,967 691,893 696,597 703,125 647,933
Investment securities ............................ 261,380 249,817 241,846 219,708 227,822
Long term debt (including ESOP debt) ............. 8,837 9,034 9,213 10,073 5,568
Shareholders' equity ............................. 153,980 142,432 135,885 124,171 113,109
Number of shares outstanding - common * .......... 8,960,197 8,879,257 9,050,889 9,034,449 8,978,603
Number of shares outstanding - preferred ......... 219,781 219,781 219,781 219,781 219,781
INCOME STATEMENT INFORMATION
Years Ended December 31
Total interest income ............................ $ 75,288 $ 76,998 $ 76,720 $ 72,973 $ 65,090
Net interest income .............................. 46,618 47,121 46,400 43,956 41,443
Provision for loan losses ........................ 1,060 1,030 979 713 623
Income before income taxes ....................... 24,714 24,465 23,354 19,802 17,662
Income tax expense ............................... 7,622 7,497 7,127 5,733 4,877
Net income ....................................... 17,092 16,968 16,227 14,069 12,785
PER COMMON SHARE DATA*
Net income - basic ............................... $ 11.35 $ 1.85 $ 1.75 $ 1.52 $ 1.39
Net income - diluted ............................. 1.79 1.77 1.69 1.47 1.34
Cash dividends - common .......................... 0.80 0.65 0.56 0.48 0.44
Book value - common .............................. 16.95 15.83 14.83 13.67 12.54
</TABLE>
FINANCIAL RATIOS
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average equity ........................... 11.35% 12.26% 12.51% 11.90% 11.75%
Return on average assets ........................... 1.66 1.67 1.61 1.47 1.36
Dividend payout - common ........................... 41.94 34.41 31.26 30.65 30.80
Average equity to average assets ................... 14.67 13.64 12.85 12.35 11.61
</TABLE>
* Prior period per share information has been restated for the effect of the
3 for 2 stock split in the form of a dividend in 1997, as well as the
adoption of SFAS No. 128, Earnings per Share in 1997.
- --------------------------------------------------------------------------------
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
This discussion concerns Omega Financial Corporation and the consolidated
results of its five active subsidiaries ("Omega" or the "Corporation"), Omega
Bank, N.A. ("Omega Bank"), Hollidaysburg Trust Company ("Hollidaysburg"), Penn
Central National Bank ("Penn Central"), Central Pennsylvania Investment Company
("CPI") and Central Pennsylvania Life Insurance Company ("CPLI"). The purpose is
to focus on information concerning Omega's financial condition and results of
operations which is not readily apparent from the consolidated financial
statements. In order to obtain a clear understanding of this discussion, the
reader should reference the consolidated financial statements, the notes thereto
and other financial information presented in this Annual Report.
FORWARD LOOKING STATEMENTS
The information contained in this Annual Report 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, Year
2000 compliance and its effect on the Corporation's financial condition or
results of operation and other statements as to trends or management's beliefs,
expectations or opinions. Such forward looking statements are subject to risks
and uncertainties and may be affected by various factors which may cause actual
results to differ materially from those in the forward looking statements
including without limitation, the effect of economic conditions and related
uncertainties, the effect of interest rates on the Corporation, federal and
state government regulation, competition, and the time and expense of addressing
the Year 2000 issue. Certain of these risks, uncertainties and other factors are
discussed in this Annual Report or in Omega's Annual Report on Form 10-K for the
year ended December 31, 1998, a copy of which may be obtained from Omega upon
request and without charge (except for the exhibits thereto).
NATURE OF OPERATIONS
Omega Financial Corporation is a bank holding company operating primarily in
central Pennsylvania, with the purpose of delivering financial services within
its local market. Consisting of three banks and two active non-bank
subsidiaries, Omega Financial Corporation provides retail and commercial banking
services through 44 offices in Centre, Clinton, Mifflin, Juniata, Blair,
Huntingdon, Bedford and Montour counties. Omega's banks provide a full range of
banking services including an automatic teller machine network, checking
accounts, NOW accounts, savings accounts, money market accounts, investment
certificates, fixed rate certificates of deposit, club accounts, secured and
unsecured commercial and consumer loans, construction and mortgage loans, safe
deposit facilities, credit loans with overdraft checking protection and student
loans. The banking affiliates also provide a variety of trust services.
Management believes the Corporation has a relatively stable deposit base with no
major seasonal depositor or group of depositors. Most of the Corporation's
commercial customers are small and mid-sized businesses in central Pennsylvania.
- --------------------------------------------------------------------------------
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
OVERVIEW
Omega functions as a financial intermediary and therefore its financial
condition should be viewed in terms of changes in its uses and sources of funds.
Table 1 depicts average daily balances, the dollar change and percentage change
for the past two years. This table is referenced for the discussion in this
section.
TABLE 1
Changes in Uses and Sources of Funds
($ in thousands)
<TABLE>
<CAPTION>
1998 Increase(Decrease) 1997 Increase(Decrease) 1996
Average --------------------- Average ---------------------- Average
Balance Amount % Balance Amount % Balance
----------- ----------- ---- ----------- ----------- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Funding Uses:
-------------
Loans ................................. $ 676,664 $ 2,552 0.4% $ 674,112 $ (12,429) (1.8)% $ 686,541
Tax-exempt loans ...................... 27,355 8,336 43.8 19,019 1,301 7.3 17,718
Investment securities ................. 194,141 (14,802) (7.1) 208,943 16,454 8.5 192,489
Tax-exempt investment securities ...... 52,477 14,751 39.1 37,726 3,113 9.0 34,613
Interest bearing deposits ............. 761 156 25.8 605 (52) (7.9) 657
Federal funds sold .................... 16,256 (2,617) (13.9) 18,873 (2,619) (12.2) 21,492
----------- ----------- ---- ----------- ----------- ---- -----------
Total interest earning assets .... 967,654 8,376 0.9 959,278 5,768 0.6 953,510
Non-interest earning assets ........... 70,949 3,865 5.8 67,084 (844) (1.2) 67,928
Less: Allowance for loan losses ....... (11,924) (169) 1.4 (11,755) 40 (0.3) (11,795)
----------- ----------- ---- ----------- ----------- ---- -----------
Total uses ....................... $ 1,026,679 $ 12,072 1.2% $ 1,014,607 $ 4,964 0.5% $ 1,009,643
=========== =========== ==== =========== =========== ==== ===========
Funding Sources:
----------------
Interest bearing demand deposits ...... $ 229,484 $ 10,180 4.6% $ 219,304 $ (2,600) (1.2)% $ 221,904
Savings deposits ...................... 102,636 515 0.5 102,121 (2,136) (2.0) 104,257
Time deposits ......................... 396,457 (20,939) (5.0) 417,396 (610) (0.1) 418,006
Repurchase agreements ................. 14,235 6,088 74.7 8,147 6,334 349.4 1,813
Other borrowed funds .................. 5,867 256 4.6 5,611 (1,303) (18.8) 6,914
----------- ----------- ---- ----------- ----------- ---- -----------
Total interest bearing liabilities 748,679 (3,900) (0.5) 752,579 (315) (0.0) 752,894
Demand deposits ....................... 114,382 3,862 3.5 110,520 (2,526) (2.2) 113,046
Other liabilities ..................... 13,041 (107) (0.8) 13,148 (863) (6.2) 14,011
Shareholders' equity .................. 150,577 12,217 8.8 138,360 8,668 6.7 129,692
----------- ----------- ---- ----------- ----------- ---- -----------
Total sources .................... $ 1,026,679 $ 12,072 1.2% $ 1,014,607 $ 4,964 0.5% $ 1,009,643
=========== =========== ==== =========== =========== ==== ===========
</TABLE>
Omega's funding sources have increased over the last two years at rates of 1.2%
and 0.5% in 1998 and 1997, respectively. In 1998, the increased sources of funds
came primarily from shareholders' equity, through the income stream, as total
deposits and other interest bearing liabilities were essentially flat. The
$12,072,000 of increased funds were used primarily for loan production, as 69%
of these available funds were invested in tax-exempt loans. During 1997, total
average deposits and interest bearing liabilities declined by $2,841,000 from
1996, with funding source increases rising from shareholders' equity. In this
year, with average loans declining, the available funds were utilized primarily
for funding purchases of investment securities.
More detailed discussion of Omega's earning assets and interest bearing
liabilities will follow in sections titled Loans, Investments, Deposits and
Asset Liability Management.
- --------------------------------------------------------------------------------
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
LOANS
In 1998, total average loans were $704,000,000 as compared to $693,100,000 in
1997, an increase of $10,900,000, or 1.6%. During the year, the customer's
preference was for fixed rate loans as opposed to variable rate. On average,
fixed rate loans increased by $62,200,000, or 16.2%, while variable rate loans
declined by $51,400,000, or 16.7%.
The fixed rate loan increases were made up of increases of $43,100,000 in
taxable commercial loans, $15,300,000 in personal residential loans and
$10,200,000 in tax-exempt commercial loans. Other personal fixed rate loans
declined by $6,300,000.
Average Asset Mix Change
Average Average
Loans Investments
----- -----------
1994 67.5% 26.8%
1995 70.3% 24.1%
1996 69.8% 24.7%
1997 68.3% 26.7%
1998 68.6% 26.5%
Variable rate loan decreases were made up of decreases of $37,900,000 in taxable
commercial loans, $8,000,000 in personal residential loans, $1,800,000 in
tax-exempt commercial loans and $2,100,000 in credit card loans outstanding.
(The entire credit card portfolio was sold in December of 1997). Management
believes that this shift from variable to fixed rate was attributable to the
flat yield curve present during the year, and the customers' perception of
future rate environments.
In 1997, total average loans were $693,100,000 as compared to $704,300,000 in
1996, a decrease of $11,200,000, or 1.6%. The loan category that contributed the
most to this decrease was personal installment loans, specifically indirect auto
loans. Balances in this category averaged $13,300,000 less in 1997 than in 1996
due to heavy competition from the auto manufacturers financing plans.
Additionally, because of concerns of overall increased levels of consumer debt,
Omega tightened its credit standards. In December of 1997, the Corporation's
credit card portfolio was sold. Its outstanding balances were $2,200,000 at the
time of the sale.
Emphasis in the consumer lending area in 1997 was placed on residential
mortgages and home-equity products, where balances at year-end 1997 were
$276,700,000, or $24,900,000 higher than December 31, 1996. Commercial loans and
commercial real estate loans in total maintained similar balances on December
31, 1997 as in 1996, however, commercial real estate loans grew as commercial,
financial and agricultural loans declined. In 1997, new loan demands kept pace
with pay-offs.
The loan portfolio as of December 31, 1998 was comprised of 57% consumer loans
and 43% commercial loans (including construction), as compared to 58% and 42%,
respectively, at December 31, 1997. See Note 5 of Notes to Consolidated
Financial Statements.
- --------------------------------------------------------------------------------
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
Omega's lending strategy stresses quality growth, diversified by product and
industry. A standardized credit policy is in place throughout the Corporation,
and a special credit committee reviews all large loan requests prior to
approval. Omega's commercial and consumer lenders make credit judgments based on
a customer's existing debt obligations, ability to pay and general economic
trends.
Management has been monitoring the activity within the loan portfolio very
carefully and successfully competed within its market for real estate loans,
both commercial and residential. Pricing standards were cautiously lowered in
order to attract growth. Omega intends to aggressively pursue growth in each of
the loan categories again during 1999. A competitive pricing environment is
expected and may force Omega to again lower its pricing structure in order to
continue to maintain and build loan volumes.
The loan portfolio carries the potential risk of past due, non-performing or,
ultimately, charged-off loans. Omega attempts to manage this risk through credit
approval standards as discussed above, and aggressive monitoring and collection
policies.
Loan loss reserves have been established in order to absorb probable losses on
existing loans. An annual provision is charged to current earnings to maintain
the reserve at adequate levels. Charge-offs and recoveries are recorded as an
adjustment to the reserve. The allowance for loan losses at December 31, 1998
was 1.63% of total loans, net of unearned discount, as compared to 1.70% of
total loans at the end of 1997. The allowance decreased $21,000 from 1997 as net
charge-offs of $1,081,000 exceeded the provision of $1,060,000. Net charge-offs
for 1998 and 1997 were 0.15% of average loans. Commercial loans represented 52%
of the loans charged off in 1998, while personal loans represented 70% of the
loans charged off in 1997. Because of the level of non-performing loans and the
increase in net charge-offs in both 1998 and 1997, management increased the
provision for loan losses in both years. Non-performing loans were 0.90% of
loans as of December 31, 1998, and 1.00% of loans as of December 31, 1997. (See
Table 2). The increase in non-accrual loans is due primarily to two loan
relationships that were classified to non-accrual status during 1998, with a
combined outstanding balance of $954,000. Accruing loans past due 90 days or
more significantly decreased in 1998. Subsequent to year-end 1998, one large
loan that had been classified as non-accrual since April 1997 was repaid with
full recovery of principal and interest. The balance was $2,116,000 and
significantly improves the non-performing loan ratio. Excluding this loan, the
year-end 1998 non-performing loan balance would have been $4,406,000, or 0.61%
of loans.
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.
At December 31, 1998, non-performing loans (as defined in Table 2) as a
percentage of the allowance for loan losses were 55.4% as compared to 58.6% at
December 31, 1997. Of the $6,522,000 of non-performing loans at December 31,
1998, $4,761,000 were collateralized with real estate, $1,641,000 with other
assets, and $120,000 were unsecured.
Allowance for Losses to Loans
at Year End
------------------------------
1994 1.71%
1995 1.66%
1996 1.70%
1997 1.70%
1998 1.63%
- --------------------------------------------------------------------------------
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
TABLE 2
Non-Performing Loans
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans ............................... $5,627 $4,762 $2,079 $1,932 $1,596
Accruing loans past due 90 days or more ......... 682 2,103 1,241 2,697 1,317
Restructured loans .............................. 213 47 14 -- 44
------ ------ ------ ------ ------
Total non-performing loans ...................... $6,522 $6,912 $3,334 $4,629 $2,957
====== ====== ====== ====== ======
</TABLE>
Note 6 to the Consolidated Financial Statements summarizes the allowance for
loan losses for each of the last five years. Management's estimate of net
charge-offs for 1999 follows (in thousands):
Commercial, financial and agricultural.............. $ 311
Real estate - commercial............................ 183
Real estate - mortgage.............................. --
Personal............................................ 566
-------
Total............................................... $ 1,060
=======
Non-Performing Loans to Loans
at Year End
-----------------------------
1994 0.43%
1995 0.66%
1996 0.48%
1997 1.00%
1998 0.90%
Net Charge-Offs to Average Loans
--------------------------------
1994 0.12%
1995 0.08%
1996 0.12%
1997 0.15%
1998 0.15%
INVESTMENTS
Average investments, defined to include all interest earning assets except loans
(i.e. investment securities available for sale (at market value), investment
securities held to maturity, federal funds sold and interest bearing deposits),
increased by $1,300,000, or 0.5%, during 1998, after increasing by $18,700,000,
or 7.4% during 1997. Average gross unrealized gains on investment securities
increased by $3,800,000 in 1998 as compared to 1997 and interest bearing
deposits with other financial institutions remained relatively flat, while
average federal funds sold declined by $2,600,000. The federal funds sold were
reduced to help fund loan growth. Investment securities in total remained flat
in 1998 when compared to 1997, however, funds from maturing taxable securities
were used to purchase tax-exempt securities. Although tax-exempt securities
carry a lower rate than taxable securities, the tax exemption of interest income
increases the yield by lowering the tax expense (see Note 11 to Notes to
Consolidated Financial Statements).
During 1997, average investments increased by $18,700,000, or 7.4%. Because of
reduced loan volumes in 1997, funds from loan run-off and pay-offs became
available, as did other non-deposit sources of funding (short term borrowings),
- --------------------------------------------------------------------------------
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
for investing opportunities outside the loan market. This accounted for the
investment balance increase. It is important to note that $1,900,000 of the
increase in investments is due to the mark-to-market adjustment necessary on the
portion of the portfolio that is classified as available for sale.
The investment area is managed according to internally established guidelines
and quality standards. Omega segregates its investment securities portfolio into
two classifications: those held to maturity and those available for sale. The
determination of which portfolio to hold each security is made at the time of
purchase, based on management's intent. Omega classifies all marketable equity
investments as available for sale. Debt securities are classified as available
for sale when the intent is for the security to be available to be used for
strategic asset/liability management purposes such as to manage interest rate
risk, prepayment risk or liquidity needs. Securities are classified as held to
maturity when it is management's intent to hold these securities until maturity,
for matching against longer term funding. Note 4 to the Consolidated Financial
Statements analyzes the investment securities (including the tax-exempt
investment securities). At December 31, 1998, the market value of the entire
securities portfolio exceeded amortized cost by $8,365,000 as compared to
December 31, 1997 when market value was greater than amortized cost by
$7,677,000. The weighted average maturity of the investment portfolio is 2 years
and 1 month as of December 31, 1998 as compared to 1 year and 8 months at the
end of 1997. The weighted average maturity has remained short in order to assure
liquidity and to take advantage of the changing rate environment. Table 4
(located on page 20) shows the remaining maturity or earliest possible repricing
for investment securities.
NON-INTEREST EARNING ASSETS
Non-interest earning assets (not including unrealized gains on investment
securities) decreased $56,000, or 0.1% on average in 1998 as compared to a
decrease of $2,596,000, or 4.9% in 1997. Changes occurring in both years were
the result of normal operating activities.
A strategy was designed to systematically replace aging computer equipment
throughout the organization, as well as to increase branch office automation
through computer access in 1997. This goal was achieved during 1997, accounting
for most of the capital spending. Additionally, further commitment was made to
technological advances through updated and new computer software and equipment.
