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, 1999
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
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 8,801,400
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(Title of Class) (Number of shares outstanding
as of February 22, 2000)
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. |_|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 22, 2000 was $245,505,140. (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, 1999 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, 1999 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 2000 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, 2000. 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
GENERAL
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, Central Pennsylvania Investment Company and Central
Pennsylvania Leasing, Inc. 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
The Banks currently provide retail and commercial banking services through
42 offices in Central Pennsylvania. Omega Bank operates 24 full service banking
offices in Centre, Clinton, 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 consumer and commercial services.
Consumer services include Internet and telephone banking, an automated teller
machine network, personal checking accounts, interest checking accounts, savings
accounts, insured money market accounts, debit cards, investment certificates,
fixed and variable rate certificates of deposit, club accounts, secured and
unsecured installment loans, construction and mortgage loans, safe deposit
facilities, credit lines with overdraft checking protection, IRA accounts and
student loans. Commercial banking services include small and high-volume
business checking accounts, on-line account management services, ACH
origination, payroll direct deposit, commercial cash management services and
repurchase agreements. The Banks also provide a variety of trust and asset
management services.
As of December 31, 1999, 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
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.
On January 14, 1988, the Company formed Central Pennsylvania Leasing,
Inc., for the purpose of leasing of personal property and real estate.
COMPETITION
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, it's Company believes that the Banks'
respective legal lending limits to a single borrower (approximately $12,843,000
for Omega Bank, $4,046,000 for Penn Central Bank, and $5,753,000 for
Hollidaysburg Trust Company, as of December 31, 1999) 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.
As a result of the repeal of the Glass-Steagall Act which separated the
commercial and investment banking industries, all banking organizations are
likely to face an increase in competition. See "Supervision and Regulation --
Recent Legislation".
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SUPERVISION AND REGULATION
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
adverse effect on the business, assets or results of operations 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.
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.
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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.
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
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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 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.
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INTERSTATE BANKING
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.
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.
RECENT LEGISLATION
On November 12, 1999 the Gramm-Leach-Bliley Act (the "Act") became law,
repealing the 1933 Glass-Steagall Act's separation of the commercial and
investment banking industries. The Act expands the range of nonbanking
activities a bank holding company may engage in, while preserving existing
authority for bank holding companies to engage in activities that are closely
related to banking. The new legislation creates a new category of holding
company called a "Financial Holding Company," a subset of bank holding companies
that satisfy the following criteria: (1) all of the depository institution
subsidiaries must be well capitalized and well managed; (2) the holding company
must file with the Federal Reserve Board a declaration that it elects to be a
financial holding company to engage in activities that would not have been
permissible before the Act; and (3) all of the depository institution
subsidiaries must have a CRA rating of "satisfactory" or better. Financial
holding companies may engage in any activity that (i) is financial in nature or
incidental to such financial activity or (ii) is complementary to a financial
activity and does not pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally. The Act specifies
certain activities that are financial in nature. These activities include --
acting as principal, agent or broker for insurance; -- underwriting, dealing in
or making a market in securities; and -- providing financial and investment
advice. The Federal Reserve Board and the Secretary of the Treasury have
authority to decide whether other activities are also financial in nature or
incidental to financial activity, taking into account changes in technology,
changes in the banking marketplace, competition for banking services and so on.
These new financial activities authorized by the Act may also be engaged
in by a "financial subsidiary" of a national or state bank, except for insurance
or annuity underwriting, insurance company portfolio investments, real estate
investment and development, and merchant banking, which must be conducted in a
financial holding company. In order for the new financial activities to be
engaged in by a financial subsidiary of a national or state bank, the Act
requires each of the parent bank (and its sister-bank affiliates) to be well
capitalized and well managed; the aggregate consolidated assets of all of that
bank's financial subsidiaries may not exceed the lesser of 45% of its
consolidated total assets or $50 billion; the bank must have at least a
satisfactory CRA rating; and, if that bank is one of the 100 largest national
banks, it must meet certain financial rating or other comparable requirements.
The Act establishes a system of functional regulation, under which the
federal banking agencies will regulate the banking activities of financial
holding companies and banks' financial subsidiaries, the Securities and Exchange
Commission will regulate their securities activities and state insurance
regulators
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will regulate their insurance activities. The Act also provides new protections
against the transfer and use by financial institutions of consumers' nonpublic,
personal information.
The Act has only recently became law. Regulations of the banking agencies
implementing the legislative changes can be expected in the near future. Except
for the increase in competitive pressures faced by all banking organizations
that is a likely consequence of the Act, the legislation and implementing
regulations are likely to have a more immediate impact on large regional and
national institutions than on community-based institutions engaged principally
in traditional banking activities. Because the legislation permits bank holding
companies to engage in activities previously prohibited altogether or severely
restricted because of the risks they posed to the banking system, implementing
regulations can be expected to impose strict and detailed prudential safeguards
on affiliations among banking and nonbanking companies in a holding company
organization. Additionally, because the legislation allows various affiliates
within a single holding company organization to serve a broader array of
customers' financial goals, including their banking, insurance and investment
goals, implementing regulations can be expected to impose strict safeguards on
sharing of customer information among affiliated entities within an
organization.
The foregoing discussion is qualified in its entirety by reference to the
statutory provisions of the Act and the implementing regulations which are
adopted by various government agencies pursuant to the Act. The exact impact of
the Act on the Company and its subsidiaries, if any, cannot be predicted at this
time.
NATIONAL MONETARY POLICY
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
As of December 31, 1999, the Company had a total of 460 full-time
employees and 90 part-time employees.
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INVESTMENT CONSIDERATIONS
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, 1999, total interest bearing
liabilities maturing or repricing within one year exceeded total interest
earning assets maturing or repricing during the same time period by $110.936
million, representing a cumulative one-year sensitivity ratio of 0.76.
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
that 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."
As a result of the repeal of the Glass Steagall Act, which separated the
commercial and investment banking industries, all banking organizations are
likely to face an increase in competition. See "Item 1: Business -- Supervision
and Regulation -- Recent Legislation".
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.
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.
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
11
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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)
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 2000 to 2011.
Branches
Westerly Parkway, State College, PA (ATM)
1811 South Atherton Street, State College, PA (ATM) building owned,
land leased.
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.
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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
13
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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.
Name Age Position
---- --- --------
Daniel L. Warfel 53 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 56 Senior Vice President and Secretary of the
Company since 1987; Vice President,
Secretary and Cashier of Omega Bank since
1973.
JoAnn N. McMinn 47 Senior Vice President and Controller of the
Company since 1988; Vice President and
Controller of Omega Bank since 1976.
Donita R. Koval 39 Senior Vice President of the Company since
1995.
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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, 1999. As of February 22, 2000, the number of
shareholders of the Company's common stock was 2,777.
The company did not sell any equity securities during 1999 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, 1999.
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 Analysis -- Results of Operations" and "Financial Condition" in
the Company's Annual Report to Shareholders for the year ended December 31,
1999.
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, 1999.
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,
1999.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
15
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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 2000 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 2000 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 2000 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K.
16
<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, 1999,
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, 1999 and 1998
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity --
Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
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
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<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.
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<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, 1999 (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.
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<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.
20
<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.
Signatures Title Date
______________________ 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
21
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_______________________ Director __________________
James W. Powers, Sr.
_______________________ Director __________________
Stanton R. Sheetz
_______________________ Director __________________
Robert A. Szeyller
22
OMEGA FINANCIAL CORPORATION
1999
www.omegafinancial.com [LOGO]
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[GRAPHIC OMITTED]
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TO OUR SHAREHOLDERS, CUSTOMERS AND FRIENDS,
-------------------------------------------
Your company's earnings for 1999 were up 1.6% over 1998, with the
increased earnings coming in spite of narrowing interest rate spreads. The 1999
net income of $17.362 million was $270,000 more than 1998's figure of $17.092
million.
Even with diminished spreads, we were able to achieve an increase in
diluted earnings per share of 3.4%, $1.85 for the year. Omega's return on
average assets (ROA) was 1.63%, and return on average equity (ROE) was 11.30%.
We are also very pleased to report an 18.8% increase in your common share
dividends to $0.95 per share.
The narrowing spreads reflected the rate and competitive environments in
which we found ourselves, environments that led to both income from credit
activities and net interest income remaining essentially unchanged from 1998. At
the same time, improvements in loan quality led to a drop of 45.6% in the
percentage of non-performing loans to net loans. This reduction in a ratio that
was already low by industry standards is a testament to our continuing emphasis
on quality asset growth.
Another cornerstone of our philosophy is a stringent control of expenses.
Our determination was challenged in 1999 by necessary expenditures and
re-direction of developmental efforts of personnel associated with the Y2K
issue. Thanks to well-planned and precisely executed initiatives, Y2K did not
prevent us from achieving earnings growth.
Changes in banking laws enacted in 1999 mean a vigorous competitive
environment and more opportunities than ever before for your company. As an
industry, Y2K is behind us. We can now fully concentrate on providing both
traditional and innovative financial solutions for customers. We feel confident
in our future.
It's an exciting time for banking and Omega Financial Corporation. With
the playing field leveled among major financial service providers, we are now
able to take a role in insurance, stocks and bonds, brokerage activities and
similar services. We can provide property insurance for homeowners, life
insurance products, annuities, and many other new offerings. Though there are
lots of opportunities, we plan to pick wisely and offer the services that best
fit our mission and our markets.
Our new equipment leasing function represents this kind of commitment. We
expect our affiliate Central Pennsylvania Leasing, Inc. will provide area firms
with true leases at some of the best rates in the leasing industry. With rapid
turnaround and the hometown touch, we will specialize in providing innovative
and competitive programs that can be molded to match individual business needs.
Through a comprehensive marketing program, we will demonstrate to small and
large businesses in our area how Omega Financial Corporation can deliver the
many benefits of equipment leases, not the least of which are preservation of
cash and hedging against equipment obsolescence.
Even more of a factor than changing laws, will be changing technology.
More and more people are expressing their desire to do their banking
electronically. It is a great opportunity for us to expand our geographic reach
while targeting our investment in new office construction only to areas that
promise maximum profitability.
2 [LOGO]---------------------www.omegafinancial.com-----------------------------
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To this end, we put plans into motion during 1999 that are being realized
in 2000 and beyond. We have established an online banking presence that will
allow customers to perform the majority of their banking via the Internet. To
complement that development, we initiated a major redesign of our website,
www.omegafinancial.com, using cutting-edge web design technology. The new site
will provide a visually attractive enticement to customers and non-customers
alike to try our products and services. Additionally, we are making plans for
improvements of existing offices as well as new offices. You will hear more
about these and other plans as the year goes on.
Another commitment that is delivering results is our new Customer
Information Center. Inaugurated at mid-year 1999, our Customer Information
Center gives customers personal service via toll-free telephone numbers and the
ability to perform banking tasks--such as opening new accounts, applying for
loans, transferring money, checking balances--all without the need for customers
to leave homes or offices. In managing the opportunities these calls represent,
we remain focused on the over-arching goal of the Customer Information Center,
of Omega Financial Corporation and of our affiliates, "to exceed our customers'
expectations."
Although we aggressively pursue "non-traditional" service initiatives, we
continue to place the highest priority on assuring that these initiatives also
deliver quality service. In an electronic age, this "old fashioned" commitment
to service has proven to be a competitive edge for us, especially as other
regional institutions reduce service levels.
To affirm that we are exceeding expectations in every phase of our
customer relationships, we commissioned a survey by Diagnostics Plus, a market
and customer satisfaction research firm that has done studies for nationally
known companies across all industries. We surveyed satisfaction levels in 14
specific aspects of customer relationships, compared ourselves with the
competition, and asked about the likelihood of customers' continuing to do
business with us and about whether they would recommend us to others.
We are pleased to report that measures of overall satisfaction were high.