These upgrades began in 1998 and will be on-going expenditures over the next
several years.
DEPOSITS
The banking industry in general continues to experience limited deposit growth
because of fierce competition in the marketplace provided by mutual funds and
other investment options that directly compete with traditional bank products.
During the past 5 years, Omega has experienced slow deposit growth. As reflected
in Table 3, average total deposits declined in 1998 and 1997 by $6,300,000 and
$7,900,000, respectively. While in 1997, all types of deposits experienced
decreases, in 1998, time deposits was the only category to decline with a total
reduction on average of $20,900,000, or 5%. Transaction accounts, particularly
demand deposit accounts, increased by $14,600,000, or 3.4%.
Deposit levels have been influenced over the last three years by customers' use
of cash management accounts that sweep overnight monies into repurchase
agreements. This has caused the flow of core account funds into retail
repurchase agreements (see Other Interest Bearing Liabilities). In 1998, average
deposits were reduced by $6,100,000 as a result of the repurchase agreements, as
compared to $8,100,000 in 1997.
Average Deposit Mix Change
Average Average
Core Deposits Time Deposits
------------- -------------
1993 54.7% 45.3%
1994 56.9% 43.1%
1995 53.3% 46.7%
1996 51.2% 48.8%
1997 50.9% 49.1%
1998 53.0% 47.0%
- --------------------------------------------------------------------------------
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
TABLE 3
Changes in Deposits
($ in thousands)
<TABLE>
<CAPTION>
1998 Increase(Decrease) 1997 Increase(Decrease) 1996
Average ------------------ Average ------------------ Average
Balance Amount % Balance Amount % Balance
-------- -------- ---- -------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest bearing demand deposits ................... $229,484 $ 10,180 4.6% $219,304 $ (2,600) (1.2)% $221,904
Savings deposits ................................... 102,636 515 0.5 102,121 (2,136) (2.0) 104,257
Demand deposits .................................... 114,382 3,862 3.5 110,520 (2,526) (2.2) 113,046
-------- -------- ---- -------- -------- ---- --------
Total core(transaction) accounts ............... 446,502 14,557 3.4 431,945 (7,262) (1.7) 439,207
Time deposits ...................................... 396,457 (20,939) (5.0) 417,396 (610) (0.1) 418,006
-------- -------- ---- -------- -------- ---- --------
Total deposits ................................. $842,959 $ (6,382) (0.8)% $849,341 $ (7,872) (0.9)% $857,213
======== ======== ==== ======== ======== ==== ========
</TABLE>
OTHER INTEREST BEARING LIABILITIES
Other interest bearing liabilities on average increased $6,344,000, or 46.1% in
1998, as compared to an increase of $5,031,000, or 57.6% in 1997. The increases
in 1998 and 1997 are due to the addition of $6,088,000 and $8,147,000,
respectively, in the average balances of retail repurchase agreements (see Note
8 of Notes to Consolidated Financial Statements).
SHAREHOLDERS' EQUITY
Shareholders' equity continued to be an important funding source during 1998,
providing an average balance of $150,577,000, an increase of $12,217,000 or 8.8%
from the $138,360,000 provided in 1997. In spite of increased dividends, Omega
continued a strong rate of internal capital generation. This rate was 6.7% in
1998 and 7.9% in 1997. This internal capital generation is dependent on high
earnings performance which is reflected by a return on average assets of 1.66%
in 1998 and 1.67% in 1997, in conjunction with a prudent dividend policy that is
represented by payout ratios on the common stock of 41.9% for 1998 and 34.4% for
1997. Capital has also been increased as a result of employee stock option and
purchase plans. Other comprehensive income arising from unrealized gains (net of
tax) on securities available for sale increased average equity by $2,440,000 and
$1,163,000 in 1998 and 1997, respectively. At December 31, 1998, Omega held
177,073 shares of stock in treasury at a cost of $6,038,000.
Omega increased the value to shareholders by issuing a 3 for 2 stock split in
the form of a dividend in the second quarter of 1997. Omega also increased the
return to shareholders in 1998 by increasing its dividend 23.1% to $.80 per
common share. Cash dividends per common share in prior years were $.65 and $.56
in 1997 and 1996, respectively. Omega paid a dividend of $1.80 per preferred
share in each of the years ending 1998, 1997 and 1996. See Note 18 of Notes to
Consolidated Financial Statements regarding restrictions on dividends from
subsidiary banks to the holding company.
Equity to Asset Ratio
at Year End
-----------
1994 12.03%
1995 12.48%
1996 13.49%
1997 14.02%
1998 14.49%
Common Book Value per Share
---------------------------
1994 $12.54
1995 $13.67
1996 $14.83
1997 $15.83
1998 $16.95
Federal banking regulators have established capital adequacy requirements for
banks based on risk factors. All banks and bank holding companies are required
to have a minimum of 4% of risk adjusted assets in Tier I capital and 8% of risk
adjusted assets in total capital (Tier I and Tier II capital). As of December
31, 1998 and 1997, Omega's Tier I capital ratio was 20.8% and 19.9%,
respectively, and its total capital ratio was 22.1% and 21.1%, respectively.
Additionally, banking organizations must maintain a minimum Tier I capital to
total asset (leverage) ratio of 3%. This 3% leverage ratio is a minimum for the
top-rated banking organizations without any supervisory, financial or
operational weaknesses or deficiencies. Other banking organizations are required
to maintain leverage capital ratios 100 to 200 basis points above the minimum
depending on their financial condition. At December 31, 1998 and 1997, Omega's
leverage ratio was 14.5% and 13.3%, respectively, against a required leverage
ratio of 4% (see Note 20 of Notes to the Consolidated Financial Statements).
- --------------------------------------------------------------------------------
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
ASSET/LIABILITY MANAGEMENT
The process by which financial institutions manage their assets and liabilities
is called asset/liability management. This has become very important in an
industry undergoing an ever changing interest rate environment. The goals of
Omega's asset/liability management are increasing net interest income without
taking undue interest rate risk or material loss of net market value of its
equity, while maintaining adequate liquidity. Net interest income is increased
by widening the interest spread and increasing earning assets. Liquidity is
measured by the ability to meet both depositors' and credit customers'
requirements.
NET INTEREST INCOME AND INTEREST RATE RISK
Omega believes that it has managed interest rate risk in achieving optimal
levels of net interest income. Interest rate risk is the risk to net interest
income or capital arising from movement of interest rates. Sources of interest
rate risk include; repricing risk, basis risk and yield curve risk. Management
utilizes two methodologies to aid in the management of interest rate risk: gap
analysis and economic simulation.
GAP ANALYSIS
Gap is defined as the volume difference between interest rate sensitive assets
and liabilities. Gap is one of the tools used to manage repricing risk.
Repricing risk results from differences in the timing of rate changes and cash
flows that occur in the pricing and maturity of assets and liabilities. By
managing gap, fluctuations in net interest income can be minimized, thereby
achieving consistent growth in net interest income during periods of changing
interest rates. Table 4 (located on page 20) shows the period and cumulative
static gaps for various time intervals as of December 31, 1998. The data in this
table is based upon the earliest possible repricing dates or maturity, whichever
comes first. Core deposit accounts, defined as interest bearing demand deposits,
certain savings accounts and checking accounts with interest, are considered to
have repricing implications of various intervals between one month and five
years. The gap analysis is used as an indicator of what may happen to net
interest income if interest rates rise or fall. On a cumulative basis over the
next twelve months, Omega is in a negative gap position of $55,687,000 at
December 31, 1998, indicating more interest bearing liabilities than earning
assets will reprice during that period. Over the past year, the level of our gap
and interest rate risk positions have been affected by both the extension of our
loan portfolio, which reflects our customers preference for fixed rates and the
shortening of our certificate of deposit base as customers continue to prefer
shorter term certificates.
ECONOMIC SIMULATION
Economic simulation is another tool used by management to measure and manage
interest rate risk, including repricing, basis and yield curve risk. Management
simulates possible economic conditions and interest rate scenarios in order to
quantify the impact on net interest income. The effect that changing interest
rates has on Omega's net interest income is simulated by moving interest rates
up and down at 100 basis point increments. This simulation is known as rate
shocks. For example, at December 31, 1998, should interest rates rise by 100
basis points immediately and Omega's balances do not grow and the mix does not
change, net interest income would increase over the next twelve months by
$523,000. If interest rates would decline by 100 basis points immediately, net
interest income would decrease by $515,000 over the next twelve months. The
table below summarizes the results of the rate shocks for the twelve month
period following December 31, 1998 (in thousands).
-----------------------------------
Change in Change in
Interest Rates Net Interest
(Basis Points) Income
-----------------------------------
400 $2,022
300 1,580
200 1,058
100 523
0 0
(100) (515)
(200) (1,016)
(300) (1,494)
(400) (1,924)
-----------------------------------
- --------------------------------------------------------------------------------
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
Omega's management cannot predict the direction of interest rates nor will the
mix remain unchanged, yet, management uses this information to help formulate
strategies to minimize any unfavorable effect on net interest income as a result
of interest rate changes. As an example, since 1990, Omega has executed a number
of interest rate contracts, including interest rate swaps and floors (notional
balance of $30,000,000 as of December 31, 1998, see Note 13 of Notes to the
Consolidated Financial Statements) in order to hedge certain prime interest rate
loans against declining rates. As part of these agreements, Omega is receiving a
fixed rate on the notional balance with a weighted average maturity of 2 months
at a weighted rate of 8.36% and is paying the U.S. prime rate. Since Omega
entered into these agreements in 1996, the prime rate has decreased from 8.25%
to the current rate of 7.75%. The interest rate swaps have allowed Omega to
maintain a steady margin on $30,000,000 of prime-related loans over the past 3
years, despite changes in the prime rate.
As the rate shocks indicate, the Corporation is exposed to a loss of income if
interest rates fall. Net interest income at risk for a 100 basis point decrease
in rates as of December 31, 1998 was $515,000, or 1.12%, of net interest income,
compared to $568,000, or 1.23%, as of December 31, 1997. Omega's rate risk
policies provide for maximum limits on net interest income which can be at risk
for 100 through 400 basis point changes in interest rates. During 1998, Omega's
rate risk position was consistently within policy limits.
Omega's low level of interest rate risk is directly related to the preference of
our customers for fixed rate loans and shorter term deposits. If customer
preferences change, the same effects could be obtained in the cash market by
investing funds for a longer term; however, this would reduce liquidity and
require more capital.
In addition to determining the impact on net interest income from various
interest rate changes, the same analysis is applied to determine the change that
interest rate movements would have on Omega's market value of equity (MVE). The
MVE provides an indicator of economic value and is computed by discounting all
contractual future cash flows at current market rates. The effect that changing
interest rates have on Omega's MVE is simulated by moving interest rates up and
down at 100 basis point increments. This provides management with information
necessary to analyze long-term interest rate risk. Management can limit
long-term interest rate risk, but it is generally at the expense of short-term
earnings which can cause more volatility in the short term. At December 31,
1998, Omega's net interest income and MVE were within the guidelines established
by management.
Basis risk is another source of interest rate risk and arises from the
difference in movements of interest rates earned on assets and the interest
rates paid on liabilities with otherwise similar repricing characteristics. The
Corporation analyzed the effects of basis risk on both net interest income and
MVE. This was done through interest rate shocks, which isolate the movements of
the treasury rate and prime rate. The following shows the results of these rate
shocks (in thousands):
Change in Change in Change in
Basis Interest Rates Net Interest Income Market Value of Equity
----- -------------- ------------------- ----------------------
Prime Risk -100 $(1,299) $ 7,315
Treasury Risk +100 $(1,255) $ 11,229
The table above indicates the results of a 100 basis point decrease in the prime
rate with all other interest rates unchanged. In this scenario, the
Corporation's net interest income would decrease by $1,299,000 and market value
of equity would increase by $7,315,000. These results support the Corporation's
actions in using interest rate swaps and floors to hedge its exposure to a
decline in net interest income when the interest rates on prime-based loans
decrease. The treasury risk noted above shows that if the treasury curve
increased 100 basis points with no other interest rate changes, the
Corporation's net interest income would decrease $1,255,000 and market value of
equity would increase $11,229,000. In both the prime risk and treasury risk
results, only the direction of change in which interest rates would adversely
affect earnings is shown. If interest rates were to change in the opposite
direction from that indicated, Omega would experience a similar increase in net
interest income.
Interest rate risk can also result from yield curve risk. Yield curve risk is
the exposure of earnings due to the pricing of assets or liabilities being
influenced by the shape of the yield curve. The Corporation analyzed the effects
of yield curve risk on both net interest income and MVE. The analysis included
the affects of an inverted yield curve, where the thirty year rate was 500 basis
points under the one month rate. Results indicate that this type of yield curve
would decrease the Corporation's net interest income by $5,693,000, or 12.38%,
and market value of equity would increase by $56,712,000, or 28.88%.
- --------------------------------------------------------------------------------
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
The gap analysis, rate shock simulation and basis risk analysis described above
are performed in a static environment. In reality, Omega's balance sheet is
dynamic and in constant change as are interest rates. Management applies the
same techniques to projected future volumes and various interest rate scenarios
prior to making any hedging decision or decisions that involve the acquisition
or investment of funds.
LIQUIDITY
There is no standardized formula for measuring liquidity. Past methods do not
apply due to the complexity of today's balance sheet. Omega's management has
adopted a liquidity measurement that answers the following three questions:
1. How much cash is on hand and can be raised over the next thirty days
without any principal loss on the assets?
2. If adverse publicity was released about the industry or the Corporation,
what is the ability of Omega to meet depositor needs? This would be the run
on the bank or worst case scenario.
3. What are the funding requirements through the next ninety days?
First, total liquid assets are determined. This includes cash on hand, federal
funds sold, market value of U.S. Treasury and Agency securities not pledged,
loans that could be sold within thirty days, cash from maturities within thirty
days and any other readily marketable asset.
Second, total short-term liabilities are determined. This includes federal funds
purchased, repurchase agreements, certificates of deposit over $100,000
scheduled to mature within thirty days, and an estimated amount of the retail
deposits.
Average Loan to Deposit Ratio
-----------------------------
1994 77.9%
1995 82.2%
1996 82.2%
1997 81.6%
1998 83.5%
The short-term liabilities are deducted from the liquid assets to determine a
surplus or deficit and a percentage of total assets is determined. At December
31, 1998, total liquid assets were $153,963,000 while the short-term liabilities
were $56,422,000. This left a surplus of liquid assets of $97,541,000, or 9.2%
of total assets. Management believes that a surplus of not less than 5% to 7% is
adequate.
Another measure of liquidity is the average loan to deposit ratio. This ratio
was 83.5% at December 31, 1998 and 81.6% at December 31, 1997. Management's
target range for this ratio is 70% to 85%.
If required due to unforeseen circumstances, Omega has the ability to increase
its liquidity through the sale of assets, primarily financial instruments. As
disclosed in Note 2 of Notes to the Consolidated Financial Statements, most of
Omega's financial assets have a fair value in excess of their aggregate book
value, therefore some of these instruments could be sold if needed for liquidity
purposes, and their sale would not negatively affect current earnings and
capital.
As to off-balance sheet liquidity, Omega has federal funds lines totaling
$18,000,000 at December 31, 1998. At December 31, 1998, Omega had no amount
outstanding against these federal funds lines. Omega's banks are members of the
Federal Home Loan Bank of Pittsburgh which provides overnight or term funding to
the banks of $62,572,000. This borrowing limit could be increased to a maximum
amount of $282,733,000 with the purchase of additional FHLB stock. At December
31, 1998, Omega had $5,000,000 outstanding against the term line and no
overnight advances (See Note 8 of Notes to the Consolidated Financial
Statements). Another source of liquidity is the Federal Reserve Discount Window.
Omega is able to borrow up to the amount of collateral pledged, which as of
December 31, 1998 was $11,737,000.
- --------------------------------------------------------------------------------
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
MARKET ENVIRONMENT
Omega's market is generally in central Pennsylvania and primarily in the
counties of Centre, Clinton, Mifflin, Blair, Huntingdon, Bedford, Juniata and
Montour.