Two out of three of our customers were "very satisfied" rating us 9 or 10 on a
10-point scale. Additionally, when compared to other financial institutions, we
led them in convenience, location and customer service.
The investment community recognizes this sort of commitment even in the
global world of today's financial markets. We received word late last year from
Berliner Freiverkehr (Aktien) Handel AG that the firm had recently started
trading the shares of Omega Financial Corporation on the German stock market.
One of the biggest German brokerage firms, Berliner Freiverkehr acts as a market
maker for over-the-counter stocks in Berlin, Frankfurt and Stuttgart. In their
letter, representatives of the firm told us that they were prompted to begin
trading Omega Financial shares after finding us "very promising."
Because of the combined efforts of directors, staff and management, we
believe that the Berliner Freiverkehr expression of confidence in Omega
Financial Corporation is well deserved. We also see the new century as "very
promising" for your company. The initiatives we instituted in 1999, combined
with a steadfast commitment to our traditional operating philosophy, have
prepared us to take advantage of the broadening opportunities that stretch
before us in the coming years.
Sincerely,
/s/ David B. Lee /s/ D. Stephen Martz
David B. Lee D. Stephen Martz
Chairman and Chief Executive Officer President and Chief Operating Officer
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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, 1999.
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
Susan K. Kratzer ............................Vice President, Call Center Manager
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
Central Pennsylvania Leasing, Inc.
117 S. Allen Street
State College, PA 16801
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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
Eric F. Kraytz ...........Vice President, Commercial Lending
Thomas C. Landis ....................Vice President, Lending
Mary Grace Kudey ............................Vice President,
Commercial Lending
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 Ronald C. Shearer
Ralph A. Germak Kenneth O. Stuck, D. Ed.
Jerry Leach William S. Taylor, III
Roy A. Leister Mervin R. Zendt
Steven L. Palm
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
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<PAGE>
BANK DIRECTORS AND OFFICERS
---------------------------
HOLLIDAYSBURG TRUST COMPANY
BOARD OF DIRECTORS
Ralph W. Arthur, Jr. John P. Kinney
Merle K. Evey, Esq. D. Stephen Martz
Allan E. Gibboney, Esq. Stanton R. Sheetz
David C. Hileman Vincent C. Turiano
DIRECTORS EMERITI
Rex W. Hershberger Dorothea D. Nelson
Charles I. Kreider Lester E. Plank
Joseph R. Good Roy F. Rumbaugh
James J. Madden Joseph Tanner
OFFICERS
D. Stephen Martz .......................Chairman, President,
Chief Executive Officer
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 [LOGO]---------------------www.omegafinancial.com-----------------------------
<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, 1999, the number of
shareholders of record of the Corporation's common stock was 2,737.
The following table sets forth, for the periods indicated (1) the high and low
sale prices and (2) dividends declared:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
Dividends Dividends
Quarter Ended High Low Declared High Low Declared
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
March 31 ................................... $33.88 $29.75 $0.22 $39.00 $34.25 $0.18
June 30 .................................... 36.88 33.25 0.24 39.50 33.75 0.20
September 30 ............................... 34.75 31.63 0.24 37.00 29.63 0.20
December 31 ................................ 32.38 28.50 0.25 34.00 28.63 0.22
</TABLE>
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. 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:
J.J.B. Hilliard Janney Montgomery Scott, Inc.
501 South Fourth Street 1801 Market Street
Louisville, KY 40202 Philadelphia, PA 19103
(800-627-3557) (800-526-6397)
F. J. Morrissey & Co. ABN AMRO Chicago Corporation
1700 Market St. Suite 1420 208 S. LaSalle Street
Philadelphia, PA 19103-3913 Chicago, IL 60604
(800-842-8928) (800-621-0686)
Ferris, Baker Watts, Inc.
6 Bird Cage Walk
Hollidaysburg, PA 16648
(800-343-5149)
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, 1999 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 fully described in Omega's Annual Report on Form 10-K for the
year ended December 31, 1999, 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 24, 2000 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 retrieved through the Omega Financial Corporation web site at
WWW.OMEGAFINANCIAL.COM.
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<PAGE>
SELECTED FINANCIAL DATA
-----------------------
The following selected financial data of Omega Financial Corporation and
subsidiaries for the five years ended December 31, 1999 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 1999 1998 1997 1996 1995
----------------------------------------------------------------------
at December 31 (In thousands of dollars, except share and per share data)
<S> <C> <C> <C> <C> <C>
Assets ................................................ $1,053,403 $1,062,704 $1,015,903 $1,007,345 $ 994,840
Deposits .............................................. 851,595 870,660 840,775 846,030 850,182
Loans, net ............................................ 704,948 722,967 691,893 696,597 703,125
Investment securities ................................. 272,669 261,380 249,817 241,846 219,708
Long term debt (including ESOP debt) .................. 10,611 8,837 9,034 9,213 10,073
Shareholders' equity .................................. 151,151 153,980 142,432 135,885 124,171
Number of shares outstanding -- common * .............. 8,774,507 8,960,197 8,879,257 9,050,889 9,034,449
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 ................................. $ 74,493 $ 75,268 $ 76,998 $ 76,720 $ 72,973
Net interest income ................................... 46,788 46,618 47,121 46,400 43,956
Provision for loan losses ............................. 1,060 1,060 1,030 979 713
Income before income taxes ............................ 24,257 24,714 24,465 23,354 19,802
Income tax expense .................................... 6,895 7,622 7,497 7,127 5,733
Net income ............................................ 17,362 17,092 16,968 16,227 14,069
PER COMMON SHARE DATA*
Net income -- basic ................................... $ 1.92 $ 1.87 $ 1.85 $ 1.75 $ 1.52
Net income -- diluted ................................. 1.85 1.79 1.77 1.69 1.47
Cash dividends -- common .............................. 0.95 0.80 0.65 0.56 0.48
Book value -- common .................................. 16.96 16.95 15.83 14.83 13.67
</TABLE>
FINANCIAL RATIOS
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average equity ......................... 11.30% 11.35% 12.26% 12.51% 11.90%
Return on average assets ......................... 1.63 1.66 1.67 1.61 1.47
Dividend payout -- common ........................ 48.29 41.94 34.41 31.26 30.65
</TABLE>
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<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 six 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"), Central Pennsylvania Life Insurance Company ("CPLI") and Central
Pennsylvania Leasing, Inc. 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 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 and competition. 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, 1999, 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 three active non-bank
subsidiaries, Omega Financial Corporation provides retail and commercial banking
services through 42 offices in Centre, Clinton, Mifflin, Juniata, Blair,
Huntingdon and Bedford counties. Omega's banks provide a full range of consumer
and commercial services. Consumer services include Internet and telephone
banking, an automated teller machine network, personal checking accounts,
interest checking accounts, savings accounts, insured money market accounts,
debit cards, investment certificates, fixed and variable rate certificates of
deposit, club accounts, secured and unsecured installment loans, construction
and mortgage loans, safe deposit facilities, credit lines with overdraft
checking protection, IRA accounts and student loans. Commercial banking services
include small and high-volume business checking accounts, on-line account
management services, ACH origination, payroll direct deposit, commercial cash
management services and repurchase agreements. The banking affiliates also
provide a variety of trust and asset management 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.
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<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.
Overall, Omega's average assets in total have grown by 3.5%, from $1,026,679,000
in 1998 to $1,062,698,000 in 1999. In order to optimize its present and future
performance, management must constantly assess its various risk factors and act
accordingly. During 1999, in order to reduce credit risk and market risk, one
banking office was sold. This sale included $12,935,000 in loans and $14,322,000
in deposit liabilities. Additionally, to reduce interest rate risk, a block of
mortgage loans, totaling $21,207,000 was also sold. Both sales occurred late in
the second quarter of 1999. As the total loans sold represented approximately
4.9% of loans outstanding at the time of the sale, and deposits sold were 1.7%
of total deposits, it is important to consider the effect of the sale when
discussing changes in balance sheet positions from 1998 to 1999.
TABLE 1
Changes in Uses and Sources of Funds
($ in thousands)
<TABLE>
<CAPTION>
1999 Increase(Decrease) 1998 Increase(Decrease) 1997
Average ------------------ Average ------------------ Average
Balance Amount % Balance Amount % Balance
----------- --------- ----- ----------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Funding Uses:
Loans ................................. $ 681,840 $ 5,176 0.8% $ 676,664 $ 2,552 0.4% $ 674,112
Tax-exempt loans ...................... 26,052 (1,303) (4.8) 27,355 8,336 43.8 19,019
Investment securities ................. 190,446 (3,695) (1.9) 194,141 (14,802) (7.1) 208,943
Tax-exempt investment securities ...... 76,592 24,115 46.0 52,477 14,751 39.1 37,726
Interest bearing deposits ............. 3,659 2,898 380.8 761 156 25.8 605
Federal funds sold .................... 24, 448 8,192 50.4 16,256 (2,61) (13.9) 18,873
Other interest earning assets ......... 2,988 2,988 -- -- -- -- --
----------- --------- ----- ----------- ----------- ----- -----------
Total interest earning assets .... 1,006,025 38,371 4.0 967,654 8,376 0.9 959,278
Non-interest earning assets ........... 68,503 (2,446) (3.4) 70,949 3,865 5.8 67,084
Less: Allowance for loan losses ....... (11,830) 94 (0.8) (11,924) (169) 1.4 (11,755)
----------- --------- ----- ----------- ----------- ----- -----------
Total uses ....................... $ 1,062,698 $ 36,019 3.5% $ 1,026,679 $ 12,072 1.2% $ 1,014,607
=========== ========= ===== =========== =========== ===== ===========
Funding Sources:
Interest bearing demand deposits ...... $ 240,806 $ 11,322 4.9% $ 229,484 $ 10,180 4.6% $ 219,304
Savings deposits ...................... 105,574 2,938 2.9 102,636 515 0.5 102,121
Time deposits ......................... 396,339 (118) -- 396,457 (20,939) (5.0) 417,396
Repurchase agreements ................. 17,520 3,285 23.1 14,235 6,088 74.7 8,147
Other borrowed funds .................. 14,413 8,546 145.7 5,867 256 4.6 5,611
----------- --------- ----- ----------- ----------- ----- -----------
Total interest bearing liabilities 774,652 25,973 3.5 748,679 (3,900) (0.5) 752,579
Demand deposits ....................... 121,053 6,671 5.8 114,382 3,862 3.5 110,520
Other liabilities ..................... 13,374 333 2.6 13,041 (107) (0.8) 13,148
Shareholders' equity .................. 153,619 3,042 2.0 150,577 12,217 8.8 138,360
----------- --------- ----- ----------- ----------- ----- -----------
Total sources .................... $ 1,062,698 $ 36,019 3.5% $ 1,026,679 $ 12,072 1.2% $ 1,014,607
=========== ========= ===== =========== =========== ===== ===========
</TABLE>
Omega's funding sources have increased over the last two years at rates of 3.5%
and 1.2% in 1999 and 1998, respectively. If the branch office sale had not taken
place and the $14,322,000 of deposits were still outstanding liabilities, growth
in funding sources in 1999 would have been 3.8%. In 1999, the majority of the
growth was in core transaction accounts (demand and savings). These funds were
used primarily for short term investing purposes, as Year 2000 contingency
planning dictated a larger degree of liquidity than would normally be necessary.
Also in 1999, funds were borrowed to support the Omega Stock Repurchase program
and for Year 2000 planning considerations. 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.
More detailed discussion of Omega's earning assets and interest bearing
liabilities will follow in sections titled Loans, Investments, Deposits and
Asset Liability Management.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
LOANS
In 1999, total average loans were $707,892,000 as compared to $704,019,000 in
1998, an increase of $3,873,000, or 0.6%. If the branch sale and the mortgage
loan sale had not taken place, and the $34,142,000 of loans related to these
mortgages and this branch had been outstanding the entire year, loan growth
would have been at 3.3%. During the year, the customer's general preference was
for fixed rate loans as opposed to variable rate. On average, fixed rate loans
increased by $16,150,000, or 3.6%, while variable rate loans declined by
$12,277,000, or 4.8%.
[The following table was depicted as a bar chart in the printed material.]
AVERAGE ASSET MIX CHANGE
AVERAGE AVERAGE
LOANS INVESTMENTS
1995 70.3% 24.1%
1996 69.8% 24.7%
1997 68.3% 26.7%
1998 68.6% 26.5%
1999 66.6% 28.6%
Driving the fixed rate loan increases was a $27,883,000 increase in taxable
commercial loans. Absolute levels of fixed rate consumer mortgages actually
declined on average by $2,972,000. However, average mortgage balances were
decreased by approximately $13,160,000 as a result of the mortgage loan sale and
the sale of the branch office. Thus, actual average new volume of fixed rate
mortgage loans was $10,188,000. Similarly, absolute levels of personal fixed
rate loans dropped on average by $5,762,000, while the branch sale reduced
average loans in this category by $8,303,000, resulting in new loan average
increases of $2,541,000. Fixed rate tax-exempt commercial loans declined on
average by $2,999,000 during 1999 as compared to 1998.
Variable rate loan changes were made up of decreases of $5,435,000 in taxable
commercial loans, $7,742,000 in personal residential loans, and $794,000 in
personal loans. These decreases were slightly offset by an increase in variable
rate tax free commercial loans of $1,694,000. Management believes that this
shift from variable to fixed rate, continuing since 1998, was attributable to
the flat yield curve present during the year, and the customers' perception of
future rate environments.
In 1998, total average loans were $704,019,000 as compared to $693,131,000 in
1997, an increase of $10,888,000, or 1.6%. During 1998, the customers'
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.
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.
The loan portfolio as of December 31, 1999 was comprised of 56% consumer loans
and 44% commercial loans (including construction), as compared to 57% and 43%,
respectively, at December 31, 1998. See Note 5 of Notes to Consolidated
Financial Statements.
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<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 both commercial and
residential real estate loans. Pricing standards were cautiously lowered in
order to attract growth. Omega intends to aggressively pursue growth in each of
the loan categories again during 2000, with an emphasis on mortgage loan
origination. A competitive pricing environment is expected to continue and may
force Omega to maintain its relaxed pricing structure in order to continue to
maintain and build new 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, 1999
was 1.68% of total loans, net of unearned discount, as compared to 1.63% of
total loans at the end of 1998. The allowance increased $93,000 from 1998 as the
provision of $1,060,000 exceeded the net charge-offs of $967,000. Net
charge-offs for 1999 and 1998 were 0.14% and 0.15%, respectively of average
loans. Commercial loans represented 55% of the loans charged off in 1999, as
compared to 52% of the loans charged off in 1998. Because of the level of
non-performing loans, the absolute growth of the loan portfolio and the decrease
in net charge-offs in 1999, management did not increase the provision for loan
losses in 1999. Non-performing loans were 0.49% of loans as of December 31,
1999, and 0.90% of loans as of December 31, 1998 (see Table 2). All categories
of non-performing loans decreased in 1999, most significantly the non-accrual
loans. Early in 1999, one large loan with an outstanding balance exceeding
$2,000,000 that had been classified as non-accrual since April 1997 was repaid
with full recovery of principal and interest.
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, 1999, non-performing loans (as defined in Table 2) as a
percentage of the allowance for loan losses were 29.0% as compared to 55.4% at
December 31, 1998. Of the $3,443,000 of non-performing loans at December 31,
1999, $2,122,000 were collateralized with real estate, $1,222,000 with other
assets and $99,000 were unsecured.
[The following table was depicted as a bar chart in the printed material.]
ALLOWANCE FOR LOSSES TO LOANS
AT YEAR END
1995 1.66%
1996 1.70%
1997 1.70%
1998 1.63%
1999 1.68%
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
TABLE 2
Non-Performing Loans
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans .................................... $2,640 $5,627 $4,762 $2,079 $1,932
Accruing loans past due 90 days or more............... 619 682 2,103 1,241 2,697
Restructured loans ................................... 184 213 47 14 --
------ ------ ------ ------ ------
Total non-performing loans ........................... $3,443 $6,522 $6,912 $3,334 $4,629
====== ====== ====== ====== ======
</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 2000 follows (in thousands):
Commercial, financial and agricultural.............. $ 53
Real estate -- commercial........................... 35
Real estate -- mortgage............................. --
Personal............................................ 482
------
Total............................................... $ 570
======
[The following table was depicted as a bar chart in the printed material.]
NON-PERFORMING LOANS TO LOANS
AT YEAR END
1995 0.66%
1996 0.48%
1997 1.00%
1998 0.90%
1999 0.49%
[The following table was depicted as a bar chart in the printed material.]
NET CHARGE-OFFS TO AVERAGE LOANS
1995 0.08%
1996 0.12%
1997 0.15%
1998 0.15%
1999 0.14%
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, interest bearing deposits and
other interest-earning assets), increased by $34,498,000, or 13.1%, during 1999,
after increasing by $1,300,000, or 0.5% during 1998. Of the increase,
$24,115,000, or 70% was tax-exempt investment 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 of
Notes to Consolidated Financial Statements). During 1999 $3,695,000 of taxable
investment securities that matured were re-employed along with remaining
available funds into shorter-term, liquid investments to meet Year 2000 planning
specifications.
Average investments increased by $1,300,000, or 0.5%, during 1998, after
increasing by $18,700,000, or 7.4% during 1997. 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.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
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. Prior
to April 1, 1999, the determination of which portfolio to hold a security was
made at the time of purchase, based on management's intent. All marketable
equity investments were classified as available for sale. Debt securities were
classified as available for sale when the intent was 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
were classified as held to maturity when it was management's intent to hold
these securities until maturity, for matching against longer term funding. On
April 1, 1999, Omega adopted Statement of Accounting Standard (SFAS) No. 133,
which allowed for a one-time reclassification of securities from the held to
maturity portfolio into the available for sale portfolio without calling into
question the intent of the company to hold the remaining securities in the held
to maturity category to maturity. At the date of adoption, Omega transferred
investment securities with a cost basis of $102,672,000 from the held to
maturity to the available for sale portfolio. As a result of this transfer,
Omega realized an increase in accumulated other comprehensive income of
$425,000, which is reflected as a cumulative effect of a change in accounting
principle. At December 31, 1999, the market value of the entire securities
portfolio exceeded amortized cost by $1,295,000 as compared to December 31, 1998
when market value was greater than amortized cost by $8,365,000. The weighted
average maturity of the investment portfolio is 1 year and 10 months as of
December 31, 1999 as compared to 2 years and 1 month at the end of 1998. The
weighted average maturity has remained short in order to achive a level of
liquidity. Table 4 (located on page 21) shows the remaining maturity or earliest
possible repricing for investment securities.
NON-INTEREST EARNING ASSETS
Non-interest earning assets (exclusive of unrealized gains on investment
securities) increased $548,000, or 1.1% on average in 1999 as compared to a
decrease of $56,000, or 0.1% in 1998. Changes occurring in both years were the
result of normal operating activities.
Late in the fourth quarter of 1999, Omega used excess cash to purchase bank
owned life insurance (BOLI) in the amount of $20,112,000. Average balances in
1999 on non-interest earning assets were not materially affected by the purchase
due to the timing of the event.
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.
In spite of the fact that Omega sold $14,322,000 of deposits as part of the
branch office sale in the second quarter of 1999, average deposits in total grew
for the first time in three years, by 2.5%. If the deposit liabilities from the
sold branch had remained with Omega, deposit growth would have been
approximately 3.8% in 1999. As reflected in Table 3, average total deposits
declined in 1998 by $6,382,000, or 0.8%. While in 1999, time deposits remained
flat, in 1998, time deposits declined with a total reduction on average of
$20,939,000, or 5.0%. Transaction accounts, led by increases in interest-bearing
demand deposits both years, increased by $20,931,000 or 4.7% in 1999 and
$14,557,000, or 3.4% in 1998. Management believes that the rate environment did
not entice customers to invest in time deposits and that consumer Year 2000
concerns for liquidity explains the volume increases in transaction accounts and
the stagnation in time deposits.
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 1999, average
repurchase agreements were $17,520,000 as compared to $14,235,000 in 1998.
[The following table was depicted as a bar chart in the printed material.]
AVERAGE DEPOSIT MIX CHANGE
Average Average
Core Deposits Time Deposits
1994 56.9% 43.1%
1995 53.3% 46.7%
1996 51.2% 48.8%
1997 50.9% 49.1%
1998 53.0% 47.0%
1999 54.1% 45.9%
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
TABLE 3
Changes in Deposits
($ in thousands)
<TABLE>
<CAPTION>
1999 Increase(Decrease) 1998 Increase(Decrease) 1997
Average ------------------ Average ------------------ Average
Balance Amount % Balance Amount % Balance
-------- -------- --- -------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest bearing demand deposits ........................... $240,806 $ 11,322 4.9% $229,484 $ 10,180 4.6% $219,304
Savings deposits ........................................... 105,574 2,938 2.9 102,636 515 0.5 102,121
Demand deposits ............................................ 121,053 6,671 5.8 114,382 3,862 3.5 110,520
-------- -------- --- -------- -------- ---- --------
Total core(transaction) accounts ....................... 467,433 20,931 4.7 446,502 14,557 3.4 431,945
Time deposits .............................................. 396,339 (118) -- 396,457 (20,939) (5.0) 417,396
-------- -------- --- -------- -------- ---- --------
Total deposits ......................................... $863,772 $ 20,813 2.5% $842,959 $ (6,382) (0.8)% $849,341
======== ======== === ======== ======== ==== ========
</TABLE>
OTHER INTEREST BEARING LIABILITIES
Other interest bearing liabilities on average increased $11,831,000, or 58.9% in
1999, as compared to an increase of $6,344,000, or 46.1% in 1998. The increases
in 1999 and 1998 are due to the addition of $3,285,000 and $6,088,000,
respectively, in the average balances of retail repurchase agreements. Also,
during 1999, Omega borrowed $10,000,000 from the Federal Home Loan Bank on a
short-term basis for the purpose of match-funding a commercial loan and
$2,000,000 was borrowed on a long-term basis by Omega from another financial
institution to fund the stock repurchase program in effect (see Note 8 of Notes
to Consolidated Financial Statements).
SHAREHOLDERS' EQUITY
Shareholders' equity continued to be an important funding source during 1999,
providing an average balance of $153,619,000, an increase of $3,042,000 or 2.0%
from the $150,577,000 provided in 1998. In spite of increased dividends, Omega
continued a strong rate of internal capital generation. This rate was 5.6% in
1999 and 6.7% in 1998. This internal capital generation is dependent on high
earnings performance which is reflected by a return on average assets of 1.63%
in 1999 and 1.66% in 1998, in conjunction with a prudent dividend policy that is
represented by payout ratios on the common stock of 48.3% for 1999 and 41.9% for
1998. 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 decreased average equity by $1,886,000 in
1999 and increased average equity by $2,440,000 in 1998. At December 31, 1999,
Omega held 485,275 shares of stock in treasury at a cost of $16,369,000 as
compared to 177,073 in 1998 at a cost of $6,038,000. This increase is a result
of the Omega stock repurchase program in effect during most of 1999 (see Note 15
of Notes to Consolidated Financial Statements).
[The following table was depicted as a bar chart in the printed material.]
EQUITY TO ASSET RATIO
AT YEAR END
1995 12.48%
1996 13.49%
1997 14.02%
1998 14.49%
1999 14.36%
[The following table was depicted as a bar chart in the printed material.]