Net Income (in thousands)
-------------------------
1994 $12,785
1995 $14,069
1996 $16,227
1997 $16,968
1998 $17,092
- --------------------------------------------------------------------------------
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
TABLE 4
MATURITY DISTRIBUTION
AS OF DECEMBER 31, 1998
(In thousands)
Remaining Maturity / Earliest Possible Repricing
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Over Three Over Six Over One
Three Months But Months But Year But Over
Months Within Six Within One Within Five Five
or Less Months Year Years Years Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Interest bearing deposits ............. $ 1,455 $ -- $ -- $ -- $ -- $ 1,455
Federal funds sold .................... 18,350 -- -- -- -- 18,350
Investment securities:
U.S. Treasury securities:
and obligations of other
U.S. Government agencies
and corporations ............ 999 2,003 32,055 49,640 -- 84,697
Corporate and other securities ... 789 590 3,417 64,426 9,094 78,316
Obligations of state and political
subdivisions ................ 4,022 2,912 9,165 35,961 991 53,051
Mortgage backed securities ....... 6,008 6,069 11,480 3,997 -- 27,554
Stocks ........................... -- -- -- -- 10,522 10,522
Loans:
Commercial, financial, and
agricultural ................ 55,521 4,328 10,232 17,702 10,118 97,901
Real estate - commercial ......... 61,511 13,373 11,339 53,503 59,261 198,987
Real estate - construction ....... 5,362 122 364 2,149 7,893 15,890
Real estate - mortgage ........... 12,614 12,116 22,001 84,094 97,021 227,846
Home equity ...................... 16,811 3,174 6,264 38,259 19,292 83,800
Personal (net of
unearned interest) .......... 26,076 6,214 11,562 41,725 9,410 94,987
Lease financing (net of
unearned interest) .......... 214 217 578 2,539 8 3,556
--------- --------- --------- --------- --------- ---------
Total Interest Earning Assets .............. 209,732 51,118 118,457 393,995 223,610 996,912
--------- --------- --------- --------- --------- ---------
Interest Bearing Liabilities
Demand deposits ....................... 28,226 -- -- 159,944 -- 188,170
Savings deposits ...................... 93,410 -- 21,375 40,925 -- 155,710
Certificates of deposit
over $100,000 ............... 14,572 10,152 6,465 16,835 273 48,297
Time deposits ......................... 110,518 60,065 66,988 108,521 100 346,192
Short-term borrowings ................. 17,638 -- -- -- -- 17,638
Long-term debt ........................ 5,000 -- -- -- -- 5,000
Other interest bearing liabilities .... 585 -- -- -- 3,837 4,422
--------- --------- --------- --------- --------- ---------
Total Interest Bearing Liabilities ......... 269,949 70,217 94,828 326,225 4,210 765,429
--------- --------- --------- --------- --------- ---------
Gap ........................................ $ (60,217) $ (19,099) $ 23,629 $ 67,770 $ 219,400 $ 231,483
========= ========= ========= ========= ========= =========
Cumulative Gap ............................. $ (60,217) $ (79,316) $ (55,687) $ 12,083 $ 231,483
========= ========= ========= ========= =========
Cumulative sensitivity ratio ............... 0.78 0.77 0.87 1.02 1.30
Commercial, financial and agricultural
loans maturing after one year with:
Fixed interest rates .................. $ 7,331 $ 8,278 $ 15,609
Variable interest rates ............... 15,404 16,135 31,539
--------- --------- ---------
Total ................................. $ 22,735 $ 24,413 $ 47,148
========= ========= =========
</TABLE>
- --------------------------------------------------------------------------------
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
RESULTS OF OPERATIONS
OVERVIEW
1998
Omega reported earnings in 1998 of $17,092,000, an increase of 0.7% over 1997.
On a diluted basis, net income per common share improved, reaching $1.79 in
1998, an increase of 1.1%, or $.02, over 1997. Several occurrences took place in
1998 which management believes significantly affected the year's financial
performance. They are as follows:
o solid net interest margin
o increased fee income on traditional banking services and new products
o increase from gains on securities
o write off of intangibles from a prior acquisition
Return on Average Assets
------------------------
1994 1.36%
1995 1.47%
1996 1.61%
1997 1.67%
1998 1.66%
Assets were $1,062,704,000 at December 31, 1998, representing a $46,801,000, or
4.6%, increase over year-end 1997. Loans (net of unearned discount) were
$722,967,000 compared to $691,893,000 at December 31, 1997, an increase of 4.5%,
or $31,074,000. Deposits increased by $29,885,000, or 3.6%, at December 31,1998
when compared to December 31, 1997.
Return on average equity decreased from 12.26% to 11.35% in 1998, while return
on average assets decreased to 1.66% from 1.67% in 1997. Omega's performance can
be compared to its national peers with consolidated assets of $1 billion to $3
billion (using the most current data for September 30, 1998).
Omega Peers
----- -----
Return on average assets .......... 1.66% 1.26%
Return on average equity .......... 11.37 13.97
1997
Omega reported earnings in 1997 of $16,968,000, an increase of 4.6% over 1996.
On a diluted basis, net income per common share continued to improve, reaching
$1.77 in 1997, an increase of 4.7%, or $.08, over 1996. The key factors which,
in management's opinion, influenced the operating results in 1997 are as
follows:
o increased net interest margin
o increased fee income on traditional services
o increase from gains on securities and loan sales
Return on Average Equity
------------------------
1994 11.75%
1995 11.90%
1996 12.51%
1997 12.26%
1998 11.35%
Assets were $1,015,903,000 at December 31, 1997, representing an $8,558,000, or
0.8%, increase over year-end 1996. Loans (net of unearned discount) were
$691,893,000 compared to $696,597,000 at December 31, 1996, a decrease of 0.7%,
or $4,704,000. Deposits decreased by $5,255,000, or 0.6%, from December 31,1996
to December 31, 1997.
Return on average equity decreased from 12.51% in 1996 to 12.26% in 1997, while
return on average assets increased to 1.67% from 1.61% in 1996. Omega's
performance can be compared to its national peers with consolidated assets of $1
billion to $3 billion as of December 31, 1997.
Omega Peers
----- -----
Return on average assets .......... 1.67% 1.28%
Return on average equity .......... 12.26 14.17
- --------------------------------------------------------------------------------
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
NET INTEREST INCOME
Net interest income is the amount by which interest income on earning assets
exceeds interest expense on interest bearing liabilities. Because some interest
earning assets are tax exempt, an adjustment is made for analytical purposes to
place all assets on a fully tax equivalent basis.
Table 5 (located on page 24) shows average asset and liability balances, average
interest rates and interest income and expense for the period 1996-1998. In
addition, it shows the changes attributable to the volume and rate components of
net interest income.
1998
- ----
Total average loans were $704,019,000 in 1998 at an average weighted yield of
8.56% that produced $60,266,000 in interest income. This represented a
$10,888,000, or 1.6%, increase in average volumes from 1997. The yield decreased
34 basis points from 8.90% in 1997 causing a decrease of $2,147,000 in interest
income, partially offsetting an increase of $730,000 of favorable mix and volume
changes for a net decrease of $1,417,000, or 2.3%, when compared to 1997. The
yield decrease of 34 basis points from 8.90% to 8.56% was partially a result of
approximately $43,000,000 of variable rate loans tied to prime converting to
fixed rate, priced off the Treasury curve. Additionally, most new loans in 1998
were fixed rate loans.
Investment securities averaged $246,618,000 for a decrease of $51,000. The
average weighted yield decreased to 5.71% from 5.77% in 1997. Interest income
from securities decreased a total of $170,000, with $252,000 attributable to the
replacement of approximately $15,000,000 of maturing taxable investment
securities with tax exempt investment securities that carry a lower rate, but
higher tax equivalent yield. Interest bearing deposits increased $156,000, or
25.8%, and federal funds sold decreased 13.9%, or $2,617,000. The net increase
in average volumes of $2,512,000 on the above three assets was a result of funds
supplied by deposits.
Total interest earning assets averaged $967,654,000 at a yield of 7.78% and
produced total interest income of $75,268,000 for 1998. The net increase in
average earning assets of $8,376,000 in 1998 over 1997 was funded primarily by
borrowings. The yield decreased 25 basis points from 8.03% due mainly to the
lower yielding fixed rate and tax-free loans. The mix of earning assets remained
stable in 1998, with 68.6% of all earning assets made up of loans, as compared
to 68.3% in 1997 (see Average Asset Mix Change chart on page 11). Interest
income increased $342,000 from volume and mix changes and decreased $2,072,000
from generally lower yields producing a net decrease of 2.2%, or $1,730,000. On
a fully tax equivalent basis, interest income decreased by only $1,269,000.
Total interest bearing liabilities averaged $748,679,000 at a cost of
$28,650,000 for a composite rate of 3.83%. This represented a decrease in
interest bearing liabilities of 0.5%, or $3,900,000, over 1997. The composite
rate decreased from 3.97% in 1997, or 14 basis points. Interest expense
decreased $552,000 due to lower rates and $675,000 due to volume and mix
changes. These changes resulted in a net decrease of $1,227,000, or 4.1%, in
interest expense.
Non-interest bearing funding sources, including equity, averaged $278,000,000 in
1998, compared to $262,028,000 in 1997, for an increase of $15,972,000, or 6.1%.
This resulted in a decrease of 16 basis points in the rate to fund interest
earning assets (computed by dividing the total interest expense by the total
average earning assets) from 3.12% in 1997 to 2.96% in 1998.
Net interest income was $46,618,000 for 1998, a decrease of $503,000, or 1.1%,
from 1997. This was the result of an increase of $1,017,000 in favorable volume
and mix changes and a decrease of $1,520,000 as a result of interest rate
effects. Net yield was 4.82% in 1998 and 4.91% in 1997. On a fully tax
equivalent basis, the net yield decreased from 5.08% to 5.03% in 1998.
Following is a schedule comparing Omega's margin performance to the average of
its national peers as of September 30, 1998:
Percent of average earning assets Omega Peers
--------------------------------- ----- -----
Interest income - tax equivalent .......... 7.94% 8.40%
Interest expense .......................... 2.96 3.94
Net interest income - tax equivalent ...... 4.98 4.46
- --------------------------------------------------------------------------------
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
1997
- ----
Total average loans were $693,131,000 in 1997 at a yield of 8.90% that produced
$61,683,000 in interest income. This represented an $11,128,000, or 1.6%
decrease in average volumes from 1996. The yield decreased 1 basis point from
8.91% in 1996 to 8.90% in 1997. As a result of the decreased average loan
volumes, interest income was reduced by $1,034,000. The lower average yield
further reduced interest income by $23,000. The volume decrease was caused by a
number of factors, including a general tightening of credit standards and
increased competition for indirect auto loans, as discussed earlier in the
Financial Condition section. The 1997 average balance of investment securities
was $246,649,000, an increase over 1996 of $19,567,000, or 8.6% compared to
1996. The yield increased to 5.77% in 1997 from 5.64% in 1996. Interest income
from securities increased a total of $1,440,000, with $1,121,000 attributable to
higher volumes, and $319,000 due to higher yields. Average interest bearing
deposits decreased $52,000, or 7.9%, and federal funds sold decreased 12.2%, or
$2,619,000. The net increase in average volumes of $16,896,000 on the above
three types of assets was a result of reduced loan funding needs and improved
employment of excess cash.
Total interest earning assets averaged $959,278,000 at a yield of 8.03% and
produced total interest income of $76,998,000 for 1997. Compared to 1996, the
average volumes increased $5,768,000, or 0.6%. The yield decreased 2 basis
points from 8.05% in 1996 as compared to 8.03% in 1997 as the mix of earning
assets shifted from 69.8% loans in 1996 to 68.3% loans in 1997 (See Average
Asset Mix Change chart on page 11). Interest income decreased $60,000 from
volume and mix changes and increased $338,000 from rate differences producing a
net increase of 0.4%, or $278,000.
Total interest bearing liabilities in 1997 averaged $752,579,000 at a cost of
$29,877,000 for a composite rate of 3.97%. This represented a decrease in
interest bearing liabilities of $315,000, over 1996. The composite rate
decreased from 4.03% in 1996, or 6 basis points. In 1997 interest expense
decreased $555,000 due to lower rates and increased $112,000 due to favorable
volume and mix changes compared to 1996. These changes resulted in a total
decrease of $443,000, or 1.5%, in interest expense.
Non-interest bearing funding sources, including equity, averaged $262,028,000 in
1997, compared to $256,749,000 in 1996, for an increase of $5,279,000, or 2.1%.
This resulted in a decrease of 6 basis points in the rate to fund interest
earning assets (computed by dividing the total interest expense by the total
average earning assets) from 3.18% in 1996 to 3.12% in 1997.
Net interest income was $47,121,000 for 1997, an increase of $721,000, or 1.6%,
from 1996. This was the result of a decrease of $172,000 in volume and mix
changes and an increase of $893,000 as a result of interest rate effects. Net
yield increased 4 basis points to 4.91% from 4.87% in 1996. On a fully tax
equivalent basis, the net yield increased from 5.03% to 5.08% in 1997.
Following is a schedule comparing Omega's margin performance to the average of
its national peers as of December 31, 1997:
Percent of average earning assets Omega Peers
--------------------------------- ----- -----
Interest income - tax equivalent ........... 8.19% 8.44%
Interest expense ........................... 3.11 3.92
Net interest income - tax equivalent ....... 5.08 4.52
- --------------------------------------------------------------------------------
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
TABLE 5
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31,
====================================================================================================================================
1998 1997
----------------------------------- ---------------------------------
Average Yield/ Average Yield/
Balance (1) Interest Rate Balance (1) Interest Rate
---------- ---------- ---- ---------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (5),(7) ......................................... $ 676,664 $ 58,711 8.68% $ 674,112 $ 60,380 8.96%
Tax-exempt loans ...................................... 27,355 1,555 5.68 19,019 1,303 6.85
---------- ---------- ---- ---------- --------- ----
Total loans ......................................... 704,019 60,266 8.56 693,131 61,683 8.90
Investment securities ................................. 194,141 11,769 6.06 208,943 12,542 6.00
Tax-exempt investment securities ...................... 52,477 2,302 4.39 37,726 1,699 4.50
---------- ---------- ---- ---------- --------- ----
Total investment securities ......................... 246,618 14,071 5.71 246,669 14,241 5.77
Interest bearing deposits ............................. 761 39 5.12 605 34 5.62
Federal funds sold .................................... 16,256 892 5.49 18,873 1,040 5.51
---------- ---------- ---- ---------- --------- ----
Total interest earning assets ........................... 967,654 75,268 7.78 959,278 76,998 8.03
Non-interest earning assets:
Cash and due from banks ............................... 32,404 29,972
Allowance for loan losses ............................. (11,924) (11,755)
Premises and equipment ................................ 17,240 17,917
Other assets (8) ...................................... 21,305 19,195
---------- ----------
Total ............................................... $1,026,679 $1,014,607
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2) .................. $ 229,484 4,044 1.76 $ 219,304 4,109 1.87
Savings deposits ...................................... 102,636 2,309 2.25 102,121 2,309 2.26
Time deposits ......................................... 396,457 21,394 5.40 417,396 22,804 5.46
Other, including short-term borrowings, long-term debt
and other interest bearing liabilities .............. 20,102 903 4.49 13,758 655 4.76
---------- ---------- ---- ---------- --------- ----
Total interest bearing liabilities ...................... 748,679 28,650 3.83 752,579 29,877 3.97
---------- ---------
Non-interest bearing liabilities:
Demand deposits ....................................... 114,382 110,520
Other ................................................. 13,041 13,148
Shareholders' equity .................................... 150,577 138,360
---------- ----------
Total ............................................... $1,026,679 $1,014,607
========== ==========
Net interest income ..................................... $ 46,618 $ 47,121
========== ==========
Net yield on interest earning assets (3) ................ 4.82% 4.91%
==== ====
Net interest income and yield -- tax equivalent basis (4) $ 48,695 5.03% $ 48,737 5.08%
========== ==== ========== ====
========================================================================
</TABLE>
1) Average balances were calculated using a daily average.
2) Includes NOW and money market accounts.
3) Net yield on interest earning assets is net interest income divided by
average interest earning assets.
4) Interest on obligations of states and municipalities is not subject to
federal income tax. In order to make the net yield comparable on a fully
taxable basis, a tax equivalent adjustment is applied against the
tax-exempt income utilizing a federal tax rate of 35%.
5) Non-accruing loans and investments are included in the above table until
they are charged off.
6) The change in interest due to rate and volume has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
7) Interest on loans includes income/(loss) of $(2,000) in 1998, $(13,000) in
1997 and $72,000 in 1996 from interest rate contracts used to hedge prime
interest rate loans.
8) Includes gross unrealized gains on securities available for sale:
$8,537,000 in 1998, $4,785,000 in 1997 and $2,993,000 in 1996.
- --------------------------------------------------------------------------------
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
TABLE 5
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(In thousands)
<TABLE>
<CAPTION>
==================================
1996
---------------------------------
Average Yield/
Balance (1) Interest Rate
---------- --------- ----
<S> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (5),(7) ......................................... $ 686,541 $ 61,504 8.96%
Tax-exempt loans ...................................... 17,718 1,236 6.98
---------- --------- ----
Total loans ......................................... 704,259 62,740 8.91
Investment securities ................................. 192,489 11,208 5.82
Tax-exempt investment securities ...................... 34,613 1,593 4.60
---------- --------- ----
Total investment securities ......................... 227,102 12,801 5.64
Interest bearing deposits ............................. 657 35 5.33
Federal funds sold .................................... 21,492 1,144 5.32
---------- --------- ----
Total interest earning assets ........................... 953,510 76,720 8.05
Non-interest earning assets:
Cash and due from banks ............................... 32,581
Allowance for loan losses ............................. (11,795)
Premises and equipment ................................ 17,584
Other assets (8) ...................................... 17,763
----------
Total ............................................... $1,009,643
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2) .................. $ 221,904 4,496 2.03
Savings deposits ...................................... 104,257 2,407 2.31
Time deposits ......................................... 418,006 22,960 5.49
Other, including short-term borrowings, long-term debt
and other interest bearing liabilities .............. 8,727 457 5.24
---------- --------- ----
Total interest bearing liabilities ...................... 752,894 30,320 4.03
---------
Non-interest bearing liabilities:
Demand deposits ....................................... 113,046
Other ................................................. 14,011
Shareholders' equity .................................... 129,692
----------
Total ............................................... $1,009,643
==========
Net interest income ..................................... $ 46,400
=========
Net yield on interest earning assets (3) ................ 4.87%
====
Net interest income and yield -- tax equivalent basis (4) $ 47,923 5.03%
========= ====
==================================
</TABLE>
<TABLE>
<CAPTION>
==========================================================================
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due To (6) Increase (Decrease) Due To (6)
----------------------------------- -----------------------------------
Volume Rate Total Volume Rate Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans (5),(7) ....................................... $ 228 $ (1,897) $ (1,669) $ (1,124) $ 0 $ (1,124)
Tax-exempt loans .................................... 502 (250) 252 90 (23) 67
--------- --------- --------- --------- --------- ---------
Total loans ....................................... 730 (2,147) (1,417) (1,034) (23) (1,057)
Investment securities ............................... (897) 124 (773) 980 354 1,334
Tax-exempt investment securities .................... 645 (42) 603 141 (35) 106
--------- --------- --------- --------- --------- ---------
Total investment securities ....................... (252) 82 (170) 1,121 319 1,440
Interest bearing deposits ........................... 8 (3) 5 (3) 2 (1)
Federal funds sold .................................. (144) (4) (148) (144) 40 (104)
--------- --------- --------- --------- --------- ---------
Total interest earning assets ......................... 342 (2,072) (1,730) (60) 338 278
Non-interest earning assets:
Cash and due from banks .............................
Allowance for loan losses ...........................
Premises and equipment ..............................
Other assets (8) ....................................
Total .............................................
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2) ................ 184 (249) (65) (50) (337) (387)
Savings deposits .................................... 11 (11) 0 (48) (50) (98)
Time deposits ....................................... (1,157) (253) (1,410) (33) (123) (156)
Other, including short-term borrowings, long-term ...
debt and other interest bearing liabilities ....... 287 (39) 248 243 (45) 198
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities .................... (675) (552) (1,227) 112 (555) (443)
--------- --------- --------- --------- --------- ---------
Non-interest bearing liabilities:
Demand deposits .....................................
Other ...............................................
Shareholders' equity ..................................
Total .............................................
Net interest income ................................... $ 1,017 $ (1,520) $ (503) $ (172) $ 893 $ 721
========= ========= ======== ========= ======== ========
Net yield on interest earning assets (3) ..............
Net interest income and yield -- tax equivalent basis (4)
===========================================================================
</TABLE>
- --------------------------------------------------------------------------------
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
PROVISION FOR LOAN LOSSES
Omega's provision for loan losses was $1,060,000 in 1998 and $1,030,000 in 1997
for an increase of $30,000. This increase was precipitated by the increase in
the amount of net charge-offs, which exceeded the loan loss provision by $21,000
in 1998 and by $27,000 in 1997. Net charge-offs in 1998 and 1997 were .15% of
average loans outstanding. Non-performing loans as a ratio to the allowance for
loan losses were 55.4% at year-end 1998 and 58.6% at the end of 1997. The
allowance for loan losses as a ratio to net loans was 1.63% and 1.70% at
December 31, 1998 and 1997, respectively. The ratio of net charge-offs to
average loans compared to Omega's national peers is as follows:
Omega Peers
----- -----
September 30, 1998 ........... .11% .26%
December 31, 1997 ............ .15 .29
Management believes that the allowance for loan losses at December 31, 1998 is
adequate based on its analysis of the loan portfolio. Such analysis considers
factors that include historical and anticipated losses, the status of
non-performing delinquent loans, prevailing and anticipated economic conditions
and industry standards.
Net Interest Yield
------------------
Yield on Cost to Fund Net Interest
Earning Assets Earning Assets Yield
-------------- -------------- -----
1994 7.37% 2.68% 4.69%
1995 8.08% 3.21% 4.87%
1996 8.05% 3.18% 4.87%
1997 8.03% 3.12% 4.91%
1998 7.78% 2.96% 4.82%
- --------------------------------------------------------------------------------
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
NON-INTEREST INCOME
1998
- ----
Non-interest income grew to $13,345,000 during 1998 for a 31.4%, or $3,189,000
increase when compared to $10,156,000 for 1997. Most categories of non-interest
income were improved in 1998 as compared to 1997. The Corporation continued to
place emphasis on traditional banking services and improve its overall fee
structure. As a result, fee income from loans, deposits and other services
increased by $750,000, or 12.8%. In the fourth quarter of 1998, net securities
gains of $2,630,000 were recorded, causing net gains from investment securities
for the year to increase by $2,344,000, or 192.8%. Net gains from the sale of
loans and other assets decreased by $61,000, or 19.1%.
As a percentage of average assets, non-interest income (excluding securities
gains) was .95% for 1998, as compared to .88% in 1997. When compared to our
national peers (most current data as of September 30, 1998), Omega's ratio was
.95% and the peer average was 1.19%.
1997
- ----
Non-interest income grew to $10,156,000 during 1997 for a 12.6%, or $1,136,000,
increase when compared to $9,020,000 for 1996. The focus in 1997 was on
increasing revenues generated from traditional services, by delivering new
products and expanded services to our customer base, such as debit cards and
asset management services. As a result, trust fees increased by $236,000, or
9.4%, while fees relating to deposit accounts grew $384,000, or 13.3%, in 1997.
Net gains from investment transactions of $1,218,000 in 1997 represented an
increase of $429,000, or 54.4%, over 1996. Also, during 1997, the credit card
portfolio was sold, resulting in a gain of $220,000. Total other income in 1997
was $139,000 less than in 1996, however, in 1996 a one-time $300,000 gain was
recorded from the disposition of an asset carried as other real estate.
Non-Interest Income to Average Assets
(excluding security gains)
--------------------------
1994 0.75%
1995 0.77%
1996 0.82%
1997 0.88%
1998* 0.95%
As a percentage of average assets, non-interest income (excluding securities
gains) was .88% for 1997, as compared to .82% in 1996. The national peer average
for 1997 was 1.29%.
NON-INTEREST EXPENSE
1998
- ----
Omega's operating expenses were $34,189,000 for 1998 as compared to $31,782,000
for 1997, representing an increase of $2,407,000, or 7.5%.
Salaries and employee benefits increased by 3.7%, or $648,000 in 1998 as
compared to 1997, as a result of an increase of six full-time equivalent
employees on average and normal salary merit increases. Net occupancy expense
has been stable over the last three years, totaling $2,177,000 in 1998.
Equipment expense increased by 9.3%, or $174,000 in 1998 as compared to 1997, as
technology advances continue. Data processing service fees were $76,000, or 4.9%
higher in 1998 than in 1997, as new services were added.
Non-Interest Expense to Average Assets
--------------------------------------
1994 3.30%
1995 3.28%
1996 3.08%
1997 3.13%
1998 3.14%
* 1998 non-recurring item - 0.19%
During the fourth quarter of 1998, Omega recorded a non-recurring charge to
non-interest expense in the amount of $1,944,000. This represents a complete
write-off of all remaining goodwill and core deposit intangibles relating to a
branch that was acquired in 1995. The original premium was $2,300,000, with
amortization scheduled to run through 2010. Management's analysis of the
projected operating results of this branch and its deteriorated deposit base led
to the determination that the remaining premium could not be recovered from the
projected future cash flows attributable to the branch. In addition, given the
projected deterioration in the deposit levels at this branch, management
determined that the fair value of the branch assets did not exceed their
carrying value. Therefore, these intangibles were charged off in the current
year. Other operating expense, exclusive of the non-recurring item in 1998
decreased by $427,000, or 4.9% when compared to 1997.
- --------------------------------------------------------------------------------
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
As a percentage of average assets, non-interest expense was 3.33% for 1998 as
compared to 3.13% in 1997. Excluding the non-recurring charge in 1998
(representing .19% of average assets), this ratio is 3.14%. At September 30,
1998, Omega's ratio of non-interest expense to average assets was 3.13%,
compared to a national peer average of 3.20%.
1997
- ----
Omega's operating expenses were $31,782,000 for 1997 as compared to $31,087,000
for 1996, representing an increase of $695,000, or 2.2%. In order to understand
the change, it is important to review some unusual events which affected this
area in previous years. For example, during 1996, Omega's defined benefit
retirement plan was terminated, resulting in a one-time reduction of employee
benefits expense of $391,000. Therefore, it was expected that salaries and
employee benefits expense in 1997 would increase by 2.4%, just to replace the
normal required benefits costs. The additional increase of 3.6%, or $590,000,
was a result of normal staffing adjustments and merit increases. Another area
that requires a look back to previous years is FDIC insurance premiums. This
expense has been very erratic over the last several years. Prior to 1995, the
base rate on insurance premiums for Omega's banks was 23 cents per hundred
dollars of deposits. In April of 1995, the rate was reduced significantly to 4
cents, then further reduced in 1996 to the minimum of $2,000 per year per bank.
Then, in 1997, the rate was increased again, causing an increase in expense for
FDIC premiums of $96,000, or 1200%. These fluctuations have been the result of
the FDIC attempting to maintain the Bank Insurance Fund at reasonable levels.
While occupancy expense and data processing service costs remained relatively
unchanged, equipment expense rose by $83,000, or 4.6%, resulting primarily from
purchases for technology advancement. Other expense decreased in 1997 by
$470,000, or 5.1%, bringing this category to approximately the same level as in
1995.
At December 31, 1997, Omega's ratio of non-interest expense to average assets
was 3.13%, compared to a 3.08% in 1996. The national peer average for 1997 was
3.26%.
INCOME TAXES
Income taxes for 1998 amounted to $7,622,000 compared to $7,497,000 in 1997. The
effective tax rate was 30.8% in 1998. The non-recurring charge, specifically the
accelerated amortization of non-deductible goodwill increased the effective tax
rate by 0.7%. Excluding this preference item, the effective tax rate would have
been 30.1%, compared to 30.6% in 1997. This improvement was due to the change in
the mix of tax-exempt investments and loans. Omega's level of average tax-exempt
investments and average tax-exempt loans increased in 1998 by 40.7% or
$23,087,000, decreasing the federal tax rate by 4.8%. In 1997, tax exempt
earning assets had decreased from the prior year by 8.4% or $4,414,000, and
reduced federal tax by only 3.8%. Average tax-exempt investments and loans as a
percentage of average assets were 7.8%, 5.6% and 5.2% in 1998, 1997 and 1996,
respectively. Tax-exempt income as a percentage of income before income tax was
15.6%, 12.3% and 12.1% in 1998, 1997 and 1996, respectively. See Note 11 of
Notes to Consolidated Financial Statements for further information on income
taxes.
NET INCOME
For comparative purposes, the following table sets forth earnings and certain
earnings ratios for the past three years, excluding the non-recurring charge to
earnings in 1998.
1998 1997 1996
------- ------- -------
Net income .......................... $18,531 $16,968 $16,227
Return on average assets ............ 1.81% 1.67% 1.61%
Return on average equity ............ 12.31 12.26 12.51
- --------------------------------------------------------------------------------
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
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 Corporation 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.
In 1997, a committee was formed to:
1. Identify all of the date-dependent systems at the Corporation that
could be impacted by the Year 2000 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 certification of
compliance from all external information service providers
3. Formulate and execute a plan to minimize risk for customer and vendor
Y2K failure
4. Determine the cost of and plan for replacement of non-compliant
systems
5. Formulate a contingency plan for unexpected failures.
The committee is comprised of executive officers and operations personnel from
all major divisions of the Corporation. 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 December 31, 1998, about 75% of the critical PC software
applications had 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 Corporation's "Hot Site", where
backup hardware and software are maintained for continued operations in any
crisis. This software (and most related hardware) has been found to be reliable
when tested for all critical dates. As a result of testing thus far, one major
hardware item will be replaced in 1999.
All external software service providers have been contacted and have been asked
to provide certification and validation that their systems have been thoroughly
tested and are Y2K compliant. If the provider is not currently Y2K compliant we
have requested a timetable of planned system upgrades to achieve required
compliance. All critical vendors have indicated that they are dealing with their
Y2K issues, and in most cases, planned to have their testing completed by
December 31, 1998. Omega's testing with all critical outside vendors will be
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 Omega'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 the identification phase of its Y2K
process and has completed testing of all but three software applications. Proxy
testing with this provider's bank clients will continue to be conducted through
the first 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 the provider's 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 December 31, 1998, 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 will be 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.
- --------------------------------------------------------------------------------
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
Non IT systems that are micro-chip driven are also used throughout the
Corporation. These include such items as proof machines, HVAC, vaults, security
systems, elevators, telephones, 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 December 31, 1998, the control system for the HVAC
system at the Omega Administration Building has been tested and found to be
compliant. However, 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. All
remaining testing should be substantially completed by March 31, 1999.
Omega's financial results are dependent upon the solvency of its customer base;
their ability to repay loans and maintain deposits. Therefore, a process has
begun in which business customers with existing levels of aggregate loans in
excess of a designated amount are contacted, reviewed, and rated as to credit
risk. 74% of the credit relationships reviewed were deemed to be low risk, as
these borrowers are aware of the potential problems with 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 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 December 31, 1998. The current projections of costs to
complete the Y2K remediation are estimated to be approximately $700,000.
Included in this estimate is the amount of $175,000, which will be capitalized
for replacement of a major piece of hardware. The remaining costs (currently
projected at $525,000) will be expensed as incurred over the next twelve 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
first quarter of 1999.
- --------------------------------------------------------------------------------
30
<PAGE>
CONSOLIDATED BALANCE SHEETS
---------------------------
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Cash and due from banks (Notes 1 and 3) .................................................. $ 40,066 $ 31,938
Interest bearing deposits with other financial institutions .............................. 1,455 600
Federal funds sold ....................................................................... 18,350 22,650
Investment securities held to maturity
(market value-$117,954 and $117,344 respectively) (Notes 1 and 4) ...................... 116,829 116,802
Investment securities available for sale (Notes 1 and 4) ................................. 144,551 133,015
Total loans (Notes 1, 5, 6 and 17) ....................................................... 723,485 692,861
Less: Unearned discount ................................................................. (518) (968)
Allowance for loan losses ......................................................... (11,772) (11,793)
----------- -----------
711,195 680,100
Premises and equipment, net (Notes 1 and 7) .............................................. 16,816 17,589
Other assets (Note 1) .................................................................... 13,442 13,209
----------- -----------
TOTAL ASSETS ............................................................................. $ 1,062,704 $ 1,015,903
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing ................................................................... $ 132,291 $ 114,777
Interest bearing ....................................................................... 738,369 725,998
----------- -----------
870,660 840,775
Short-term borrowings (Note 8) ........................................................... 17,638 18,260
Other liabilities ........................................................................ 11,004 9,816
ESOP debt (Note 12) ...................................................................... 3,837 4,034
Long-term debt (Note 8) .................................................................. 5,000 --
Other interest bearing liabilities ....................................................... 585 586
----------- -----------
TOTAL LIABILITIES ........................................................................ 908,724 873,471
Commitments and Contingent Liabilities (Notes 10, 13 and 14)
Shareholders' Equity (Note 15)
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 ............................................... (2,875) (3,125)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares;
Issued -
9,137,270 shares at December 31, 1998; 9,050,730 shares at December 31, 1997
Outstanding -
8,960,197 shares at December 31, 1998;
8,879,257 shares at December 31, 1997 ................................................ 45,686 45,258
Capital surplus .......................................................................... 3,209 1,822
Retained earnings ........................................................................ 104,285 94,426
Accumulated other comprehensive income ................................................... 4,713 4,998
Cost of common stock in treasury:
177,073 shares at December 31, 1998;
171,473 shares at December 31, 1997 .................................................... (6,038) (5,947)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............................................................... 153,980 142,432
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................................... $ 1,062,704 $ 1,015,903
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
31
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans ................................................ $60,266 $61,683 $62,740
Interest and dividends on investment securities:
Taxable interest income ................................................. 11,148 12,004 10,711
Tax-exempt interest income .............................................. 2,302 1,699 1,593
Dividend income ......................................................... 621 538 497
Other interest income ..................................................... 931 1,074 1,179
------- ------- -------
TOTAL INTEREST INCOME ..................................................... 75,268 76,998 76,720
INTEREST EXPENSE:
Interest on deposits ...................................................... 27,747 29,222 29,863
Interest on short-term borrowings ......................................... 783 342 134
Interest on long-term debt and
other interest bearing liabilities ...................................... 120 313 323
------- ------- -------
TOTAL INTEREST EXPENSE .................................................... 28,650 29,877 30,320
------- ------- -------
NET INTEREST INCOME ....................................................... 46,618 47,121 46,400
Provision for loan losses (Note 6) ........................................ 1,060 1,030 979
------- ------- -------
INCOME FROM CREDIT ACTIVITIES ............................................. 45,558 46,091 45,421
OTHER INCOME:
Trust fees ................................................................ 2,904 2,746 2,510
Service fees on deposit accounts .......................................... 3,427 3,281 2,897
Investment securities gains, net (Note 4)
Investment securities held to maturity .................................. -- 2 1
Investment securities available for sale ................................ 3,560 1,216 788
Gain on sale of loans and other assets .................................... 258 319 319
Other ..................................................................... 3,196 2,592 2,505
------- ------- -------
TOTAL OTHER INCOME ........................................................ 13,345 10,156 9,020
OTHER EXPENSE:
Salaries and employee benefits (Note 12) .................................. 18,032 17,384 16,403
Net occupancy expense ..................................................... 2,177 2,185 2,189
Equipment expense ......................................................... 2,043 1,869 1,786
Data processing service ................................................... 1,618 1,542 1,533
FDIC insurance premiums ................................................... 101 104 8
Other ..................................................................... 10,218 8,698 9,168
------- ------- -------
TOTAL OTHER EXPENSE ....................................................... 34,189 31,782 31,087
------- ------- -------
INCOME BEFORE INCOME TAXES ................................................ 24,714 24,465 23,354
Income tax expense (Notes 1 and 11) ...................................... 7,622 7,497 7,127
------- ------- -------
NET INCOME ................................................................ $17,092 $16,968 $16,227
======= ======= =======
EARNINGS PER SHARE (Notes 1 and 9)
Basic ..................................................................... $ 1.87 $ 1.85 $ 1.75
Diluted ................................................................... $ 1.79 $ 1.77 $ 1.69
Weighted average shares and equivalents:
Basic ..................................................................... 8,949 8,950 9,057
Diluted ................................................................... 9,475 9,476 9,508
</TABLE>
All share and per share information has been restated to give effect to the 3
for 2 stock split on April 30, 1997.
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
32
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Years Ended December 31, 1996, 1997 and 1998
--------------------------------------------------------
Unearned
Preferred Comp- Common Capital Retained
Stock ensation Stock Surplus Earnings
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ........................ $ 5,000 $ (4,373) $ 30,245 $ 5,134 $ 86,778
Comprehensive income:
Net income ...................................... 16,227
Change in unrealized securities gains, net ......