COMMON BOOK VALUE PER SHARE
1995 $13.67
1996 $14.83
1997 $15.83
1998 $16.95
1999 $16.96
Omega increased the return to shareholders in 1999 by increasing its dividend
18.8% to $.95 per common share. Per share common dividends in prior years were
$.80 and $.65 in 1998 and 1997, respectively. Omega paid a dividend of $1.80 per
preferred share in each of the years ending 1999, 1998 and 1997. See Note 18 of
Notes to Consolidated Financial Statements regarding restrictions on dividends
from subsidiary banks to the holding company.
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, 1999 and 1998, Omega's Tier I capital ratio was 21.2% and 20.8%,
respectively, and its total capital ratio was 22.5% and 22.1%, respectively.
Additionally, banking organizations must maintain a minimum Tier I capital to
total average 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
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
to maintain leverage capital ratios 100 to 200 basis points above the minimum
depending on their financial condition. At December 31, 1999 and 1998, Omega's
leverage ratio was 14.1% and 14.5%, respectively, against a required leverage
ratio of 4% (see Note 20 of Notes to Consolidated Financial Statements).
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 order to achieve
optimal levels of net interest income. Interest rate risk is the risk to net
interest income or capital arising from movement of interest rates. There are
several components of interest rate risk: repricing risk, basis risk, customer
option risk and yield curve risk. The two methodologies used by the Corporation
to aid in the management of interest rate risk are gap analysis and economic
simulation. Gap analysis is a tool used by the Corporation primarily to measure
repricing risk while economic simulation is used to measure and manage repricing
risk, basis risk and customer option risk.
Gap analysis and rate shock simulations 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 using projected future
volumes and various interest rate scenarios to analyze potential hedging
decisions or decisions that involve the acquisition or investment of funds.
Economic simulation involves management simulating 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.
As the table below indicates, the Corporation is exposed to a loss of income if
interest rates fall. For example, net interest income at risk for a 100 basis
point decrease in rates as of December 31, 1999 was $333,000, or .71%, of net
interest income, compared to $515,000, or 1.11%, of net interest income at risk
as of December 31, 1998. Omega's rate risk policies provide for maximum limits
on net interest income that can be at risk for 100 through 400 basis point
changes in interest rates. During 1999, Omega's rate risk position was
consistently within policy limits.
Effect of Interest Rate Risk on Net Interest Income
- --------------------------------------------------------------------------------
Change Total Change
Change in Change Due Change Due to Due to
Interest Rates to Repricing Due to Customer Interest Rate
(Basis Points) Risk Basis Risk Options Risk
- --------------------------------------------------------------------------------
300 $214 $445 $255 $914
200 169 297 163 629
100 62 168 79 309
0 0 0 0 0
-100 (58) (168) (107) (333)
-200 (141) (297) (290) (728)
-300 (177) (445) (325) (947)
- --------------------------------------------------------------------------------
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 by changing investment,
lending, funding or pricing strategies; however, these strategies could reduce
liquidity or require maintaining additional capital.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
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 has 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,
1999, Omega's net interest income and MVE were within the guidelines established
by management and the Board of Directors. The table below summarizes the results
of rate shocks showing the effect that interest rate risk has on market value of
equity as of December 31, 1999 (in thousands):
Effect of Interest Rate Risk on Market Value of Equity
- --------------------------------------------------------------------------------
Change Total Change
Change in Change Due Change Due to Due to
Interest Rates to Repricing Due to Customer Interest Rate
(Basis Points) Risk Basis Risk Options Risk
- --------------------------------------------------------------------------------
300 $(18,713) $ 6,026 $ 3,899 $(8,788)
200 (13,202) 4,529 2,656 (6,017)
100 (6,953) 2,499 1,373 (3,081)
0 0 0 0 0
-100 7,225 (2,499) (2,110) 2,616
-200 14,297 (4,529) (5,330) 4,438
-300 21,204 (6,026) (5,361) 9,817
- --------------------------------------------------------------------------------
REPRICING RISK
Repricing risk arises from differences between the timing of rate changes and
the timing of cash flows that occur in the pricing and maturity of assets and
liabilities. The static gap analysis is one of the tools used to measure and
manage repricing risk. 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 21) shows the
period and cumulative static gaps for various time intervals as of December 31,
1999. 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 $114,849,000 at December 31, 1999, indicating more interest bearing
liabilities than earning assets will reprice during that period. Over the past
two years, the level of our gap and interest rate risk positions has 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.
As of December 31, 1999, should interest rates rise by 100 basis points
immediately and Omega's balances do not grow and the mix does not change,
repricing risk would cause net interest income to increase over the next twelve
months by $62,000. If interest rates would decline by 100 basis points
immediately, repricing risk would cause net interest income to decrease by
$58,000 over the next twelve months.
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, in 1999, Omega sold $21,207,000 in
long-term fixed rate residential mortgages to a third party in order to decrease
repricing risk.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
BASIS RISK
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 isolated the movements of
the prime rate and treasury rates. The following shows the results of these rate
shocks (in thousands):
Effect of Basis Risk on Net Interest Income
- --------------------------------------------------------------------------------
Change in Change in Change in
Change in Net interest Income Net interest Income Net interest Income
Interest Rates Due to Due to Treasury Due to
(Basis Points) Prime Basis Risk Basis Risk Total Basis Risk
- --------------------------------------------------------------------------------
300 $ 4,153 $(3,708) $ 445
200 2,769 (2,472) 297
100 1,404 (1,236) 168
0 0 0 0
-100 (1,404) 1,236 (168)
-200 (2,769) 2,472 (297)
-300 (4,153) 3,708 (445)
- --------------------------------------------------------------------------------
The table above indicates the results of changes in the prime rate or treasury
rates, keeping all other interest rates unchanged. If the prime rate would
increase by 100 basis points, and all other rates remained unchanged, the
Corporation's net interest income would increase by $1,404,000 and market value
of equity would decrease by $5,544,000. The Corporation's prime basis risk has
decreased over the last several years as a result of customer preference for
fixed rate loans and the fact that the Corporation has increasingly indexed
variable rate loans to rates other than the prime rate. If all points on the
treasury curve would increase 100 basis points and all other rates remained
unchanged, the Corporation's net interest income would decrease $1,236,000 and
market value of equity would increase $8,043,000. This change can be attributed
to the fact that most deposit rates are indexed to the treasury curve, therefore
an increase in treasury rates would increase interest expense more than interest
income.
Effect of Basis Risk on Market Value of Equity
- --------------------------------------------------------------------------------
Change in Change in Change in
Change in Market Value Market Value Market Value
Interest Rates Due to Due to Treasury Due to
(Basis Points) Prime Basis Risk Basis Risk Total Basis Risk
- --------------------------------------------------------------------------------
300 $(18,104) $24,130 $6,026
200 (11,558) 16,087 4,529
100 (5,544) 8,043 2,499
0 0 0 0
-100 5,544 (8,043) (2,499)
-200 11,558 (16,087) (4,529)
-300 18,104 (24,130) (6,026)
- --------------------------------------------------------------------------------
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
CUSTOMER OPTION RISK
Customer option risk arises when a customer has the right to alter the level and
timing of cash flows of an asset or liability. Prepayment options on loans and
early withdrawal of deposits are two of the most common types of customer
options. The Corporation analyzed the effects of customer options on net
interest income and MVE by using interest rate shocks that include the effect of
estimated prepayments on our mortgage portfolio. Prepayment levels are dependent
on several factors including the current interest rate enviroment, the interest
rate on the loan as well as other contractual provisions of the loan. Mortgage
prepayment levels were determined by using estimated prepayments of
mortgage-backed securities with similar maturity and rate characteristics.
Customer options resulting from a 100 basis point decrease in interest rates
would cause net interest income to decrease $107,000 and market value of equity
to decrease $2,110,000.
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 assets.
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.
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, 1999, total liquid assets were $165,809,000 while the short-term liabilities
were $57,513,000. This left a surplus of liquid assets of $108,296,000, or
10.3%, of total assets. Management believes that a surplus of not less than 5%
to 7% is adequate.
[The following table was depicted as a bar chart in the printed material.]
AVERAGE LOAN TO DEPOSIT RATIO
1995 82.2%
1996 82.2%
1997 81.6%
1998 83.5%
1999 82.0%
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
Another measure of liquidity is the average loan to deposit ratio. This ratio
was 82.0% at December 31, 1999 and 83.5% at December 31, 1998. 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, 1999. At December 31, 1999, Omega had no amount
outstanding against these federal funds lines. In addition, each of the
Corporaton's banks are members of the Federal Home Loan Bank of Pittsburgh which
provides overnight or term funding to the banks with a borrowing limit of
$64,962,000. This borrowing limit could be increased to a maximum amount of
$264,084,000 with the purchase of additional Federal Home Loan Bank stock. At
December 31, 1999, Omega had $15,000,000 outstanding against the term line and
no overnight advances (See Note 8 of Notes to 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, 1999 was $53,136,000.
MARKET ENVIRONMENT
Omega's market is generally in central Pennsylvania and primarily in the
counties of Centre, Clinton, Mifflin, Blair, Huntingdon, Bedford, and Juniata.
[The following table was depicted as a bar chart in the printed material.]
NET INCOME (IN THOUSANDS)
1995 $14,069
1996 $16,227
1997 $16,968
1998 $17,092
1999 $17,362
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
TABLE 4
MATURITY DISTRIBUTION
AS OF DECEMBER 31, 1999
(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 ...................... $ 872 $ -- $ -- $ -- $ -- $ 872
Federal funds sold ............................. 1,975 -- -- -- -- 1,975
Investment securities:
U.S. Treasury securities
and obligations of other
U.S. Government agencies
and corporations .......................... 15,997 12,007 15,553 76,180 -- 119,737
Corporate and other securities ............... 3,128 6,394 6,372 30,454 787 47,135
Obligations of state and political
subdivisions .............................. 1,557 990 1,061 73,250 3,523 80,381
Mortgage backed securities ................... 3,412 3,460 3,455 1,368 759 12,454
Stocks ....................................... -- -- -- -- 11,717 11,717
Loans:
Commercial, financial, and
agricultural .............................. 63,944 3,358 7,568 20,063 12,160 107,093
Real estate -- commercial .................... 61,509 10,014 14,627 71,211 47,448 204,809
Real estate -- construction .................. 8,222 96 218 2,885 4,618 16,039
Real estate -- mortgage ...................... 9,970 9,335 21,016 80,478 79,762 200,561
Home equity .................................. 16,000 3,558 6,971 41,750 23,432 91,711
Personal (net of
unearned interest) ........................ 24,422 4,945 9,067 36,698 6,947 82,079
Lease financing (net of
unearned interest) ........................ 234 316 503 1,603 -- 2,656
--------- --------- --------- --------- --------- ---------
Total Interest Earning Assets ..................... 211,242 54,473 86,411 435,940 191,153 979,219
========= ========= ========= ========= ========= =========
Interest Bearing Liabilities
Demand deposits ................................ 26,731 -- -- 151,464 -- 178,195
Savings deposits ............................... 93,964 -- 20,955 40,018 -- 154,937
Certificates of deposit over $100,000 .......... 21,523 10,000 10,623 15,182 283 57,611
Time deposits .................................. 117,710 54,039 75,303 94,309 100 341,461
Short-term borrowings .......................... 28,527 -- -- -- -- 28,527
ESOP debt ...................................... -- -- -- -- 3,611 3,611
Long-term debt ................................. 7,000 -- -- -- -- 7,000
Other interest bearing liabilities ............. -- 600 -- -- -- 600
--------- --------- --------- --------- --------- ---------
Total Interest Bearing Liabilities ................ 295,455 64,639 106,881 300,973 3,994 771,942
--------- --------- --------- --------- --------- ---------
Gap ............................................... $ (84,213) $ (10,166) $ (20,470) $ 134,967 $ 187,159 $ 207,277
========= ========= ========= ========= ========= =========
Cumulative Gap .................................... $ (84,213) $ (94,379) $(114,849) $ 20,118 $ 207,277
========= ========= ========= ========= =========
Cumulative sensitivity ratio ...................... 0.71 0.74 0.75 1.03 1.27
Commercial, financial and agricultural
loans maturing after one year with:
Fixed interest rates ........................... $ 26,490 $ 44,843 $ 71,333
Variable interest rates ........................ 14,309 10,665 24,974
--------- --------- ---------
Total .......................................... $ 40,799 $ 55,508 $ 96,307
========= ========= =========
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
RESULTS OF OPERATIONS
1999 FINANCIAL PERFORMANCE OVERVIEW
Omega's earnings reached a record $17,362,000 in 1999, an increase of 1.6% over
1998. On a diluted basis, net income per common share improved, reaching $1.85
in 1999, an increase of 3.4%, or $.06, over 1998. Several occurrences took place
in 1999 which management believes significantly influenced the year's financial
performance. They are as follows and will be discussed in detail in the
following sections:
o declining, but solid net interest margin
o Year 2000 liquidity planning
o increased fee income on traditional banking services
o decrease from gains on security sales
o sales of other assets and liabilities
o expense associated with technology advancement
Assets were $1,053,403,000 at December 31, 1999, representing a $9,301,000, or
0.9%, decrease from year-end 1998. The decrease was caused by the sale of a
banking office containing $14,139,000 in assets, as well as a block of mortgage
loans totalling $21,207,000. Without the sales, assets would have increased by
approximately $26,000,000, or 2.4%. Loans (net of unearned discount) were
$704,948,000 compared to $722,967,000 at December 31, 1998, a decrease of 2.5%,
or $18,019,000. Deposits decreased by $19,065,000, or 2.2%, at December 31,1999
when compared to December 31, 1998. Without the sales of the branch and the
mortgage loans, loans would have increased $16,132,000, or 2.2% and deposits
would have decreased by $4,743,000, or 0.5%.