Total comprehensive income .......................
Common dividends declared - $.56 per share ....... (5,073)
Cash dividends, preferred - $1.80 per share ...... (396)
Amortization of unearned compensation ............. 998
Tax benefit from employee stock options ........... 113
Tax benefit from preferred stock
dividends paid to ESOP .......................... 100
Purchase of treasury stock - 73,241 shares ........
Exercised employee stock options - 84,201 shares .. 276 515
-------- -------- -------- -------- --------
Balance at December 31, 1996 ...................... 5,000 (3,375) 30,521 5,649 97,749
Comprehensive income:
Net income ...................................... 16,968
Change in unrealized securities gains, net ........
Total comprehensive income ........................
Common dividends declared - $.65 per share ........ (5,838)
Cash dividends, preferred - $1.80 per share ....... (396)
Amortization of unearned compensation ............. 250
Tax benefit from employee stock options .......... 321
Tax benefit from preferred stock
dividends paid to ESOP ......................... 93
Purchase of treasury stock - 279,603 shares .......
Exercised employee stock options - 108,610 shares . 292 324
Issuance of treasury stock to ESOP - 17,192 shares
3 for 2 stock split, issued in the form -
of a stock dividend - 2,999,164 shares .......... 14,445 (4,151) (14,471)
-------- -------- -------- -------- --------
Balance at December 31, 1997 ...................... 5,000 (3,125) 45,258 1,822 94,426
Comprehensive income:
Net income ...................................... 17,092
Change in unrealized securities gains, net ........
Total comprehensive income ........................
Common dividends declared - $.80 per share ........ (7,169)
Cash dividends, preferred - $1.80 per share ....... (396)
Amortization of unearned compensation ............. 250
Tax benefit from employee stock options ........... 245
Tax benefit from preferred stock dividends
paid to ESOP .................................... 87
Purchase of treasury stock - 23,300 shares ........
Exercised employee stock options - 87,530 shares .. 428 1,387
Issuance of treasury stock to ESOP - 17,700 shares
-------- -------- -------- -------- --------
Balance at December 31, 1998 ...................... $ 5,000 $ (2,875) $ 45,686 $ 3,209 $104,285
======== ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1996 , 1997 and 1998
---------------------------------------------
Accumulated Cost of
Other Comp- Common
rehensive Stock
Income In Treasury Total
-------- ----------- --------
<S> <C> <C> <C>
Balance at January 1, 1996 ................................... $ 2,209 $ (822) $124,171
Comprehensive income:
Net income .................................................
Change in unrealized securities gains, net ................. 398
Total comprehensive income .................................. 16,625
Common dividends declared - $.56 per share .................. (5,073)
Cash dividends, preferred - $1.80 per share ................. (396)
Amortization of unearned compensation ........................ 998
Tax benefit from employee stock options ...................... 113
Tax benefit from preferred stock
dividends paid to ESOP ..................................... 100
Purchase of treasury stock - 73,241 shares ................... (2,383) (2,383)
Exercised employee stock options - 84,201 shares ............. 939 1,730
-------- -------- --------
Balance at December 31, 1996 ................................. 2,607 (2,266) 135,885
Comprehensive income:
Net income .................................................
Change in unrealized securities gains, net ................... 2,391
Total comprehensive income ................................... 19,359
Common dividends declared - $.65 per share ................... (5,838)
Cash dividends, preferred - $1.80 per share .................. (396)
Amortization of unearned compensation ........................ 250
Tax benefit from employee stock options ..................... 321
Tax benefit from preferred stock dividends paid to ESOP ..... 93
Purchase of treasury stock - 279,603 shares .................. (10,140) (10,140)
Exercised employee stock options - 108,610 shares ............ 1,712 2,328
Issuance of treasury stock to ESOP - 17,192 shares ........... 596 596
3 for 2 stock split, issued in the form -
of a stock dividend - 2,999,164 shares ..................... 4,151 (26)
-------- -------- --------
Balance at December 31, 1997 ................................. 4,998 (5,947) 142,432
Comprehensive income:
Net income .................................................
Change in unrealized securities gains, net ................... (285)
Total comprehensive income ................................... 16,807
Common dividends declared - $.80 per share ................... (7,169)
Cash dividends, preferred - $1.80 per share .................. (396)
Amortization of unearned compensation ........................ 250
Tax benefit from employee stock options ...................... 245
Tax benefit from preferred stock dividends paid to ESOP ...... 87
Purchase of treasury stock - 23,300 shares ................... (705) (705)
Exercised employee stock options - 87,530 shares ............. 1,815
Issuance of treasury stock to ESOP - 17,700 shares ........... 614 614
-------- -------- --------
Balance at December 31, 1998 ................................. $ 4,713 $ (6,038) $153,980
======== ======== ========
</TABLE>
Common dividends in 1996 have been adjusted to reflect the 3 for 2 stock split
on April 30, 1997.
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
33
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................................... $ 17,092 $ 16,968 $ 16,227
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................................. 4,522 2,489 3,349
Provision for loan losses ..................................................... 1,060 1,030 979
Gain on sale of investment securities ......................................... (2,913) (1,218) (789)
Non-monetary exchange of cost-method investments .............................. (421) -- --
Gain on sale of fixed assets and other property owned ......................... (214) (77) (304)
Gain on sale of loans ......................................................... (45) (241) (15)
(Increase) decrease in deferred tax asset ..................................... (427) 26 (188)
(Increase) decrease in interest receivable and other assets ................... (132) (1,044) 45
Decrease in interest payable .................................................. (384) (179) (570)
Increase (decrease) in taxes payable .......................................... 78 (689) 338
Amortization of deferred net loan costs (fees) ................................ 157 (104) (233)
Deferral of net loan fees ..................................................... 476 299 237
Increase in accounts payable and accrued expenses ............................. 1,730 741 836
-------- -------- --------
Total adjustments ........................................................... 3,487 1,033 3,685
-------- -------- --------
Net cash provided by operating activities ....................................... 20,579 18,001 19,912
Cash flows from investing activities: Proceeds from the sale or maturity of:
Interest bearing deposits with other financial institutions ................. 1,622 1,269 3,471
Investment securities available for sale - sales and maturities ............. 64,824 44,350 43,446
Investment securities held to maturity-- maturities ......................... 42,824 39,286 29,974
Purchase of:
Interest bearing deposits with other financial institutions ................. (2,477) (1,357) (3,140)
Investment securities available for sale .................................... (76,237) (45,290) (47,592)
Investment securities held to maturity ...................................... (42,814) (41,793) (47,098)
(Increase) decrease in loans .................................................. (34,479) 736 (5,207)
Gross proceeds from sale of loans ............................................. 1,736 2,957 10,919
Capital expenditures .......................................................... (1,177) (1,783) (2,448)
Sale of fixed assets and other property owned ................................. 908 502 524
Decrease (increase) in federal funds sold ..................................... 4,300 (4,575) (5,615)
-------- -------- --------
Net cash used in investing activities ........................................... (40,970) (5,698) (22,766)
Cash flows from financing activities:
Increase (decrease) in deposits, net .......................................... 29,885 (5,255) (4,152)
Increase in borrowings, net ................................................... 4,378 7,968 3,047
Net change in other interest bearing liabilities .............................. (1) (7) 63
Dividends paid ................................................................ (7,185) (6,053) (4,080)
Tax benefit from preferred stock dividend and
stock option activity ....................................................... 332 414 213
Issuance of common stock ...................................................... 1,815 616 791
Acquisition of treasury stock ................................................. (705) (10,140) (2,383)
Proceeds from sale of treasury stock .......................................... -- 1,712 939
-------- -------- --------
Net cash provided by (used in) financing activities ............................. 28,519 (10,745) (5,562)
-------- -------- --------
Net increase (decrease) in cash and due from banks .............................. $ 8,128 $ 1,558 $ (8,416)
======== ======== ========
Cash and due from banks at beginning of period .................................. $ 31,938 $ 30,380 $ 38,796
Cash and due from banks at end of period ........................................ 40,066 31,938 30,380
-------- -------- --------
Net increase (decrease) in cash and due from banks .............................. $ 8,128 $ 1,558 $ (8,416)
======== ======== ========
Interest paid ................................................................... $ 29,079 $ 30,056 $ 30,890
Income taxes paid ............................................................... 7,517 7,112 6,944
</TABLE>
The accompanying notes are an integral part of these statements.
- --------------------------------------------------------------------------------
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
OMEGA FINANCIAL CORPORATION AND SUBSIDIARES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NATURE OF OPERATIONS
Omega Financial Corporation is a bank holding company operating primarily in
central Pennsylvania, for the purpose of delivering financial services within
its local market. Consisting of three banks and four non-bank subsidiaries,
Omega Financial Corporation provides retail and commercial banking services
through 44 offices in Centre, Clinton, Mifflin, Juniata, Blair, Huntingdon,
Bedford and Montour counties. Its banks provide a full range of banking services
including an automatic teller machine network, checking accounts, NOW accounts,
savings accounts, money market accounts, investment certificates, fixed rate
certificates of deposit, club accounts, secured and unsecured commercial and
consumer loans, construction and mortgage loans, safe deposit facilities, credit
loans with overdraft checking protection and student loans. The bank
subsidiaries also provide a variety of trust services. Management believes that
Omega Financial Corporation has a relatively stable deposit base with no major
seasonal depositor or group of depositors. Most of Omega Financial Corporation's
commercial customers are small and mid-sized businesses in central Pennsylvania.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Omega Financial Corporation and its wholly owned
subsidiaries conform to generally accepted accounting principles and to general
industry practices. A summary of the more significant accounting policies
applied in the preparation of the accompanying consolidated financial statements
follows.
Principles of consolidation
The consolidated financial statements include the accounts of Omega Financial
Corporation and its wholly owned subsidiaries (hereafter collectively referred
to as "Omega" or the "Corporation"): Omega Bank, N.A. ("Omega Bank"),
Hollidaysburg Trust Company ("Hollidaysburg"), Penn Central National Bank ("Penn
Central"), Central Pennsylvania Investment Co., Central Pennsylvania Life
Insurance Co., Central Pennsylvania Leasing, Inc. and Central Pennsylvania Real
Estate, Inc. All significant intercompany transactions and balances have been
eliminated.
On December 31, 1996, two of Omega's banking subsidiaries were consolidated into
one, when Montour Bank was merged into Omega Bank.
Investment securities
Investment securities within the Corporation's investment portfolio are
classified as available for sale or held to maturity. The determination as to
which portfolio to hold each security is made at the time of purchase, based on
management's intent. All equity investments are classified as available for
sale. Debt securities are classified as available for sale when the intent is
for the security to be available to be used for strategic asset/liability
management purposes such as to manage interest rate risk, prepayment risk, or
liquidity needs. Securities are classified as held to maturity when it is
management's intent to hold such securities until maturity.
Securities classified as available for sale are stated at market value, with the
unrealized gains and losses, net of tax, reported as a component of
comprehensive income, until realized. Investment securities classified as held
to maturity are stated at cost, adjusted for amortization of premium and
accretion of discount on a level-yield basis. Interest and dividends on
investment securities held to maturity are recognized as income when earned.
Gains or losses on the disposition of securities are based on the net proceeds
and the adjusted carrying amount of the specific securities sold (See Note 4).
Derivative financial instruments
Omega uses interest rate contracts to achieve interest rate risk management
objectives. These contracts are accounted for on an accrual basis and the net
interest differential is recognized as an adjustment to interest income (See
Note 2). The market value of these financial instruments represents the amount
Omega would receive or pay to terminate the agreements and is determined through
dealer quotes.
Loans
Interest on all loans is accrued over the term of the loans based on the amount
of principal outstanding, except on certain installment loans granted at Omega
Bank, on which interest is recognized as income under a method that approximates
the interest method.
Loans on which the accrual of interest has been discontinued are designated as
non-accrual loans. Accrual of interest on loans is discontinued when reasonable
doubt exists as to the full, timely collection of principal or interest. When a
loan is placed on non-accrual status, all interest previously accrued but not
collected is reversed against current period income. Income on such loans is
then recognized only to the extent that cash is received and where the future
collection of principal is probable. Accruals are resumed on loans only when
they are brought fully current with respect to
- --------------------------------------------------------------------------------
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
interest and principal, and when, in the judgment of management, the loan is
estimated to be fully collectible as to both principal and interest.
Loan origination fees and costs
Loan origination fees and related direct origination costs for a given loan are
offset and the net amount is deferred and amortized over the life of the loan as
an adjustment to interest income.
Allowance for loan losses
For financial reporting purposes, the provision for loan losses charged to
current operating income is based on management's estimates, and ultimate losses
may vary from the current estimates. These estimates are reviewed periodically
and as adjustments become necessary, they are reported in earnings in the
periods in which they become known. The adequacy of the level of the reserve is
determined by a continuing review of the composition and growth of the loan
portfolio, overall portfolio quality, specific problem loans, prior loan loss
experience and current economic conditions that may affect a borrower's ability
to pay. The loan loss provision for federal income tax purposes is based on
current income tax regulations, which allow for deductions equal to net
charge-offs.
Other real estate owned and held for investment
Assets acquired in settlement of mortgage loan indebtedness are recorded as a
part of other real estate owned and held for investment and are included in
other assets at the lower of the estimated value of the asset (fair value minus
estimated costs to sell) or the carrying amount of the loan. Costs to maintain
the assets and subsequent gains and losses attributable to their disposal are
included in other income and other expenses as appropriate. No depreciation or
amortization expense is recognized. At December 31, 1998 and 1997, the carrying
value of other real estate owned and held for investment was $259,000 and
$618,000, respectively.
Bank premises and equipment and depreciation
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using both the straight-line and declining-balance
methods, over the estimated useful lives of the assets (See Note 7).
Intangible Assets
Core deposit intangibles and goodwill are included in other assets. Intangible
assets are amortized using the straight-line method over their estimated useful
lives of 15 years. Management periodically reviews and assesses the
realizability of intangible assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121. This Statement requires the recognition of
an impairment loss when the estimate of undiscounted future cash flows expected
to be generated by the asset is less than its carrying amount. Measurement of
impairment loss is based on the fair value of the asset, which is determined
using valuation techniques such as the present value of expected future cash
flows. During the fourth quarter of 1998, management recorded an impairment loss
of $1,944,000 related to core deposit intangibles and goodwill associated with
an acquired branch since it was determined at that time these assets had been
impaired.
Income taxes
Omega and its subsidiaries, except for Central Pennsylvania Life Insurance
Company, file a consolidated federal income tax return. The provision for income
taxes is based upon the results of operations, adjusted principally for
tax-exempt income. Certain items of income or expense are reported in different
periods for financial reporting and tax return purposes. The tax effects of
these temporary differences are recognized currently in the deferred income tax
provision or benefit.
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
applicable enacted marginal tax rate(s). Deferred income tax expenses or
benefits are based on the changes in the deferred tax asset or liability from
period to period.
Earnings per share
As of December 31, 1997, Omega adopted SFAS No. 128, "Earnings per Share", which
established standards for computing and presenting earnings per share (EPS).
This Statement replaced the presentation of primary EPS with a presentation of
basic EPS, and replaced the presentation of fully diluted EPS with a
presentation of diluted EPS. Basic EPS is computed by dividing income available
to common stockholders by the weighted-average number of common 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. All prior period EPS data presented in these
financial statements has been restated to conform with this data (see Notes 9
and 19).
Comprehensive income
Effective January 1, 1998, Omega adopted SFAS No. 130, "Reporting Comprehensive
Income", which established new rules for the reporting and display of
comprehensive income and its components. The adoption had no impact on Omega's
net income or shareholders' equity. The objective of the Statement is to report
a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
- --------------------------------------------------------------------------------
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
with owners. SFAS No. 130 requires presentation of comprehensive income (net
income plus all other changes in net assets from nonowner sources) and its
components in the financial statements. Reclassification of financial statements
for earlier periods is provided for comparative purposes. Omega has elected to
reflect the statement of comprehensive income within the consolidated statements
of shareholders' equity (see Note 16).
Segment and related information
Effective January 1, 1998, Omega adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which requires disclosures
about segments of an enterprise and related information to provide information
about the different types of business activities in which an enterprise engages
and the different economic environments in which it operates to help users of
financial statements better understand the enterprise's performance, better
assess its prospects for future net cash flows and make more informed judgments
about the enterprise as a whole. Omega is a bank holding company operating
primarily in central Pennsylvania, with the purpose of delivering financial
services within its local market by means of a branching network. Each of
Omega's entities are part of the same reporting segment, whose operating results
are regularly reviewed and managed by a centralized executive management group.
Therefore, consolidated financial statements, as presented, reflect the
operating results of the financial services segment of our business.
Accounting pronouncements not yet adopted
During June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge 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 treatment.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance. The Statement cannot be applied retroactively.
Management has evaluated the probable impact of adopting SFAS No. 133 on the
financial statements and believes it to be immaterial to the results of
operations.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", requires
disclosure of estimated fair values of Omega's financial instruments. The
following describes the estimated fair value of the Corporation's financial
instruments as well as the significant methods and assumptions used to determine
these estimated fair values.
The fair value disclosures are made based on relevant market information for
similar credit risk and management assumptions. The estimated values do not
reflect any premium or discount that may be realized from offering for sale at
one time Omega's entire holdings of a particular financial instrument. In
addition, the fair value estimates do not consider the potential income taxes or
other expenses that would be incurred in the actual sale of an asset or
settlement of a liability.
Cash and due from banks, Interest bearing deposits with other financial
institutions and Federal funds sold - The carrying amounts approximate fair
value due to the short maturity of these instruments.
Investment securities - The fair value of investment securities is determined by
reference to quoted market prices or dealer quotes (see Note 4).
Commercial, financial and agricultural loans - These loans are made on either a
floating or fixed rate basis. The estimated fair value of these loans is
determined by discounting the future contractual cash flows using rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturity or repricing period. The discount rates utilized for
these loans are equivalent to the national prime rate with a spread of
approximately 25 to 100 basis points at December 31, 1998 and a spread of 50 to
125 basis points at December 31, 1997. Estimated fair value for commercial real
estate and construction loans is determined on the same basis as the above
commercial loans.
Real estate mortgage loans - This category is comprised primarily of residential
mortgages that are adjustable rate mortgages (ARMs) or fixed rate mortgages. The
estimated fair value of these loans is arrived at by discounting the future
contractual cash flows at the current market rate for these loans. No prepayment
or acceleration of the cash flows is assumed. The rates utilized for adjustable
rate mortgages are equivalent to the U.S. Treasury rate for the same term with a
spread of approximately 150 to 270 basis points at December 31, 1998 and a
spread of 150 to 250 basis points at December 31, 1997. The current market rate
for the fixed rate mortgages ranged from 6.90% to 7.35% at December 31, 1998 and
from 7.25% to 7.75% at December 31, 1997.
- --------------------------------------------------------------------------------
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Home equity - This category is comprised primarily of fixed rate loans, but does
include home equity lines of credit which have floating rates. The fair value of
the fixed rate loans is estimated by discounting the future contractual cash
flows using rates at which similar loans would be made to borrowers for the same
remaining maturity. Home equity lines of credit are on a floating basis and
approximate current market rates.
Personal loans and lease financing - This category is comprised primarily of
fixed rate loans, but does include personal lines of credit which have floating
rates. The fair value of the fixed rate loans is estimated by discounting the
future contractual cash flows. The discount factor for these loans is the
current national market rate for a 48 month automobile loan plus 50 basis
points. This rate was 8.97% and 9.20% on December 31, 1998 and 1997,
respectively. Personal lines of credit are on a floating basis and approximate
current market rates.
Demand and savings accounts - The fair value of these deposits is the amount
payable on demand.
Time deposits - The estimated fair value is determined by discounting the
contractual cash flows, using the rates currently offered for deposits of
similar remaining maturities. The rates utilized for time deposits are
equivalent to the U.S. Treasury rate for the same term minus a spread of 0 to 40
basis points at December 31, 1998 and 35 to 60 basis points at December 31,
1997.
All other interest bearing liabilities' carrying values approximate fair value.
Short-term and long-term borrowings are on a floating basis and approximate
current market rates. Other interest bearing liabilities reprice semi-annually
at current market rates.
At December 31, 1998, Omega had existing interest rate contracts with a total
notional balance of $30,000,000. These agreements had a positive fair value of
$48,000 based on dealer quotes on that date. At December 31, 1997, existing
interest rate swap agreements had a total notional balance of $40,000,000 and a
negative fair value of $54,000 (see Note 13).
Commitments to extend credit and standby letters of credit - The fair value of
loan commitments and standby letters of credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreement and the present credit worthiness of the
counter parties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rate. As
of December 31, 1998 and 1997, the commitment amount approximates fair value for
these financial instruments.
<TABLE>
<CAPTION>
(in thousands)
December 31, 1998 December 31, 1997
------------------------------ ------------------------------
Book Fair Book Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and due from banks .................................. $ 40,066 $ 40,066 $ 31,938 $ 31,938
Interest bearing deposits ................................ 1,455 1,455 600 600
Federal funds sold ....................................... 18,350 18,350 22,650 22,650
Investment securities held to maturity ................... 116,829 117,954 116,802 117,344
Investment securities available for sale ................. 144,551 144,551 133,015 133,015
Loans (net of unearned interest):
Commercial, financial and agricultural ................. 97,901 96,037 126,740 125,970
Real estate - commercial ............................... 198,987 198,496 141,485 140,725
Real estate - construction ............................. 15,890 15,993 21,167 21,182
Real estate - mortgage ................................. 227,846 229,437 212,780 214,226
Home equity ............................................ 83,800 84,172 63,905 64,154
Personal ............................................... 94,987 96,102 121,447 121,991
Lease financing ........................................ 3,556 3,577 4,369 4,364
Allowance for loan losses .............................. (11,772) -- (11,793) --
----------- ----------- ----------- -----------
Total loans .............................................. 711,195 723,814 680,100 692,612
Interest receivable ...................................... 7,512 7,512 7,855 7,855
----------- ----------- ----------- -----------
Total financial assets ................................... $ 1,039,958 $ 1,053,702 $ 992,960 $ 1,006,014
=========== =========== =========== ===========
Demand deposits .......................................... $ 320,462 $ 320,462 $ 277,042 $ 277,042
Savings deposits ......................................... 155,710 155,710 154,640 154,640
Time deposits ............................................ 394,488 398,766 409,093 411,583
Short-term borrowings .................................... 17,638 17,638 13,260 13,260
Long-term debt ........................................... 5,000 4,998 5,000 4,997
Other interest bearing liabilities ....................... 4,422 4,422 4,620 4,620
Interest payable ......................................... 1,858 1,858 2,213 2,213
----------- ----------- ----------- -----------
Total financial liabilities .............................. $ 899,578 $ 903,854 $ 865,868 $ 868,355
=========== =========== =========== ===========
</TABLE>
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
Omega's banking subsidiaries are required to maintain cash reserve balances with
the Federal Reserve Bank. The total required reserve balances were $10,109,000
and $2,158,000 as of December 31, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. INVESTMENT SECURITIES (IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------
Securities classified as Held to Maturity Gross Gross
Amortized Market Weighted Unrealized Unrealized
Type and maturity Cost Value Avg. Yield Gains Losses
- ----------------------------------------------------------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- -----------------------------------------------------------
Within one year ......................................... $ 6,018 $ 6,068 6.35% $ 50 $ --
After one year but within five years .................... 20,473 20,697 6.08 234 (10)
After five years but within ten years ................... -- -- -- -- --
After ten years ......................................... -- -- -- -- --
Obligations of state and political subdivisions
- -----------------------------------------------------------
Within one year ......................................... 927 937 6.24 10 --
After one year but within five years .................... 2,174 2,228 6.25 54 --
After five years but within ten years ................... 1,883 1,997 6.69 114 --
After ten years ......................................... -- -- -- -- --
Corporate and other securities
- -----------------------------------------------------------
Within one year ......................................... 7,667 7,692 5.99 26 (1)
After one year but within five years .................... 41,484 41,959 6.13 483 (8)
After five years but within ten years ................... 1,801 1,807 6.15 16 (10)
After ten years ......................................... 2,099 2,102 6.24 3 --
Mortgage-backed securities
- -----------------------------------------------------------
Within one year ......................................... 2,537 2,543 6.16 8 (2)
After one year but within five years .................... 8,599 8,652 6.29 53 --
After five years but within ten years ................... 5,874 5,904 5.96 33 (3)
After ten years ......................................... 10,544 10,619 5.81 81 (6)
Investment in low income housing projects ................. 541 541 N/M -- --
Common stock .............................................. 4,208 4,208 N/M -- --
-------- -------- ---- -------- --------
Total ..................................................... $116,829 $117,954 6.11% $ 1,165 $ (40)
======== ======== ==== ======== ========
<CAPTION>
December 31, 1998
-----------------------------------------------------------------
Securities classified as Available for Sale Gross Gross
Amortized Market Weighted Unrealized Unrealized
Type and maturity Cost Value Avg. Yield Gains Losses
- ----------------------------------------------------------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- -----------------------------------------------------------
Within one year ......................................... $ 29,039 $ 29,173 5.98% $ 134 $ --
After one year but within five years .................... 29,168 29,312 5.37 160 (16)
After five years but within ten years ................... -- -- -- -- --
After ten years ......................................... -- -- -- -- --
Obligations of state and political subdivisions
- -----------------------------------------------------------
Within one year ......................................... 3,870 3,894 6.55 26 (2)
After one year but within five years .................... 61,427 62,500 6.26 1,116 (43)
After five years but within ten years ................... 6,310 6,387 5.94 77 --
After ten years ......................................... 1,724 1,732 6.74 14 (6)
Common stock .............................................. 5,773 11,553 N/M 5,812 (32)
-------- -------- ---- -------- --------
Total ..................................................... $137,311 $144,551 6.00% $ 7,339 $ (99)
======== ======== ==== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
Securities classified as Held to Maturity Gross Gross
Amortized Market Weighted Unrealized Unrealized
Type and maturity Cost Value Avg. Yield Gains Losses
- ----------------------------------------------------------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- -----------------------------------------------------------
Within one year ......................................... $ 2,993 $ 3,003 6.02% $ 13 $ (3)
After one year but within five years .................... 18,014 18,186 6.29 172 --
After five years but within ten years ................... 3,000 3,011 6.51 11 --
After ten years ......................................... -- -- -- -- --
Obligations of state and political subdivisions
- -----------------------------------------------------------
Within one year ......................................... 1,281 1,284 6.07 3 --
After one year but within five years .................... 2,626 2,646 6.26 20 --
After five years but within ten years ................... 1,892 1,940 6.69 48 --
After ten years ......................................... -- -- -- -- --
Corporate and other securities
- -----------------------------------------------------------
Within one year ......................................... 5,883 5,873 6.04 5 (15)
After one year but within five years .................... 21,590 21,736 6.32 151 (5)
After five years but within ten years ................... 9,472 9,514 6.22 44 (2)
After ten years ......................................... 160 162 6.71 2 --
Mortgage-backed securities
- -----------------------------------------------------------
Within one year ......................................... 2,600 2,590 5.52 1 (11)
After one year but within five years .................... 13,645 13,641 6.34 31 (35)
After five years but within ten years ................... 11,625 11,679 6.26 61 (7)
After ten years ......................................... 17,400 17,458 5.83 113 (55)
Investment in low income housing projects ................. 489 489 N/M -- --
Common stock .............................................. 4,132 4,132 N/M -- --
-------- -------- ---- -------- --------
Total ..................................................... $116,802 $117,344 6.19% $ 675 $ (133)
======== ======== ==== ======== ========
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
Securities classified as Available for Sale Gross Gross
Amortized Market Weighted Unrealized Unrealized
Type and maturity Cost Value Avg. Yield Gains Losses
- ----------------------------------------------------------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- -----------------------------------------------------------
Within one year ......................................... $ 54,597 $ 54,612 5.66% $ 63 $ (48)
After one year but within five years .................... 24,546 24,629 6.08 113 (30)
After five years but within ten years ................... -- -- -- -- --
After ten years ......................................... -- -- -- -- --
Obligations of state and political subdivisions
- -----------------------------------------------------------
Within one year ......................................... 6,360 6,369 6.05 13 (4)
After one year but within five years .................... 26,473 26,857 6.72 388 (4)
After five years but within ten years ................... 6,903 6,999 6.72 96 --
After ten years ......................................... 1,045 1,057 7.26 18 (6)
Common stock .............................................. 5,414 12,492 N/M 7,078 --
-------- -------- ---- -------- --------
Total ..................................................... $125,338 $133,015 6.08% $ 7,769 $ (92)
======== ======== ==== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------
Securities classified as Held to Maturity Gross Gross
Amortized Market Weighted Unrealized Unrealized
Type and maturity Cost Value Avg. Yield Gains Losses
- ----------------------------------------------------------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- -----------------------------------------------------------
Within one year ......................................... $ 75 $ 75 6.50% $ -- $ --
After one year but within five years .................... 6,972 6,974 6.12 24 (22)
After five years but within ten years ................... -- -- -- -- --
After ten years ......................................... -- -- -- -- --
Obligations of state and political subdivisions
- -----------------------------------------------------------
Within one year ......................................... 1,369 1,375 7.14 6 --
After one year but within five years .................... 3,002 3,001 6.06 6 (7)
After five years but within ten years ................... 524 517 6.10 -- (7)
After ten years ......................................... 1,920 1,914 6.80 -- (6)
Corporate and other securities
- -----------------------------------------------------------
Within one year ......................................... 3,808 3,800 5.39 3 (11)
After one year but within five years .................... 16,330 16,289 6.04 57 (98)
After five years but within ten years ................... 7,582 7,616 6.13 35 (1)
After ten years ......................................... 160 160 7.84 1 (1)
Mortgage-backed securities
- -----------------------------------------------------------
Within one year ......................................... 338 339 6.76 1 --
After one year but within five years .................... 24,063 24,008 6.17 61 (116)
After five years but within ten years ................... 17,381 17,491 6.26 124 (14)
After ten years ......................................... 26,139 26,083 5.73 111 (167)
Investment in low income housing projects ................. 438 438 N/M -- --
Common stock .............................................. 4,091 4,091 N/M -- --
-------- -------- ---- -------- --------
Total ..................................................... $114,192 $114,171 6.05% $ 429 $ (450)
======== ======== ==== ======== ========
<CAPTION>
December 31, 1996
-----------------------------------------------------------------
Securities classified as Available for Sale Gross Gross
Amortized Market Weighted Unrealized Unrealized
Type and maturity Cost Value Avg. Yield Gains Losses
- ----------------------------------------------------------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- -----------------------------------------------------------
Within one year ......................................... $ 26,774 $ 26,758 5.47% $ 20 $ (36)
After one year but within five years .................... 59,589 59,434 5.75 122 (277)
After five years but within ten years ................... -- -- -- -- --
After ten years ......................................... -- -- -- -- --
Obligations of state and political subdivisions
- -----------------------------------------------------------
Within one year ......................................... 10,189 10,088 7.57 38 (139)
After one year but within five years .................... 18,607 18,684 6.89 126 (49)
After five years but within ten years ................... 1,708 1,716 7.48 8 --
After ten years ......................................... 1,739 1,741 6.79 20 (18)
Common stock .............................................. 5,049 9,233 N/M 4,231 (47)
-------- -------- ---- -------- --------
Total ..................................................... $123,655 $127,654 6.06% $ 4,565 $ (566)
======== ======== ==== ======== ========
</TABLE>
N/M = Not meaningful
- --------------------------------------------------------------------------------
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Investment yields were computed on a tax equivalent basis (using a 35% tax rate)
for obligations of state and political subdivisions. Total weighted average
yield does not include the common stock holdings.
Certain obligations of the U.S. Government and state and political subdivisions
are pledged to secure public monies as required by law and for other purposes.
The carrying value of the pledged assets amounted to $89,598,000, $85,628,000
and $80,405,000 at December 31, 1998, 1997 and 1996, respectively.
In addition to cash received from the scheduled maturities of securities, some
investment securities are sold at current market values during the course of
normal operations. Following is a summary of proceeds received from all
investment securities transactions, and the resulting realized gains and losses
(in thousands):
Years Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Gross proceeds from securities transactions $107,648 $ 83,636 $ 73,420
Securities available for sale:
Realized gains .......................... 2,913 1,422 842
Realized losses ......................... -- 206 54
Securities held to maturity:
Realized gains .......................... -- 2 1
Realized losses ......................... -- -- --
5. LOANS
Loans outstanding at the end of each year consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural ............. $ 97,901 $126,740 $131,147 $136,537 $138,267
Real estate - commercial ........................... 198,987 141,485 136,250 127,462 103,892
Real estate - construction ......................... 15,890 21,167 19,680 18,346 12,252
Real estate - mortgage ............................. 227,846 212,780 206,653 209,453 205,524
Home equity ........................................ 83,800 63,905 45,182 39,827 35,974
Personal ........................................... 95,060 121,813 154,587 170,529 148,731
Lease financing .................................... 4,001 4,971 4,824 4,486 4,071
-------- -------- -------- -------- --------
Total ......................................... $723,485 $692,861 $698,323 $706,640 $648,711
======== ======== ======== ======== ========
</TABLE>
Non-accrual loans at December 31, 1998 and 1997 were $5,627,000 and $4,762,000,
respectively, representing .78% and .69% of loans. Interest income not recorded
on non-accrual loans in 1998, 1997 and 1996 was $542,000, $401,000 and $201,000,
respectively. Gross interest income that would have been recorded on non-accrual
loans had these loans been in a performing status was $652,000 in 1998, of which
$110,000 was included in interest income for the year ended December 31, 1998.
- --------------------------------------------------------------------------------
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. ALLOWANCE FOR LOAN LOSSES
A summary of the transactions in the allowance for loan losses for the last five
years follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance of allowance - beginning of period .............. $11,793 $11,820 $11,668 $11,057 $11,168
Loans charged off:
Commercial, financial and agricultural ................ 463 70 428 149 480
Real estate -
Commercial .......................................... 283 348 77 -- 5
Mortgage ............................................ -- -- -- 119 130
Personal .............................................. 682 984 671 585 485
------- ------- ------- ------- -------
Total charge-offs ................................. 1,428 1,402 1,176 853 1,100
Recoveries of loans previously charged off:
Commercial, financial and agricultural ................ 146 225 181 101 160
Real estate -
Commercial .......................................... 96 6 38 -- 17
Mortgage ............................................ -- -- -- 87 45
Personal .............................................. 105 114 130 147 144
------- ------- ------- ------- -------
Total recoveries .................................. 347 345 349 335 366
------- ------- ------- ------- -------
Net charge-offs ......................................... 1,081 1,057 827 518 734
Provision for loan losses ............................... 1,060 1,030 979 713 623
Allowance acquired through bank purchase ................ -- -- -- 416 --
------- ------- ------- ------- -------
Balance of allowance - end of period .................... $11,772 $11,793 $11,820 $11,668 $11,057
======= ======= ======= ======= =======
Ratio of net charge-offs during period to
average loans outstanding ............................... 0.15% 0.15% 0.12% 0.08% 0.12%
======= ======= ======= ======= =======
</TABLE>
As of December 31, 1998, 1997 and 1996, the recorded investment in the loans for
which impairment has been recognized in accordance with SFAS No. 114 as amended
by SFAS No. 118 is $3,907,000, $3,471,000 and $931,000, respectively. The total
allowance for loan losses related to those impaired loans is $890,000, $585,000
and $222,000, at December 31, 1998, 1997 and 1996, respectively. It is the
policy of the Corporation to recognize income on impaired loans on a cash basis,
only to the extent that it exceeds principal balance recovery.