[The following table was depicted as a bar chart in the printed material.]
RETURN ON AVERAGE ASSETS
1995 1.47%
1996 1.61%
1997 1.67%
1998 1.66%
1999 1.63%
[The following table was depicted as a bar chart in the printed material.]
RETURN ON AVERAGE EQUITY
1995 11.90%
1996 12.51%
1997 12.26%
1998 11.35%
1999 11.30%
Return on average equity decreased from 11.35% in 1998 to 11.30% in 1999, while
return on average assets decreased to 1.63% from 1.66% in 1998. Omega's
performance can be compared to its Mid-Atlantic regional peer group with
consolidated assets of $1 billion to $5 billion (using the most current data for
September 30, 1999).
Omega Peers
----- -----
Return on average assets ......................... 1.69% 1.17%
Return on average equity ......................... 11.61 12.72
NET INTEREST INCOME
Net interest income is the amount by which interest income on earning assets
exceeds interest expense on interest bearing liabilities. Net interest income is
the most significant component of revenue, comprising approximately 79% of total
revenues for 1999. Net interest margin is the percentage of net return on
average earning assets and provides a measure of comparability of a financial
institution's performance. 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.
Both net interest income and net interest margin are impacted by interest rate
changes, changes in the relationships between rates and changes in the
composition of the average balance sheet. Additionally, product pricing, product
mix and customer preferences dictate the composition of the balance sheet and
the resulting net interest income. Table 5 (located on page 24) shows average
asset and liability balances, average interest rates and interest income and
expense for the period 1997 to 1999. In addition, it shows the changes
attributable to the volume and rate components of net interest income.
22 [LOGO]---------------------www.omegafinancial.com----------------------------
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
Total average loans were $707,892,000 in 1999 at an average weighted yield of
8.28% that produced $58,634,000 in interest income. This represented a
$3,873,000, or 0.6%, increase in average volumes from 1998. The yield decreased
28 basis points to 8.28% from 8.56% in 1998 causing a decrease of $2,009,000 in
interest income, partially offsetting an increase of $377,000 of favorable mix
and volume changes for a net decrease of $1,632,000, or 2.7%, when compared to
1998. In order to explain the 28 basis point decline in loan yields in 1999, we
must consider both the effects of Omega's pricing index as well as competitive
pressures that forced spreads down. Omega uses the US Treasury rates as indices
for pricing most of its loans. In 1999, the spread between Treasury and the
prime rate was wider than historical spreads, resulting in lower loan rates for
new loans. In 1999, the weighted average rate of all new loans was 8.30%, 26
basis points lower than the composite rate of the loan portfolio in total during
1998. Additional constraints were placed on loan rates as a result of an
ever-increasing competitive loan pricing environment.
Investment securities averaged $267,038,000 for an increase of $20,420,000, or
8.28% over the average investment securities in 1998. The average weighted yield
decreased to 5.36% from 5.71% in 1998, as Year 2000 liquidity concerns
influenced the types of new investments purchased during 1999. New securities
purchased during 1999 were relatively shorter in term and lower in yield than
would have been the case in a normal funds management situation. Additionally,
tax-exempt investment securities were used to a higher degree in 1999 than in
previous years. Approximately $24,000,000 of maturing taxable investment
securities were replaced with tax-exempt investment securities that carry a
lower rate, but higher tax equivalent yield. Interest income from securities
increased a total of $234,000. Interest bearing deposits, federal funds sold and
commercial paper, as a group on average, increased a total of 82.7%, or
$14,078,000. These funds, supplied primarily by increases in average deposits,
were employed in these short-term, liquid assets as a direct result of Year 2000
liquidity planning.
Total interest earning assets averaged $1,006,025,000 at a yield of 7.40% and
produced total interest income of $74,493,000 for 1999. The net increase in
average earning assets of $38,371,000 in 1999 over 1998 was funded by increased
deposits and borrowings. The yield decreased 38 basis points from 7.78% due
mainly to the lower yielding fixed rate and tax-free loans, as well as
shorter-term, lower-yielding investments. The mix of earning assets changed
slightly in 1999, when 66.6% of earning assets were made up of loans compared to
68.6% in 1998. (See Average Asset Mix Change chart on page 11). Interest income
increased $1,885,000 from volume and mix changes and decreased $2,660,000 from
generally lower yields producing a net decrease of 1.0%, or $775,000. On a fully
tax equivalent basis, interest income decreased by $340,000.
Total interest bearing liabilities averaged $774,652,000 at a cost of
$27,705,000 carrying a composite rate of 3.58%. This represented an increase in
interest bearing liabilities of 3.5%, or $25,973,000, over 1998. The composite
rate decreased from 3.83% in 1998, or 25 basis points. Interest expense
decreased $1,729,000 due to lower rates and increased $784,000 due to volume and
mix changes. These changes resulted in a net decrease of $945,000, or 3.3%, in
interest expense.
Non-interest bearing funding sources, including equity, averaged $288,046,000 in
1999, compared to $278,000,000 in 1998, for an increase of $10,046,000, or 3.6%.
This resulted in a decrease of 21 basis points in the rate to fund interest
earning assets (computed by dividing the total interest expense by the total
average earning assets) from 2.96% in 1998 to 2.75% in 1999.
Net interest income was $46,788,000 for 1999, an increase of $170,000, or 0.4%,
from 1998. This was the result of an increase of $1,101,000 in favorable volume
and mix changes and a decrease of $931,000 as a result of interest rate effects.
Net yield was 4.65% in 1999 and 4.82% in 1998. On a fully tax equivalent basis,
the net yield decreased from 5.03% to 4.90% in 1999. As a comparison, Omega's
regional peer group reported an average net interest margin of 4.18% through
September 30, 1999 versus Omega's 4.94%.
- ----------------------------www.omegafinancial.com---------------------[LOGO] 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,
====================================================================================================================================
1999 1998
------------------------------------- ---------------------------------
Average Yield/ Average Yield/
ASSETS Balance (1) Interest Rate Balance (1) Interest Rate
----------- ----------- ----- ----------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (5),(7) ......................................... $ 681,840 $ 57,203 8.39% $ 676,664 $ 58,711 8.68%
Tax-exempt loans ...................................... 26,052 1,431 5.49 27,355 1,555 5.68
----------- ----------- ---- ----------- --------- ----
Total loans ........................................ 707,892 58,634 8.28 704,019 60,266 8.56
Investment securities ................................. 190,446 11,071 5.81 194,141 11,769 6.06
Tax-exempt investment securities ...................... 76,592 3,234 4.22 52,477 2,302 4.39
----------- ----------- ---- ----------- --------- ----
Total investment securities ........................ 267,038 14,305 5.36 246,618 14,071 5.71
Interest bearing deposits ............................. 3,659 181 4.95 761 39 5.12
Federal funds sold .................................... 24,448 1,228 5.02 16,256 892 5.49
Commercial paper ...................................... 2,988 145 4.85 -- -- --
----------- ----------- ---- ----------- --------- ----
Total interest earning assets ............................ 1,006,025 74,493 7.40 967,654 75,268 7.78
Non-interest earning assets:
Cash and due from banks ............................... 34,952 32,404
Allowance for loan losses ............................. (11,830) (11,924)
Premises and equipment ................................ 15,771 17,240
Other assets (8) ...................................... 17,780 21,305
----------- -----------
Total .............................................. $ 1,062,698 $1,026,679
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2) .................. $ 240,806 3,865 1.61 $ 229,484 4,044 1.76
Savings deposits ...................................... 105,574 2,375 2.25 102,636 2,309 2.25
Time deposits ......................................... 396,339 20,015 5.05 396,457 21,394 5.40
Other, including short-term borrowings, long-term debt,
and other interest bearing liabilities ............. 31,933 1,450 4.54 20,102 903 4.49
----------- ----------- ---- ----------- --------- ----
Total interest bearing liabilities ....................... 774,652 27,705 3.58 748,679 28,650 3.83
----------- ---------
Non-interest bearing liabilities:
Demand deposits ....................................... 121,053 114,382
Other ................................................. 13,374 13,041
Shareholders' equity ..................................... 153,619 150,577
----------- -----------
Total .............................................. $ 1,062,698 $ 1,026,679
=========== ===========
Net interest income ...................................... $ 46,788 $ 46,618
=========== =========
Net yield on interest earning assets (3) ................. 4.65% 4.82%
==== ====
Net interest income and yield -- tax equivalent basis (4) $ 49,300 4.90% $ 48,695 5.03%
=========== ==== ========= ====
=======================================================================
</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 $31 in 1999, $(2) in 1998 and
$(13) in 1997 from interest rate contracts used to hedge prime interest
rate loans.
8) Includes gross unrealized gains on securities available for sale: $5,637
in 1999, $8,537 in 1998 and $4,785 in 1997.
24 [LOGO]---------------------www.omegafinancial.com----------------------------
<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>
======================================= ========================================= ===========================================
1997 1999 Compared to 1998 1998 Compared to 1997
Average Yield/ Increase (Decrease) Due To (6) Increase (Decrease) Due To (6)
Balance (1) Interest Rate Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 674,112 $ 60,380 8.96% $ 450 $ (1,958) $ (1,508) $ 228 $ (1,897) $ (1,669)
19,019 1,303 6.85 (73) (51) (124) 502 (250) 252
---------- ---------- ---- -------- ---------- ---------- ---------- ---------- ----------
693,131 61,683 8.90 377 (2,009) (1,632) 730 (2,147) (1,417)
208,943 12,542 6.00 (221) (477) (698) (897) 124 (773)
37,726 1,699 4.50 1,024 (92) 932 645 (42) 603
---------- ---------- ---- -------- ---------- ---------- ---------- ---------- ----------
246,669 14,241 5.77 803 (569) 234 (252) 82 (170)
605 34 5.62 143 (1) 142 8 (3) 5
18,873 1,040 5.51 417 (81) 336 (144) (4) (148)
-- -- -- 145 -- 145 -- -- --
---------- ---------- ---- -------- ---------- ---------- ---------- ---------- ----------
959,278 76,998 8.03 1,885 (2,660) (775) 342 (2,072) (1,730)
29,972
(11,755)
17,917
19,195
----------
$1,014,607
==========
$ 219,304 4,109 1.87 187 (366) (179) 184 (249) (65)
102,121 2,309 2.26 66 -- 66 11 (11) --
417,396 22,804 5.46 (6) (1,373) (1,379) (1,157) (253) (1,410)
13,758 655 4.76 537 10 547 287 (39) 248
---------- ---------- ---- -------- ---------- ---------- ---------- ---------- ----------
752,579 29,877 3.97 784 (1,729) (945) (675) (552) (1,227)
---------- -------- ---------- ---------- ---------- ---------- ----------
110,520
13,148
138,360
----------
$1,014,607
==========
$ 47,121 $ 1,101 $ (931) $ 170 $ 1,017 $ (1,520) $ (503)
========== ======== ========== ========== ========== ========== ==========
4.91%
====
$ 48,737 5.08%
========== ====
======================================= ========================================= ===========================================
</TABLE>
- ----------------------------www.omegafinancial.com---------------------[LOGO] 25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
[The following table was depicted as a bar chart in the printed material.]