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
Estimated ----------------------------
Useful Life 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Land ......................................... -- $ 2,371 $ 2,371
Premises and leasehold improvements .......... 5-40 years 20,052 19,809
Furniture, computer software
and equipment .............................. 3-20 years 18,414 17,489
Construction in progress ..................... -- 194 221
---------- ----------
41,031 39,890
Less accumulated depreciation ................ (24,215) (22,301)
---------- ----------
$ 16,816 $ 17,589
========== ==========
</TABLE>
Depreciation expense on premises and equipment charged to operations was
$1,950,000 in 1998, $1,831,000 in 1997 and $1,762,000 in 1996.
- --------------------------------------------------------------------------------
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. BORROWINGS
Borrowings consist of the following (in thousands):
December 31,
-----------------
Short-Term Borrowings: 1998 1997
------- -------
Retail repurchase agreements ............................... $17,638 $13,260
Note payable to Federal Home Loan Bank, with variable rates
payable at Libor plus 2 basis points .................... -- 5,000
------- -------
$17,638 $18,260
======= =======
Long-Term Debt:
Note payable to Federal Home Loan Bank, with variable rates
payable at Libor plus 5 basis points .................... $ 5,000 $ --
Omega has repurchase agreements with several of its depositors, under which
customers' funds are invested daily into an interest bearing account. These
funds are carried by the Corporation as short-term debt and are collateralized
by U.S. Government securities. The interest rate paid on these funds is variable
and subject to change monthly.
The short-term note payable, as of December 31, 1997, in the amount of
$5,000,000 with the Federal Home Loan Bank matured in 1998, and was renewed as a
three-year long-term note payable. The $5,000,000 Federal Home Loan Bank
long-term note payable at December 31, 1998 will mature in 2001, with the full
principal balance payable upon maturity. Omega must maintain sufficient
qualifying collateral, as defined, to secure all outstanding advances.
Omega has lines of credit established with various financial institutions for
overnight funding needs. These lines provided a total of $18,000,000 in 1998 and
$20,000,000 in 1997, with interest payable at the daily federal funds rate.
There were no borrowings on December 31, 1998 or December 31, 1997 under these
credit facilities.
Omega also has credit with the Federal Home Loan Bank of Pittsburgh with a total
borrowing capacity of $62,572,000 (including overnight borrowing) as of December
31, 1998. If the Corporation were to purchase additional Federal Home Loan Bank
stock, the maximum borrowing capacity could be increased to $282,733,000. The
Federal Home Loan Bank is a source of both short-term and long-term funding. The
Corporation must maintain sufficient qualifying collateral, as defined, to
secure all outstanding advances.
9. CALCULATION OF EARNINGS PER SHARE
The following table shows the calculation of earnings per share for the years
ended December 31, 1998, 1997 and 1996. Prior year data has been restated to
reflect the 3 for 2 stock split in the form of a dividend in 1997 as well as the
adoption of SFAS No. 128, "Earnings per Share".
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------------------------ ------------------------------- ------------------------------
Shares Per-Share Shares Per-Share Shares Per-Share
Income Denom- Income Denom- Income Denom-
Numerator inator Amount Numerator inator Amount Numerator inator Amount
------------------------------ ------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income ........................... $17,092 $16,968 $16,227
Less: Preferred stock dividends ...... (396) (396) (396)
------- ------- -------
Basic EPS
Income available to common
shareholders ..................... 16,696 8,949 $ 1.87 16,572 8,950 $ 1.85 15,831 9,057 $ 1.75
====== ====== ======
Effect of Dilutive Securities
Impact of:
Assumed conversion of preferred
to common stock ............. 346 346 346
Assumed excercises of outstanding
options ..................... 180 180 105
Preferred stock dividends
available to common
shareholders ................. 396 396 396
Elimination of tax benefit of
allocated preferred dividends (51) (45) (38)
Additional expense required to
fund ESOP debt ............... (77) (111) (131)
------- ----- ------- ----- ------- -----
Diluted EPS
Income available to common
shareholders plus assumed
conversions ..................... $16,964 9,475 $ 1.79 $16,812 9,476 $ 1.77 $16,058 9,508 $ 1.69
======= ===== ====== ======= ===== ====== ======= ===== ======
</TABLE>
- --------------------------------------------------------------------------------
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. OPERATING LEASE OBLIGATIONS
The Corporation has entered into a number of leasing arrangements which are
classified as operating leases. The operating leases are for several branch
locations, automatic teller machines (ATM), computer equipment and automobiles.
The majority of the branch location and ATM leases are renewable at the
Corporation's option. In addition, future rental payments on many of the branch
and ATM leases are subject to change in relation to fluctuations in the Consumer
Price Index. Future minimum lease commitments are based on current rental
payments.
The following is a summary of future minimum rental payments for the next five
years required under operating leases that have initial or remaining
noncancellable lease terms in excess of one year as of December 31, 1998 (in
thousands):
Years ending December 31,
1999.................................. $ 221
2000.................................. 166
2001.................................. 153
2002.................................. 138
2003.................................. 134
Later years........................... 842
--------
Total minimum payments required....... $ 1,654
========
Rental expense charged to operations, net of sublease income, was $106,000,
$73,000 and $88,000 in 1998, 1997 and 1996, respectively, which includes
short-term cancellable leases.
11. INCOME TAXES
The components of income tax expense for the three years ended December 31, 1998
were (in thousands):
1998 1997 1996
------- ------- -------
Current tax expense ............... $ 7,948 $ 7,625 $ 7,451
Deferred tax benefit .............. (326) (128) (324)
------- ------- -------
Total tax expense ................. $ 7,622 $ 7,497 $ 7,127
======= ======= =======
Income tax expense related to realized securities gains was $1,020,000 in 1998,
$426,000 in 1997 and $276,000 in 1996.
The reasons for the differences between the income tax expense and the amount
computed by applying the statutory federal income tax rate to pre-tax earnings
are as follows:
Years Ended December 31,
------------------------------
1998 1997 1996
---- ---- ----
Federal tax at statutory rate ........... 35.0% 35.0% 35.0%
Tax exempt income ....................... (4.8) (3.8) (3.7)
Low income housing credits .............. (0.4) (0.4) (0.4)
Goodwill amortization ................... 0.7 -- --
Other, net .............................. 0.3 (0.2) (0.4)
---- ---- ----
Effective rate .......................... 30.8% 30.6% 30.5%
==== ==== ====
- --------------------------------------------------------------------------------
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Deductible temporary differences and taxable temporary differences gave rise to
a net deferred tax asset for Omega as of December 31, 1998 and 1997. The
components giving rise to the net deferred tax asset are detailed below (in
thousands):
December 31,
1998 1997
------- -------
Deferred Tax Assets
Loan loss reserve .............................. $ 4,120 $ 4,121
Deferred compensation .......................... 659 622
Employee benefits .............................. 429 414
Interest on non-accrual loans .................. 215 109
Other .......................................... 3 3
------- -------
Total ........................................ 5,426 5,269
Deferred Tax Liabilities
Depreciation ................................... (309) (349)
Unrealized net gains on securities ............. (2,746) (2,679)
Intangibles .................................... -- (543)
Auto leases (net) .............................. (575) (520)
Other .......................................... (490) (299)
------- -------
Total ........................................ (4,120) (4,390)
Net deferred tax asset ------- -------
included in other assets ....................... $ 1,306 $ 879
======= =======
Omega has concluded that the deferred tax assets are realizable (on a more
likely than not basis) through the combination of future reversals of existing
taxable temporary differences, carryback availability, certain tax planning
strategies and expected future taxable income.
12. EMPLOYEE BENEFIT PLANS
Omega Stock Compensation Plans
Omega has four stock-based compensation plans, the Employee Stock Purchase Plan,
the Stock Option Plan (1986) (the "1986 Plan"), the 1996 Employee Stock Option
Plan (the "1996 Plan") and the Non-Employee Director Stock Option Plan. The 1996
Plan replaced the 1986 Plan pursuant to which no options were issuable after
1996. Omega accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with the fair value method under SFAS No. 123,
Omega's net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income .................... As reported ..... $ 17,092 $ 16,968 $ 16,227
Pro forma 16,350 16,336 15,732
Basic earnings per share ...... As reported ..... $ 1.87 $ 1.85 $ 1.75
Pro forma 1.79 1.78 1.70
Diluted earnings per share .... As reported ..... $ 1.79 $ 1.77 $ 1.69
Pro forma 1.71 1.70 1.64
</TABLE>
The SFAS No. 123 method of accounting has not been applied to options granted
prior to January 1, 1995. Therefore, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
- --------------------------------------------------------------------------------
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
The above computations were derived using the Black-Scholes option pricing model
with the following weighted average assumptions used for options granted in
1998, 1997 and 1996:
<TABLE>
<CAPTION>
Options Granted in 1998 Employee Employee Director
Stock Purchase Plan Stock Option Plan (1996) Stock Option Plan
------------------- ------------------------ -----------------
<S> <C> <C> <C>
Expected life of options 1 year 6 years 6 years
Risk-free interest rate 4.52% 4.62% 4.62%
Expected volatility 27.41 17.54 17.54
Expected dividend yield 2.59 2.59 2.59
<CAPTION>
Options Granted in 1997 Employee Employee Director
Stock Purchase Plan Stock Option Plan (1986) Stock Option Plan
------------------- ------------------------ -----------------
<S> <C> <C> <C>
Expected life of options .95 years 5.77 years 5.77 years
Risk-free interest rate 5.53% 5.75% 5.75%
Expected volatility 11.06 19.46 19.46
Expected dividend yield 2.73 2.73 2.73
<CAPTION>
Options Granted in 1996 Employee Employee Director
Stock Purchase Plan Stock Option Plan (1986) Stock Option Plan
------------------- ------------------------ -----------------
<S> <C> <C> <C>
Expected life of options 1.75 years 5.77 years 5.77 years
Risk-free interest rate 5.87% 6.25% 6.25%
Expected volatility 12.57 20.98 20.98
Expected dividend yield 2.80 2.80 2.80
</TABLE>
The Employee Stock Purchase Plan ("ESPP") is administered by the Compensation
Committee ("Committee") of the Omega Board of Directors ("Board"), consisting of
members who are not eligible to receive options under the ESPP. The Committee is
authorized to grant options to purchase common stock of Omega to all employees
of Omega and its subsidiaries who meet certain service requirements. All shares
granted under the ESPP are immediately vested. For 27 months following the date
of the grant, options are exercisable at the lesser of 90% of the fair market
value of the shares on the date of grant or 90% of the fair market value on the
date of exercise. After 27 months, the options are exercisable at 90% of the
fair market value on the exercise date. Outstanding options are scheduled to
expire through December 31, 2003. The aggregate number of shares which may be
issued upon the exercise of options under this plan is 1,125,000 shares. ESPP
options outstanding at December 31, 1998 have current exercise prices between
$21.00 and $30.15, with a weighted average exercise price of $27.06 and a
weighted average remaining contractual life of 4.28 years. All of these options
are exercisable.
The 1986 Plan and the 1996 Plan (collectively, the "SOPs") are administered by
the Committee, whose members are not eligible to receive options under the SOPs.
The Committee determines, among other things, which officers and key employees
will receive options, the number of shares to be subject to each option, the
option price and the duration of the option. Options vest over one year and are
exercisable at the fair market value of the shares at date of grant. These
options are scheduled to expire through January 1, 2008. The aggregate number of
shares which may be issued upon the exercise of options under the 1996 Plan is
1,500,000 shares. The SOPs options outstanding at December 31, 1998 have
exercise prices between $10.00 and $33.50, with a weighted average exercise
price of $20.63 and a weighted average remaining contractual life of 6.41 years.
305,404 of these options are exercisable; their weighted average exercise price
is $17.52.
The Non-Employee Director Stock Option Plan ("DSOP") is administered by the
Board. Options are granted automatically on May 1 each year to non-employee
directors of Omega. Options vest over one year and are exercisable at the fair
market value of the shares at the date of grant. These options are scheduled to
expire through May 1, 2008. The aggregate number of shares which may be issued
upon the exercise of options under this plan is 30,000. DSOP options outstanding
at December 31, 1998 have exercise prices between $16.33 and $38.13, with a
weighted average exercise price of $25.87 and a weighted average remaining
contractual life of 7.57 years. 8,400 of these options are exercisable; their
weighted average exercise price is $20.77.
- --------------------------------------------------------------------------------
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
A summary of the status of Omega's three stock-based compensation plans as
of December 31, 1998, 1997 and 1996, and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
Employee Stock Purchase Plan Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ............... 169,175 $ 25.28 187,123 $ 19.17 180,359 $ 16.83
Granted ........................................ 86,929 27.23 86,603 30.15 84,531 21.00
Exercised ...................................... (68,637) 22.91 (103,414) 18.33 (69,996) 15.49
Forfeited ...................................... (3,287) 25.10 (1,137) 22.37 (7,771) 19.09
-------- -------- --------
Outstanding at end of year ..................... 184,180 27.01 169,175 25.28 187,123 19.17
======== ======== ========
Options exercisable at year-end ................ 184,180 169,175 187,123
Weighted-average fair value of
options granted during the year ........... $ 7.48 $ 4.18 $ 3.54
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
Employee Stock Option Plan Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ............... 321,897 $ 17.33 283,090 $ 15.45 268,302 $ 13.15
Granted ........................................ 73,952 33.50 67,902 23.33 70,800 21.00
Exercised ...................................... (16,493) 13.87 (29,095) 13.03 (56,012) 11.43
Forfeited ...................................... -- -- -- -- -- --
-------- -------- --------
Outstanding at end of year ..................... 379,356 20.63 321,897 17.33 283,090 15.45
======== ======== ========
Options exercisable at year-end ................ 305,404 253,995 212,297
Weighted-average fair value of
options granted during the year ........... $ 6.35 $ 5.13 $ 5.03
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
Director Stock Option Plan Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ............... 10,800 $ 20.78 10,800 $ 18.28 7,800 $ 16.73
Granted ........................................ 3,500 38.13 2,700 28.28 3,600 21.33
Exercised ...................................... (2,400) 20.77 (2,700) 18.28 (300) 16.33
Forfeited ...................................... -- -- -- -- (300) 17.17
-------- -------- --------
Outstanding at end of year ..................... 11,900 25.87 10,800 20.78 10,800 18.28
======== ======== ========
Options exercisable at year-end ................ 8,400 8,100 7,200
Weighted-average fair value of
options granted during the year ........... $ 7.15 $ 5.61 $ 5.15
</TABLE>
Omega Employee Stock Ownership Plan
Omega has an Employee Stock Ownership Plan ("ESOP") for the benefit of employees
that meet certain age and service requirements. For the years ended December 31,
1998, 1997 and 1996, expenses incurred under this plan were $1,521,000,
$1,623,000 and $2,173,000, respectively. The majority of the funds obtained
through these contributions were used to purchase Omega stock or meet debt
service on the ESOP debt (see comment below); in 1998, 24,392 shares of Omega
common stock were acquired at a cost of $770,000, and 17,700 shares were
contributed directly to the ESOP from Omega treasury (cost basis of $614,000),
and $117,000 was applied to debt service. In 1997, 32,049 shares of Omega common
stock were acquired at a cost of $944,000,and 17,192 shares were contributed
directly to the ESOP from Omega treasury (cost basis of $596,000), and $125,000
was applied to debt service. At December 31, 1998 the ESOP holds 467,783 shares
of Omega common stock and 219,781 shares of preferred stock. The ESOP is
administered by a Board of Trustees and an Administrative Committee appointed by
the Board. All of the Trustees are officers, employees, or directors of Omega.
On July 1, 1990, the ESOP entered into a $5,000,000 leveraged transaction for
the purpose of acquiring 219,781 shares of convertible preferred stock from the
Corporation for $22.75 per share. The original term of the loan was for twenty
years and carried a fixed interest rate of 10.65% for the first ten years.
Thereafter, the ESOP had the option to take a fixed rate or various variable
rate options for the remaining term of the loan. On October 1, 1998, this loan
was refinanced at a fixed rate of 7.00% through October 1, 2005. After October
1, 2005, to and including the date this loan is
- --------------------------------------------------------------------------------
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
paid in full (maturity date is July 1, 2010), the principal balance shall bear
interest annually at the five-year Treasury rate at October 1, 2005 plus 250
basis points. The loan is collateralized by a mortgage on the Corporation's
administration center and guarantee.
In order to meet the future annual debt service of $489,000, which includes
principal and interest, the ESOP will receive $396,000 in dividends from the
preferred stock and the remainder in contributions from the Corporation. In
1998, the debt service required $512,000, of which $315,000 represented interest
expense incurred by the ESOP. In 1997, the debt service required $520,000, of
which $342,000 represented interest expense incurred by the ESOP. Outstanding
ESOP debt as of December 31, 1998 was $3,837,000. Scheduled principal repayments
on the ESOP debt are as follows:
1999 ..................... $ 226,000
2000 ..................... 242,000
2001 ..................... 259,000
2002 ..................... 278,000
2003 ..................... 298,000
Later years .............. 2,534,000
Defined Contribution Plan
Omega maintains a defined contribution plan for eligible employees as defined.
Contributions to the plan totaled $136,000, $142,000 and $146,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Executive Supplemental Income Plan
The Executive Supplemental Income benefit plan ("ESI") provides executive life
insurance and supplemental retirement benefits for certain officers of Omega
Bank. The present value of the supplemental retirement benefits to be paid under
the ESI program is being accrued over the estimated remaining service period of
the officers designated to receive these benefits. At December 31, 1998, five
current or former officers were designated to be paid these supplemental
retirement benefits. The liability for these future ESI obligations was
$1,299,000 and $1,190,000 at December 31, 1998 and 1997, respectively. For the
years ended December 31, 1998, 1997 and 1996, $131,000, $133,000 and $133,000,
respectively, were charged to operations in connection with this program.