NET INTEREST YIELD
YIELD ON COST TO FUND NET INTEREST
EARNING ASSETS EARNING ASSETS YIELD
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%
1999 7.40% 2.75% 4.65%
PROVISION FOR LOAN LOSSES
Omega's provision for loan losses was $1,060,000 in 1999 and in 1998. In 1999,
the provision for loan losses exceeded net charge-offs by $93,000, while in 1998
net charge-offs exceeded the provision by $21,000. Credit quality is a high
priority for Omega as evidenced by its low ratios of net charge-offs to average
loans outstanding and non-performing loans to the loan loss allowance. Net
charge-offs in 1999 and 1998 were .14% and .15%, respectively, of average loans
outstanding. Non-performing loans as a ratio to the allowance for loan losses
were 29.0% at year-end 1999 and 55.4% at the end of 1998. The allowance for loan
losses as a ratio to net loans was 1.68% and 1.63% at December 31, 1999 and
1998, respectively. When compared to our regional peers (most current data as of
Setember 30, 1999), Omega's ratio of net charge-offs to average loans was .19%
and the peer average was .18%.
Management believes that the allowance for loan losses at December 31, 1999 is
adequate based on its analysis of the loan portfolio. Such analysis considers
factors that include historical losses, the status of non-performing delinquent
loans, prevailing economic conditions and industry standards.
NON-INTEREST INCOME
Omega is committed to constantly increasing customer satisfaction by delivering
consumer-preferred services through convenient methods. Success in this endeavor
is evidenced by the increase in income from traditional bank services over the
last two years. In 1997, service-based fee income was 15.0% of total revenues.
In 1998, it increased to 15.9% and in 1999, 17.5% of total revenues were in the
form of service-based income. We believe that our information-packed web site
with on-line banking, our customer information call center, and our extensive
employee training programs have all contributed to the satisfaction of our
customer base. Technology advances that allow us to be better and more quickly
informed about our clients have allowed us to be more responsive to their
financial needs through personalized service and product design. Service-based
fee income (fees on deposits, loans, trust services, and other services) grew to
$10,293,000 during 1999 for an 8.0%, or $766,000 increase when compared to
$9,527,000 for 1998.
26 [LOGO]---------------------www.omegafinancial.com----------------------------
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
As a percentage of average assets, non-interest income (excluding securities
gains and other non-recurring gains) was .98% for 1999, as compared to .95% in
1998. When compared to our regional peers (most current data as of September 30,
1999), Omega's ratio was .96% and the peer average was .70%.
[The following table was depicted as a bar chart in the printed material.]
NON-INTEREST INCOME TO AVERAGE ASSETS
(EXCLUDING SECURITY GAINS AND NON-RECURRING ITEMS)
1995 0.77%
1996 0.82%
1997 0.88%
1998 0.95%
1999* 0.98%
* 1999 non-recurring item -- 0.13%
In 1999, net gains from investment securities decreased by $3,215,000, or 90.3%
to $345,000. There are many factors considered by management when opportunities
arise to sell investment securities, and therefore, income from this activity
can fluctuate dramatically from year to year.
Likewise, other non-recurring gains or losses can be realized in a given year
based upon unique circumstances. For example, in 1999 management made a decision
to sell one banking office, based on its performance level, with a resulting
gain of $1,410,000. Additionally, in order to reduce interest rate risk within
the balance sheet, a block of mortgage loans, with book value of $21,207,000 was
sold, producing a gain of $106,000.
In total, net gains realized on the sale of investment securities, loans and
other assets was $1,833,000 in 1999 versus $3,818,000 in 1998, resulting in a
decrease in non-interest income of $1,985,000, or 52.0%. These net gains
represented .17% of average assets in 1999, as compared to .37% in 1998.
NON-INTEREST EXPENSE
It is Omega's desire to minimize operating expense to produce the highest levels
of income possible. Total non-interest expenses were $33,597,000 for 1999 as
compared to $34,189,000 for 1998, representing a decrease of $592,000, or 1.7%.
Salaries and employee benefits increased by 3.2%, or $577,000 in 1999 as
compared to 1998, as a result of an increase of one full-time equivalent
employee on average and normal salary merit increases. As a comparison, Omega
employed one employee for every $2,040,000 in average assets in 1999, versus
$1,955,000 of average assets in 1998.
[The following table was depicted as a bar chart in the printed material.]
NON-INTEREST EXPENSE TO AVERAGE ASSETS
(EXCLUDING NON-RECURRING ITEMS)
1995 3.28%
1996 3.08%
1997 3.13%
1998* 3.14%
1999 3.16%
* 1998 non-recurring item -- 0.19%
In order to achieve Omega's goals for increasing the customer base through
customer satisfaction, management is committed to continual upgrading of its
delivery methods through advanced technology, both of hardware and software.
This has resulted in increased costs in the form of supplies and equipment,
depreciation and operational consolidation costs over the past few years.
Accordingly, equipment expense increased by 7.6%, or $156,000 in 1999 as
compared to 1998, as technology advances and operational consolidation costs
continue.
Other non-interest expenses, totaling $8,997,000 decreased by $1,221,000 in 1999
as compared to 1998. In 1998, Omega recorded a non-recurring charge to
non-interest expense in the amount of $1,944,000. This represented a write-off
of remaining goodwill and core deposit intangibles relating to a bank that was
acquired in 1995. (See later discussion on 1998 for details concerning this
item). As a result of the write-off in 1998, Omega recorded $223,000 less in
scheduled amortization of goodwill and core deposit intangibles in 1999 than in
1998. Exclusive of the non-recurring charge, other non-interest expense
increased $723,000, or 8.7%. This is due primarily to increased expense for
customer MAC transactions, higher Pennsylvania tax liabilities, and various
operational consolidation costs.
As a percentage of average assets, non-interest expense was 3.16% for 1999 as
compared to 3.33% in 1998. Excluding the non-recurring charge in 1998
(representing .19% of average assets), this ratio was 3.14%. At September 30,
1999, Omega's ratio of non-interest expense to average assets was 3.12%,
compared to a regional peer average of 2.78%.
- ----------------------------www.omegafinancial.com---------------------[LOGO] 27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
INCOME TAXES
Income tax expense for 1999 amounted to $6,895,000 compared to $7,622,000 in
1998. The effective tax rate was 28.4% in 1999 versus 30.8% in 1998. The
non-recurring charge in 1998, specifically the accelerated amortization of
non-deductible goodwill increased the effective tax rate by 0.7%. Excluding this
item, the effective tax rate in 1998 would have been 30.1%. The improvement in
1999 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 1999 by 28.6% or $22,812,000, decreasing the federal tax rate by
5.9%, as compared to 1998, when the tax rate was decreased by only 4.8% as a
result of income from tax-exempt assets. Average tax-exempt investments and
loans as a percentage of average assets were 9.7%, 7.8% and 5.6% in 1999, 1998
and 1997, respectively. Tax-exempt income as a percentage of income before
income tax was 19.2%, 15.6% and 12.3% in 1999, 1998 and 1997, 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.
1999 1998 1997
---------------------------------------
Net income ........................... $ 17,362 $ 17,092 $ 16,968
Return on average assets ............. 1.63% 1.66% 1.67%
Return on average equity ............. 11.30 11.35 12.26
Summarized below are the components of net income and the contribution of each
to return on assets for 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
----------------------------------- ---------------------------------
% of Average % of Average
Assets Assets
------------ ------------
<S> <C> <C> <C> <C>
Net interest income .................................... $ 46,788 4.40% $ 46,618 4.54%
Loan loss provision .................................... (1,060) (0.10) (1,060) (0.10)
Trust fees ............................................. 2,976 0.28 2,904 0.28
Deposit service fees ................................... 3,585 0.34 3,427 0.33
Other fees ............................................. 3,732 0.35 3,196 0.31
Security gains ......................................... 345 0.03 3,560 0.35
Gains on sale of other assets .......................... 1,488 0.14 258 0.03
----------------------------------- ---------------------------------
Total non-interest income .............................. 12,126 1.14 13,345 1.30
Employee expense ....................................... (18,609) (1.75) (18,032) (1.76)
Occupancy and equipment ................................ (4,370) (0.41) (4,220) (0.41)
Other non-interest expense ............................. (10,618) (1.00) (9,993) (0.97)
Non-recurring expense .................................. -- 0.00 (1,944) (0.19)
----------------------------------- ---------------------------------
Total non-interest expense ............................. (33,597) (3.16) (34,189) (3.33)
Income tax expense ..................................... (6,895) (0.65) (7,622) (0.74)
----------------------------------- ---------------------------------
Net income ............................................. $ 17,362 1.63% $ 17,092 1.66%
=================================== =================================
Average assets ......................................... $ 1,062,698 $ 1,026,679
</TABLE>
1998 FINANCIAL PERFORMANCE OVERVIEW
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
28 [LOGO]---------------------www.omegafinancial.com----------------------------
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
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 Mid-Atlantic regional peers with consolidated assets of $1
billion to $5 billion.
Omega Peers
----- -----
Return on average assets .......................... 1.66% 1.21%
Return on average equity .......................... 11.35 12.98
NET INTEREST INCOME
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 decrease
in average volumes of $2,512,000 on the above three assets was a result of
reduced funding from deposits.
Total interest earning assets averaged $967,654,000 at an average 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 3.11% 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. Omega's
regional peer group reported average net interest margins of 4.37% as of
December 31,1998.
NON-INTEREST INCOME
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 1998 net gains from investment securities
increased by $2,344,000, or 192.8%, and net gains from the sale of loans and
other assets decreased by $61,000, or 19.1%.
- ----------------------------www.omegafinancial.com---------------------[LOGO] 29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
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
regional peers, Omega's ratio was .95% and the peer average was .68%.
NON-INTEREST EXPENSE
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.
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 deteriorating 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.
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 December 31,
1998, Omega's regional peer group average was 2.80%.
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 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
YEAR 2000
As predicted by management, Omega's transition to the Year 2000 was smooth and
uneventful, due to extensive planning and testing. The program was successful,
not only because of our internal preparations, but because of the commitment and
cooperation of clients and vendors working together, sharing information,
updating infrastructure and completing the testing of hardware, software and
systems.
Total costs associated with the preparation for Year 2000 did not exceed the
projected $750,000, which included $175,000 capitalized for replacement of major
hardware. These expenditures were not material to the financial condition or
results of operations in 1999, and will have no material effect on results of
operations going forward.
30 [LOGO]---------------------www.omegafinancial.com----------------------------
<PAGE>
CONSOLIDATED BALANCE SHEETS
---------------------------
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
Cash and due from banks (Notes 1 and 3) .................................................. $ 36,580 $ 40,066
Interest bearing deposits with other financial institutions .............................. 872 1,455
Federal funds sold ....................................................................... 1,975 18,350
Investment securities held to maturity
(market value--$5,001 and $117,954 respectively) (Notes 1 and 4) ....................... 4,951 116,829
Investment securities available for sale (Notes 1 and 4) 267,718 144,551
Total loans (Notes 1, 5, 6 and 17) ....................................................... 705,241 723,485
Less: Unearned discount .................................................................. (293) (518)
Allowance for loan losses .............................................................. (11,865) (11,772)
----------- -----------
693,083 711,195
Premises and equipment,net (Notes 1 and 7) ............................................... 14,644 16,816
Other assets (Note 1) .................................................................... 33,580 13,442
----------- -----------
TOTAL ASSETS ............................................................................. $ 1,053,403 $ 1,062,704
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing ................................................................... $ 119,391 $ 132,291
Interest bearing ....................................................................... 732,204 738,369
----------- -----------
851,595 870,660
Short-term borrowings (Note 8) ........................................................... 28,527 17,638
Other liabilities ........................................................................ 10,919 11,004
ESOP debt (Note 12) ...................................................................... 3,611 3,837
Long-term debt (Note 8) .................................................................. 7,000 5,000
Other interest bearing liabilities ....................................................... 600 585
----------- -----------
TOTAL LIABILITIES ........................................................................ 902,252 908,724
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 ............................................... (2,625) (2,875)
Common stock, par value $5.00 per share:
Authorized -- 25,000,000 shares;
Issued --
9,259,782 shares at December 31, 1999;
9,137,270 shares at December 31, 1998
Outstanding --
8,774,507 shares at December 31, 1999;
8,960,197 shares at December 31, 1998 ................................................ 46,299 45,686
Capital surplus .......................................................................... 4,825 3,209
Retained earnings ........................................................................ 113,204 104,285
Accumulated other comprehensive income (Note 16) ......................................... 817 4,713
Cost of common stock in treasury:
485,275 shares at December 31, 1999;
177,073 shares at December 31, 1998 .................................................. (16,369) (6,038)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............................................................... 151,151 153,980
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................................... $ 1,053,403 $ 1,062,704
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
- ----------------------------www.omegafinancial.com---------------------[LOGO] 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,
---------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans ................................................ $58,634 $60,266 $61,683
Interest and dividends on investment securities:
Taxable interest income ................................................. 10,449 11,148 12,004
Tax-exempt interest income .............................................. 3,234 2,302 1,699
Dividend income ......................................................... 622 621 538
Other interest income ..................................................... 1,554 931 1,074
------- ------- -------
TOTAL INTEREST INCOME ..................................................... 74,493 75,268 76,998
INTEREST EXPENSE:
Interest on deposits ...................................................... 26,255 27,747 29,222
Interest on short-term borrowings ......................................... 1,089 783 342
Interest on long-term debt and
other interest bearing liabilities ...................................... 361 120 313
------- ------- -------
TOTAL INTEREST EXPENSE .................................................... 27,705 28,650 29,877
------- ------- -------
NET INTEREST INCOME ....................................................... 46,788 46,618 47,121
Provision for loan losses (Note 6) ........................................ 1,060 1,060 1,030
------- ------- -------
INCOME FROM CREDIT ACTIVITIES ............................................. 45,728 45,558 6,091
OTHER INCOME:
Trust fees ................................................................ 2,976 2,904 2,746
Service fees on deposit accounts .......................................... 3,585 3,427 3,281
Investment securities gains, net (Note 4)
Investment securities held to maturity .................................. -- -- 2
Investment securities available for sale ................................ 345 3,560 1,216
Gain on sale of loans and other assets .................................... 1,488 258 319
Other ..................................................................... 3,732 3,196 2,592
------- ------- -------
TOTAL OTHER INCOME ........................................................ 12,126 13,345 10,156
OTHER EXPENSE:
Salaries and employee benefits (Note 12) .................................. 18,609 18,032 17,384
Net occupancy expense ..................................................... 2,171 2,177 2,185
Equipment expense ......................................................... 2,199 2,043 1,869
Data processing service ................................................... 1,521 1,618 1,542
FDIC insurance premiums ................................................... 100 101 104
Other ..................................................................... 8,997 10,218 8,698
------- ------- -------
TOTAL OTHER EXPENSE ....................................................... 33,597 34,189 31,782
------- ------- -------
INCOME BEFORE INCOME TAXES ................................................ 24,257 24,714 24,465
Income tax expense (Notes 1 and 11) ...................................... 6,895 7,622 7,497
------- ------- -------
NET INCOME ................................................................ $17,362 $17,092 $16,968
======= ======= =======
EARNINGS PER SHARE (Notes 1 and 9)
Basic ..................................................................... $ 1.92 $ 1.87 $ 1.85
Diluted ................................................................... $ 1.85 $ 1.79 $ 1.77
WEIGHTED AVERAGE SHARES AND EQUIVALENTS:
Basic ..................................................................... 8,838 8,949 8,950
Diluted ................................................................... 9,315 9,475 9,476
</TABLE>
The accompanying notes are an integral part of these statements.
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<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, 1997, 1998 AND 1999
---------------------------------------------------------------------------------------
Accumulated Cost of
Unearned Other Comp- Common
Preferred Comp- Common Capital Retained rehensive Stock
Stock ensation Stock Surplus Earnings Income In Treasury Total
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ............... $ 5,000 $ (3,375) $ 30,521 $ 5,649 $ 97,749 $ 2,607 $ (2,266) $ 135,885
Comprehensive income:
Net income ............................. 16,968
Change in unrealized
securities gains, net .................... 2,391
Total comprehensive income ............... 19,359
Common dividends declared --
$.65 per share ......................... (5,838) (5,838)
Cash dividends, preferred --
$1.80 per share ........................ (396) (396)
Amortization of unearned compensation .... 250 250
Tax benefit from employee stock options .. 321 321
Tax benefit from preferred stock
dividends paid to ESOP ................. 93 93
Purchase of treasury stock --
279,603 shares ......................... (10,140) (10,140)
Exercised employee stock options --
108,610 shares ......................... 292 324 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 14,445 (4,151) (14,471) 4,151 (26)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 ............. 5,000 (3,125) 45,258 1,822 94,426 4,998 (5,947) 142,432
Comprehensive income:
Net income ............................. 17,092
Change in unrealized securities gains, net (285)
Total comprehensive income ............... 16,807
Common dividends declared --
$.80 per share ......................... (7,169) (7,169)
Cash dividends, preferred --
$1.80 per share ........................ (396) (396)
Amortization of unearned compensation .... 250 250
Tax benefit from employee stock options .. 245 245
Tax benefit from preferred stock
dividends paid to ESOP ................. 87 87
Purchase of treasury stock --
23,300 shares .......................... (705) (705)
Exercised employee stock options --
87,530 shares .......................... 428 1,387
1,815
Issuance of treasury stock to ESOP --
17,700 shares .......................... 614 614
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 ............. 5,000 (2,875) 45,686 3,209 104,285 4,713 (6,038) 153,980
Comprehensive income:
Net income ............................. 17,362
Change in unrealized securities gains, net (3,896)
Total comprehensive income ............... 13,466
Common dividends declared --
$.95 per share ......................... (8,383) (8,383)
Cash dividends, preferred --
$1.80 per share ........................ (396) (396)
Amortization of unearned compensation .... 250 250
Tax benefit from employee stock options .. 256 256
Tax benefit from preferred stock
dividends paid to ESOP ................. 80 80
Purchase of treasury stock --
319,883 shares ......................... (10,331) (10,331)
Exercised employee stock options --
134,193 shares ......................... 613 1,616 2,229
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 ............. $ 5,000 $ (2,625) $ 46,299 $ 4,825 $ 113,204 $ 817 $ (16,369) $ 151,151
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ....................................................................... $ 17,362 $ 17,092 $ 16,968
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................................. 2,221 4,522 2,489
Provision for loan losses ...................................................... 1,060 1,060 1,030
Gain on sale of investment securities .......................................... (189) (2,913) (1,218)
Non-monetary exchange of cost-method investments ............................... (156) (421) --
Loss (gain) on sale of fixed assets and other property owned ................... 5 (214) (77)
Gain on sale of loans .......................................................... (83) (45) (241)
Gain on sale of branch ......................................................... (1,410) -- --
(Increase) decrease in deferred tax asset ...................................... (229) (427) 26
Decrease (increase) in interest receivable and other assets .................... 1,937 (132) (1,044)
Increase (decrease) in interest payable ........................................ 73 (384) (179)
(Decrease) increase in taxes payable ........................................... (631) 78 (689)
Amortization of deferred net loan costs (fees) ................................. (217) 157 (104)
Deferral of net loan fees (costs) .............................................. 257 476 299
Increase in accounts payable and accrued expenses .............................. 338 1,730 741
--------- --------- ---------
Total adjustments ............................................................ 2,976 3,487 1,033
--------- --------- ---------
Net cash provided by operating activities .......................................... 20,338 20,579 18,001
Cash flows from investing activities: Proceeds from the sale or maturity of:
Interest bearing deposits with other financial institutions .................... 39,002 1,622 1,269
Commercial paper ............................................................... 5,000 -- --
Investment securities available for sale -- sales and maturities ............... 80,132 64,824 44,350
Investment securities held to maturity -- maturities ........................... 10,486 42,824 39,286
Purchase of:
Interest bearing deposits with other financial institutions .................... (38,419) (2,477) (1,357)
Commercial paper ............................................................... (4,855) -- --
Investment securities available for sale ....................................... (106,739) (76,237) (45,290)
Investment securities held to maturity ......................................... (1,212) (42,814) (41,793)
Proceeds from sale of branch ..................................................... 1,000 -- --
(Increase) decrease in loans ..................................................... (18,642) (34,479) 736
Gross proceeds from sale of loans ................................................ 22,802 1,736 2,957
Capital expenditures ............................................................. (1,118) (1,177) (1,783)
Sale of fixed assets and other property owned .................................... 644 908 502
Decrease (increase) in federal funds sold ........................................ 16,375 4,300 (4,575)
Purchase of bank-owned life insurance ............................................ (20,112) -- --
--------- --------- ---------
Net cash used in investing activities .............................................. (15,656) (40,970) (5,698)
Cash flows from financing activities:
(Decrease) increase in deposits, net ............................................. (4,743) 29,885 (5,255)
Increase in borrowings, net ...................................................... 12,889 4,378 7,968
Net change in other interest bearing liabilities ................................. 15 (1) (7)
Dividends paid ................................................................... (8,563) (7,185) (6,053)
Tax benefit from preferred stock dividend and
stock option activity ............................................................ 336 332 414
Issuance of common stock ......................................................... 2,229 1,815 616
Acquisition of treasury stock .................................................... (10,331) (705) (10,140)
Proceeds from sale of treasury stock ............................................. -- -- 1,712
--------- --------- ---------
Net cash (used in) provided by financing activities ............................... (8,168) 28,519 (10,745)
--------- --------- ---------
Net (decrease) increase in cash and due from banks ................................ $ (3,486) $ 8,128 $ 1,558
========= ========= =========
Cash and due from banks at beginning of period ..................................... $ 40,066 $ 31,938 $ 30,380
Cash and due from banks at end of period ........................................... 36,580 40,066 31,938
--------- --------- ---------
Net (decrease) increase in cash and due from banks ................................ $ (3,486) $ 8,128 $ 1,558
========= ========= =========
Interest paid ...................................................................... $ 27,632 $ 29,079 $ 30,056
Income taxes paid .................................................................. 7,124 7,517 7,112
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
OMEGA FINANCIAL CORPORATION AND SUBSIDIARES
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 42 offices in Centre, Clinton, Mifflin, Juniata, Blair, Huntingdon, and
Bedford 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.
INVESTMENT SECURITIES
Investment securities within the Corporation's investment portfolio are
classified as available for sale or held to maturity. Prior to April 1, 1999,
the determination as to which portfolio to hold each security was made at the
time of purchase, based on management's intent. All equity investments were
classified as available for sale. Debt securities were classified as available
for sale when the intent was 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 were classified as held to
maturity when it is management's intent to hold such securities until maturity.