Defined Benefit Plan Termination
During 1994, management developed a plan to terminate the Corporation's defined
benefit plan and settle the vested benefits of the plan's participants. In
anticipation of this termination, Omega froze the accrual of benefits under the
defined benefit plan in 1994 and settled the plan's obligations to retired
employees receiving benefits in 1995. In 1996, Omega settled the vested benefits
of active employees and terminated the plan. The termination resulted in a
reversion to the Corporation of $391,000, of which $107,000 was contributed to
the ESOP.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, financial
guarantees, financial options and interest exchange agreements. These
instruments involve, to varying degrees, elements of credit and interest rate
risk that are not recognized in the consolidated financial statements.
Exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit and financial
guarantees written is represented by the contractual notional amount of those
instruments. The Corporation uses the same credit policies in making these
commitments as it does for on-balance sheet instruments. The Corporation
controls the credit risk of its financial options and interest exchange
agreements through credit approvals, limits and monitoring procedures; however,
it does not generally require collateral for such financial instruments since
there is no principal credit risk.
The Corporation had outstanding loan origination commitments aggregating
$38,886,000 and $24,686,000 at December 31, 1998 and 1997, respectively. In
addition, the Corporation had $89,765,000 and $93,895,000 outstanding in unused
lines of credit commitments extended to its customers at December 31, 1998 and
1997, respectively.
There were no financial guarantees or options outstanding at December 31, 1998.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since a portion of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained by
the Corporation upon extension of credit is based on management's credit
evaluation of the counterparty.
- --------------------------------------------------------------------------------
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Standby letters of credit are instruments issued by the Corporation which
guarantee the beneficiary payment by the bank in the event of default by the
Corporation's customer in the non-performance of an obligation or service. Most
standby letters of credit are extended for one year periods. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Corporation holds collateral
supporting those commitments for which collateral is deemed necessary. At
December 31, 1998 and 1997, standby letters of credit issued and outstanding
amounted to $18,289,000 and $14,827,000, respectively.
Omega has entered into interest rate contracts to help manage its interest rate
risk associated with its commercial loans whose rates float with the prime rate.
These contracts include interest rate swaps and floors.
Under interest rate swaps, Omega agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and floating rate
interest amounts calculated by reference to an agreed notional principal amount.
At December 31, 1998 and 1997, the Corporation had the following interest rate
swap agreements in place:
Notional Amount
(in thousands)
----------------------------
Maturity Fixed Rate 1998 1997
-------- ---------- -------- --------
2/26/99 8.14% $ 10,000 $ 10,000
3/1/99 8.47 10,000 10,000
3/4/99 8.47 10,000 10,000
On these agreements the Corporation pays the prime rate and receives the fixed
rate.
Under interest rate floors, Omega pays a premium to a third party for interest
rate protection on an agreed notional principal amount, to offset the effect of
interest rates falling below the floor level during a specified period of time.
At December 31, 1998, Omega had no interest rate floor agreements. On December
31, 1997, the Corporation had the following interest rate floor agreement in
place:
(in thousands)
------------------------------
Maturity Floor Rate Based on Notional Amount Premium Paid
-------- ---------- -------- --------------- ------------
6/11/98 8.25% Prime $ 10,000 $ 27
Under this agreement, if the prime rate fell below the floor rate of 8.25%,
Omega would still have earned 8.25% on the notional balance of $10,000,000.
The notional amounts of interest rate contracts do not represent amounts
exchanged by the parties and, thus, are not a measure of Omega's exposure
through this use of derivatives. The amounts exchanged are determined by
reference to the notional amounts. Omega is exposed to credit-related losses in
the event of nonperformance by counterparties to financial instruments, but does
not expect any counterparties to fail to meet their obligations, given their
high credit ratings. The fair value of these interest rate swap contracts
reflects the estimated amounts that Omega would receive or pay to terminate the
contracts at the reporting date and are based upon dealer quotes (See Note 2).
As of December 31, 1998, there were no concentrations of credit to any
particular industry equaling 10% or more of total outstanding loans. Omega's
business activities are geographically concentrated in central Pennsylvania,
within Centre, Blair, Huntingdon, Mifflin, Juniata, Clinton, Montour and Bedford
counties. Omega has a diversified loan portfolio; however, a substantial portion
of its debtors' ability to honor their obligations is dependent upon the economy
in central Pennsylvania.
14. COMMITMENTS AND CONTINGENT LIABILITIES
In 1998, the Corporation renewed a five-year agreement to obtain data processing
services from an outside service bureau. The agreement provides for termination
penalties if it is canceled prior to the end of the commitment period by the
Corporation.
The Corporation, from time to time, may be a defendant in legal proceedings
relating to the conduct of its banking business. Most of such legal proceedings
are a normal part of the banking business, and in management's opinion, the
financial position and results of operations of the Corporation would not be
materially affected by the outcome of such legal proceedings.
- --------------------------------------------------------------------------------
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. SHAREHOLDERS' EQUITY
Five million shares of preferred stock with a par value of $5.00 per share are
authorized for issuance. The Board has the ability to fix the voting, dividend,
redemption and other rights of the preferred stock, which can be issued in one
or more series.
There are 219,781 shares of Class A cumulative convertible preferred stock
issued to Omega's Employee Stock Ownership Plan (ESOP) for a total of
$5,000,000. The preferred stock is convertible into Omega's common stock at the
current rate of 1.575 common shares for one preferred share in certain events.
The preferred stock is restricted to the ESOP and can be redeemed by the
Corporation at any time with a decreasing premium over the first ten years.
Dividends on the preferred stock are fixed at $1.80 per share per year, and are
required to be paid prior to any dividend payments on the common stock. The
preferred stock has preference in liquidation over the common stock in the
amount of $22.75 per share, plus all dividend arrearages, prior to payments to
common shareholders. Full voting rights are held by the preferred stock owner.
16. COMPREHENSIVE INCOME
Components of other comprehensive income (loss) consist of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1998
-----------------------------------------------
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 arising during the period ..................... $ 3,122 $(1,093) $ 2,029
Less reclassification adjustment for
gains included in net income ....................................... (3,560) 1,246 (2,314)
------- ------- -------
Other comprehensive income (loss) ...................................... $ (438) $ 153 $ (285)
======= ======= =======
<CAPTION>
Year ended December 31, 1997
-----------------------------------------------
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 arising during the period ..................... $ 4,894 $(1,713) $ 3,181
Less reclassification adjustment for
gains included in net income ....................................... (1,216) 426 (790)
------- ------- -------
Other comprehensive income (loss) ...................................... $ 3,678 $(1,287) $ 2,391
======= ======= =======
<CAPTION>
Year ended December 31, 1996
-----------------------------------------------
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 arising during the period ..................... $ 1,400 $ (490) $ 910
Less reclassification adjustment for
gains included in net income ....................................... (788) 276 (512)
------- ------- -------
Other comprehensive income (loss) ...................................... $ 612 $ (214) $ 398
======= ======= =======
</TABLE>
17. RELATED-PARTY TRANSACTIONS
Omega's banks have granted loans to certain officers and directors of Omega and
its subsidiaries and to their associates. These loans were made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with unrelated persons, and in the opinion
of management, do not involve more than normal risk of collection. The aggregate
dollar amount of these loans was $13,873,000, $13,020,000 and $13,949,000 at
December 31, 1998, 1997 and 1996, respectively. During 1998, $4,502,000 of new
loans were made and repayments totaled $3,444,000. None of these loans were past
due, in non-accrual status or restructured at December 31, 1998.
- --------------------------------------------------------------------------------
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. OMEGA FINANCIAL CORPORATION (PARENT COMPANY ONLY)
Financial information (in thousands):
CONDENSED BALANCE SHEETS
(Unaudited)
December 31,
-----------------------
1998 1997
-------- --------
ASSETS:
Cash ........................................... $ 7,042 $ 4,660
Investment in bank subsidiaries ................ 132,434 125,062
Investment in non-bank subsidiaries ............ 13,460 10,664
Premises and equipment, net .................... 7,053 7,283
Other assets ................................... 1,225 1,400
-------- --------
TOTAL ASSETS ..................................... $161,214 $149,069
======== ========
LIABILITIES:
Dividends payable .............................. $ 1,976 $ 1,596
Accounts payable and other liabilities ......... 1,421 1,007
ESOP debt ...................................... 3,837 4,034
-------- --------
TOTAL LIABILITIES ................................ 7,234 6,637
SHAREHOLDERS' EQUITY ............................. 153,980 142,432
-------- --------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY ......................... $161,214 $149,069
======== ========
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Years ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
INCOME:
Dividends from:
Bank subsidiaries ..................... $ 7,739 $ 14,864 $ 6,292
Non-bank subsidiaries ................. -- -- --
Management fees
from subsidiaries ......................... 10,038 9,250 8,372
-------- -------- --------
TOTAL INCOME .............................. 17,777 24,114 14,664
EXPENSE:
Interest expense ........................ 6 4 3
Other ................................... 10,038 9,250 8,372
-------- -------- --------
TOTAL EXPENSE ............................. 10,044 9,254 8,375
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES .................... 7,733 14,860 6,289
Income tax expense
(benefit) ................................. 93 33 (12)
-------- -------- --------
,640 14,827 6,301
Equity in undistributed
net income of subsidiaries ................ 9,452 2,141 9,926
-------- -------- --------
NET INCOME ................................ $ 17,092 $ 16,968 $ 16,227
======== ======== ========
- --------------------------------------------------------------------------------
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................... $ 17,092 $ 16,968 $ 16,227
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................... 1,040 926 741
(Increase) decrease in tax receivable ............... (9) (80) 280
Decrease (increase) in interest and other receivable 184 360 (671)
Increase (decrease) in taxes payable ................ 351 (246) 144
Increase in accounts payable and accrued expenses ... 673 642 135
Undistributed earnings of subsidiaries .............. (10,453) (2,291) (9,926)
-------- -------- --------
Total adjustments ................................. (8,214) (689) (9,297)
-------- -------- --------
Net cash provided by operating activities ............. 8,878 16,279 6,930
Cash flows from investing activities:
Capital expenditures ................................ (758) (1,157) (1,240)
-------- -------- --------
Net cash used in investing activities ................. (758) (1,157) (1,240)
Cash flows from financing activities:
Dividends paid ...................................... (7,185) (6,027) (4,080)
Net change in interest bearing liabilities .......... 5 38 34
Change in unearned compensation ..................... -- -- 800
Tax benefit from preferred stock dividend
and stock option activity ......................... 332 414 213
Issuance of common stock, net of retirement
of common stock ................................... 1,815 616 791
Issuance, acquisition and sale of treasury stock, net (705) (8,428) (1,444)
-------- -------- --------
Net cash used in financing activities ................. (5,738) (13,387) (3,686)
-------- -------- --------
Net increase in cash and due from banks ............... $ 2,382 $ 1,735 $ 2,004
======== ======== ========
Cash and due from banks at beginning of period ........ $ 4,660 $ 2,925 $ 921
Cash and due from banks at end of period .............. 7,042 4,660 2,925
-------- -------- --------
Net increase in cash and due from banks ............... $ 2,382 $ 1,735 $ 2,004
======== ======== ========
Income taxes paid ..................................... $ 7,364 $ 7,015 $ 6,922
</TABLE>
REGULATORY MATTERS
Certain restrictions exist regarding the ability of Omega's banking subsidiaries
to transfer funds to Omega in the form of cash dividends, loans and advances.
The approval of the Comptroller of the Currency is required to pay dividends in
excess of earnings retained in the current year plus retained net profits for
the preceding two years. At December 31, 1998, the total dividends which could
be paid to Omega without permission from the Comptroller of the Currency was
$31,123,000.
Under Federal Reserve restrictions, the banking subsidiaries are limited to the
amount they may loan to their affiliates, including Omega. At December 31, 1998,
Omega's banks had an aggregate lending limit to affiliates of $21,422,000 and no
amount was outstanding with Omega.
- --------------------------------------------------------------------------------
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the years ended December 31,
1998 and 1997 follow (in thousands, except per share data). All per share data
has been restated to give effect to the three for two stock split on April 30,
1997, and to reflect the adoption of SFAS No. 128, "Earnings per Share".
<TABLE>
<CAPTION>
1998 Quarter ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total interest income .............. $18,695 $18,957 $18,857 $18,759
Net interest income ................ 11,511 11,760 11,633 11,714
Provision for loan losses .......... 242 243 332 243
Income before income taxes ......... 5,894 6,154 6,266 6,400
Applicable income taxes ............ 1,784 1,903 1,893 2,042
Net income ......................... 4,110 4,251 4,373 4,358
Basic earnings per share ........... $ .45 $ .46 $ .48 $ .48
Diluted earnings per share ......... .43 .44 .46 .46
<CAPTION>
1997 Quarter ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total interest income .............. $18,748 $19,208 $19,495 $19,547
Net interest income ................ 11,454 11,794 11,844 12,029
Provision for loan losses .......... 258 257 258 257
Income before income taxes ......... 5,670 6,313 1,808 1,968
Net income ......................... 3,901 4,361 4,168 4,538
Basic earnings per share ........... $ .42 $ .47 $ .46 $ .50
Diluted earnings per share ......... .40 .45 .44 .48
</TABLE>
20. REGULATORY CAPITAL REQUIREMENT
The Corporation and its bank subsidiaries are subject to risk-based capital
standards by which all bank holding companies and banks are evaluated in terms
of capital adequacy. These regulatory capital requirements are administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and its bank
subsidiaries must meet specific capital guidelines that involve quantitative
measures of the Corporation's and bank subsidiaries' assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Corporation's and bank subsidiaries' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and bank subsidiaries to each maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and Tier I
capital (as defined) to average assets (as defined). Management believes, as of
December 31, 1998 and 1997, that Omega and its bank subsidiaries meet all
capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the regulatory
banking agencies categorized Omega and its bank subsidiaries as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized Omega and its bank subsidiaries must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table. There are no conditions or events since these notifications that
management believes have changed the institutions' category.
- --------------------------------------------------------------------------------
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
The table below provides a comparison of Omega and its significant bank
subsidiaries' risk-based capital ratios and leverage ratios 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 December 31, 1998:
Total Capital (to Risk Weighted Assets) ............. $158,160 22.1% $ 57,334 8.0% $ 71,668 10.0%
Tier I Capital (to Risk Weighted Assets) ............ 149,162 20.8 28,667 4.0 43,001 6.0
Tier I Capital (to Average Assets) .................. 149,162 14.5 41,067 4.0 51,334 5.0
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) ............. $143,673 21.1% $ 54,418 8.0% $ 68,023 10.0%
Tier I Capital (to Risk Weighted Assets) ............ 135,127 19.9 27,209 4.0 40,814 6.0
Tier I Capital (to Average Assets) .................. 135,127 13.3 40,584 4.0 50,730 5.0
Omega Bank
As of December 31, 1998:
Total Capital (to Risk Weighted Assets) ............. $ 80,438 19.9% $ 32,333 8.0% $ 40,416 10.0%
Tier I Capital (to Risk Weighted Assets) ............ 75,385 18.7 16,166 4.0 24,250 6.0
Tier I Capital (to Average Assets) .................. 75,385 13.2 22,798 4.0 28,498 5.0
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) ............. $ 74,430 19.5% $ 30,557 8.0% $ 38,196 10.0%
Tier I Capital (to Risk Weighted Assets) ............ 69,648 18.2 15,278 4.0 22,918 6.0
Tier I Capital (to Average Assets) .................. 69,648 12.3 22,621 4.0 28,276 5.0
Hollidaysburg Trust Company
As of December 31, 1998:
Total Capital (to Risk Weighted Assets) ............. $ 34,168 18.9% $ 14,478 8.0% $ 18,098 10.0%
Tier I Capital (to Risk Weighted Assets) ............ 31,893 17.6 7,239 4.0 10,859 6.0
Tier I Capital (to Average Assets) .................. 31,893 12.5 10,206 4.0 12,757 5.0
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) ............. $ 31,059 18.3% $ 13,604 8.0% $ 17,005 10.0%
Tier I Capital (to Risk Weighted Assets) ............ 28,920 17.0 6,802 4.0 10,203 6.0
Tier I Capital (to Average Assets) .................. 28,920 11.7 9,849 4.0 12,311 5.0
Penn Central National Bank
As of December 31, 1998:
Total Capital (to Risk Weighted Assets) ............. $ 25,169 22.8% $ 8,837 8.0% $ 11,046 10.0%
Tier I Capital (to Risk Weighted Assets) ............ 23,764 21.5 4,418 4.0 6,628 6.0
Tier I Capital (to Average Assets) .................. 23,764 13.0 7,297 4.0 9,121 5.0
As of December 31, 1997:
Total Capital (to Risk Weighted Assets) ............. $ 24,460 22.4% $ 8,754 8.0% $ 10,943 10.0%
Tier I Capital (to Risk Weighted Assets) ............ 23,070 21.1 4,377 4.0 6,566 6.0
Tier I Capital (to Average Assets) .................. 23,070 12.3 7,474 4.0 9,343 5.0
</TABLE>
- --------------------------------------------------------------------------------
55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders of Omega Financial Corporation:
We have audited the accompanying consolidated balance sheets of Omega Financial
Corporation (a Pennsylvania corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Omega Financial
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Lancaster, Pa.
January 22, 1999
- --------------------------------------------------------------------------------
56
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<NAME> OMEGA FINANCIAL CORP.
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> Dec-31-1998
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