On April 1, 1999, Omega adopted Statement of Financial Accounting Standard
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities". Upon adoption, SFAS No. 133 allowed an institution to perform a
one-time reclassification of securities from the held to maturity portfolio into
the available for sale or trading portfolios without calling into question the
intent of the company to hold the remaining securities in the held to maturity
category to maturity. At the date of adoption, Omega transferred investment
securities with a cost basis of $102,672,000 from the held to maturity to the
available for sale portfolio. As a result of this transfer, Omega realized an
increase in accumulated other comprehensive income of $425,000, which is
reflected as a cumulative effect of a change in accounting principle (See Note
16).
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. 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 adopted SFAS No. 133, "Accounting for Derivitive Instruments and Hedging
Activities" on April 1, 1999. The statement establishes accounting and reporting
standards requiring that every derivative be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 requires
that changes in the derivitive's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. With the exception of the reclassification of
certain held to maturity investments to available for sale, the adoption had no
other impact on the financial statements of Omega, as Omega has not held any
instruments that meet the defination of a derivative under SFAS No. 133 since
the adoption of the statement.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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 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, 1999 and 1998, the carrying
value of other real estate owned and held for investment was $273,000 and
$259,000, 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).
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
revised 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
(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
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
36 [LOGO]---------------------www.omegafinancial.com----------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
for earlier periods is provided for comparative purposes. Omega has elected to
reflect the statements 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.
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, adjustable 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 indexed to either the national prime rate or the
comparable U.S. Treasury rate in 1999 or solely the national prime rate in 1998.
Loans discounted at the prime rate have a positive spread of approximately 0 to
75 basis points at December 31, 1999 and a positive spread of 25 to 100 basis
points at December 31, 1998. Loans tied to the U.S. Treasury rate carry a spread
of approximately 200 to 220 basis points at December 31, 1999. Estimated fair
value for commercial real estate and construction loans is determined on the
same basis as the commercial loans listed above.
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.
Prepayments, or acceleration of cash flows, are calculated at speeds at which a
pool of loans with similar characteristics would be expected to prepay. The
rates utilized for adjustable rate mortgages are equivalent to the U.S. Treasury
rate for the same term plus a spread of approximately 165 to 265 basis points at
December 31, 1999 and a spread of 150 to 270 basis points at December 31, 1998.
The current market rate for the fixed rate mortgages ranged from 8.29% to 8.59%
at December 31, 1999 and from 6.90% to 7.35% at December 31, 1998.
Home equity loans -- 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 25 basis
points. This rate was 8.93% and 8.97% on December 31, 1999 and 1998,
respectively. Personal lines of credit are on a floating basis and approximate
current market rates.
- ----------------------------www.omegafinancial.com---------------------[LOGO] 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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 25 to
45 basis points at December 31, 1999 and 0 to 40 basis points at December 31,
1998.
Short term borrowings and long term debt -- The carrying amounts approximate
fair value as they are on a floating basis.
ESOP debt -- The estimated fair value is determined by discounting the
contractual cash flows, using rates currently available to Omega for debt with
similar terms and remaining maturities.
Other interest bearing liabilities -- This category reprices semi-annually and
fair value is arrived at by discounting the future contractual cash flows at a
rate equivalent to the 3 month U.S. Treasury rate.
At December 31, 1999, Omega had no interest rate swap agreements. 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 (See Note 13).
<TABLE>
<CAPTION>
(in thousands)
December 31, 1999 December 31, 1998
------------------------------ ------------------------------
Book Fair Book Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and due from banks .................................. $ 36,580 $ 36,580 $ 40,066 $ 40,066
Interest bearing deposits ................................ 872 872 1,455 1,455
Federal funds sold ....................................... 1,975 1,975 18,350 18,350
Investment securities held to maturity ................... 4,951 5,001 116,829 117,954
Investment securities available for sale ................. 267,718 267,718 144,551 144,551
Loans (net of unearned interest):
Commercial, financial and agricultural ................ 107,093 105,450 97,901 96,037
Real estate -- commercial ............................. 204,809 200,757 198,987 198,496
Real estate -- construction ........................... 16,039 15,802 15,890 15,993
Real estate -- mortgage ............................... 200,561 195,305 227,846 229,437
Home equity ........................................... 91,711 90,580 83,800 84,172
Personal .............................................. 82,079 83,536 94,987 96,102
Lease financing ....................................... 2,656 2,672 3,556 3,577
Allowance for loan losses ............................. (11,865) -- (11,772) --
----------- ----------- ----------- -----------
Total loans .............................................. 693,083 694,102 711,195 723,814
Interest receivable ...................................... 7,870 7,870 7,512 7,512
----------- ----------- ----------- -----------
Total financial assets ................................... $ 1,013,049 $ 1,014,118 $ 1,039,958 $ 1,053,702
=========== =========== =========== ===========
Demand deposits .......................................... $ 297,585 $ 297,585 $ 320,462 $ 320,462
Savings deposits ......................................... 154,937 154,938 155,710 155,710
Time deposits ............................................ 399,072 397,889 394,488 398,766
Short-term borrowings .................................... 28,527 28,527 17,638 17,638
ESOP debt ................................................ 3,611 3,608 3,837 3,837
Long-term debt ........................................... 7,000 6,999 5,000 4,998
Other interest bearing liabilities ....................... 600 588 585
573
Interest payable ......................................... 2,048 2,048 1,858 1,858
----------- ----------- ----------- -----------
Total financial liabilities .............................. $ 893,380 $ 892,182 $ 899,578 $ 903,842
=========== =========== =========== ===========
</TABLE>
38 [LOGO]---------------------www.omegafinancial.com----------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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 $10,381,000
and $10,109,000 as of December 31, 1999 and 1998, respectively.
4. INVESTMENT SECURITIES (IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------
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>
Investment in low income housing projects ........................... $ 592 $ 592 N/M $ -- $ --
Non-marketable stock ................................................ 4,359 4, 359 N/M --
-------- -------- ---- -------- --------
Total ............................................................... $ 4,951 $ 4,951 N/M $ -- $ --
======== ======== ==== ======== ========
<CAPTION>
December 31, 1999
----------------------------------------------------------
Securities classified as Available for Sale Gross Gross
Amortized Market Weighted Unrealized Unrealized
Type and maturity Cost Value Avg. Yield Gains Losses
- --------------------------------------------------------------------- ---------- -------- ---------- ---------- ----------
U.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year ................................................... $ 43,557 $ 43,443 5.62% $ 12 $ (126)
After one year but within five years .............................. 76,180 75,303 5.73 -- (877)
After five years but within ten years ............................. -- -- -- -- --
After ten years ................................................... -- -- -- -- --
Obligations of state and political subdivisions
- ---------------------------------------------------------------------
Within one year ................................................... 3,608 3,611 6.37 3 --
After one year but within five years .............................. 73,250 72,215 6.21 64 (1,099)
After five years but within ten years ............................. 3,333 3,199 6.05 1 (135)
After ten years ................................................... 190 190 6.33 -- --
Corporate and other securities
- ---------------------------------------------------------------------
Within one year ................................................... 10,594 10,574 6.17 17 (37)
After one year but within five years .............................. 31,473 31,262 6.11 51 (262)
After five years but within ten years ............................. 4,968 4,836 5.75 -- (132)
After ten years ................................................... 100 101 6.68 1 --
Mortgage-backed securities
- ---------------------------------------------------------------------
Within one year ................................................... 3,084 3,081 6.36 -- (3)
After one year but within five years .............................. 2,356 2,346 6.24 1 (11)
After five years but within ten years ............................. 2,762 2,756 5.90 6 (12)
After ten years ................................................... 4,252 4,239 5.70 11 (24)
Common stock ........................................................ 6,766 10,562 N/M 3,998 (202)
-------- -------- ---- -------- --------
Total ............................................................... $266,473 $267,718 5.94% $ 4,165 $ (2,920)
======== ======== ==== ======== ========
</TABLE>
- ----------------------------www.omegafinancial.com---------------------[LOGO] 39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<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
- --------------------------------------------------------------------- --------- -------- ---------- ---------- ----------
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 -- --
Non-marketable 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
- --------------------------------------------------------------------- --------- -------- ---------- ---------- ----------
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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>
40 [LOGO]---------------------www.omegafinancial.com----------------------------
<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
- -------------------------------------------------------------------- --------- -------- ---------- ---------- ----------
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 -- --
Non-marketable 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
- -------------------------------------------------------------------- --------- -------- ---------- ---------- ----------
U.S. Treasury securities and obligations of
other U.S. Government agencies
and corporations
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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>
N/M = Not meaningful
- ----------------------------www.omegafinancial.com---------------------[LOGO] 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 $107,690,000, $89,598,000
and $85,628,000 at December 31, 1999, 1998 and 1997, 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,
------------------------------
1999 1998 1997
-------- -------- --------
Gross proceeds from securities transactions ... $ 90,618 $107,648 $ 83,636
Securities available for sale:
Realized gains .............................. 286 2,913 1,422
Realized losses ............................. 97 -- 206
Securities held to maturity:
Realized gains .............................. -- -- 2
Realized losses ............................. -- -- --
5. LOANS
Loans outstanding at the end of each year consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural .......... $107,093 $ 97,901 $126,740 $131,147 $136,537
Real estate -- commercial ....................... 204,809 198,987 141,485 136,250 127,462
Real estate -- construction ..................... 16,039 15,890 21,167 19,680 18,346
Real estate -- mortgage ......................... 200,561 227,846 212,780 206,653 209,453
Home equity ..................................... 91,711 83,800 63,905 45,182 39,827
Personal ........................................ 82,079 95,060 121,813 154,587 170,529
Lease financing ................................. 2,949 4,001 4,971 4,824 4,486
-------- -------- -------- -------- --------
Total ...................................... $705,241 $723,485 $692,861 $698,323 $706,640
======== ======== ======== ======== ========
</TABLE>
Non-accrual loans at December 31, 1999 and 1998 were $2,640,000 and $5,627,000,
respectively, representing .37% and .78% of loans. Interest income not recorded
on non-accrual loans in 1999, 1998 and 1997 was $268,000, $542,000 and $401,000,
respectively. Gross interest income that would have been recorded on non-accrual
loans had these loans been in a performing status was $362,000 in 1999, of which
$94,000 was included in interest income for the year ended December 31, 1999.
42 [LOGO]---------------------www.omegafinancial.com----------------------------
<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,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance of allowance - beginning of period .............. $11,772 $11,793 $11,820 $11,668 $11,057
Loans charged off:
Commercial, financial and agricultural ................ 465 463 70 428 149
Real estate --
Commercial ......................................... 154 283 348 77 --
Mortgage ........................................... -- -- -- -- 119
Personal ............................................. 509 682 984 671 585
------- ------- ------- ------- -------
Total charge-offs .............................. 1,128 1,428 1,402 1,176 853
Recoveries of loans previously charged off:
Commercial, financial and agricultural ................ 63 146 225 181 101
Real estate --
Commercial ......................................... 15 96 6 38 --
Mortgage ........................................... -- -- -- -- 87
Personal ................................................ 83 105 114 130 147
------- ------- ------- ------- -------
Total recoveries ............................... 161 347 345 349 335
------- ------- ------- ------- -------
Net charge-offs ......................................... 967 1,081 1,057 827 518
Provision for loan losses ............................... 1,060 1,060 1,030 979 713
Allowance acquired through bank purchase ................ -- -- -- -- 416
------- ------- ------- ------- -------
Balance of allowance -- end of period ................... $11,865 $11,772 $11,793 $11,820 $11,668
======= ======= ======= ======= =======
Ratio of net charge-offs during period to
average loans outstanding ............................... 0.14% 0.15% 0.15% 0.12% 0.08%
======= ======= ======= ======= =======
</TABLE>
As of December 31, 1999, 1998 and 1997, 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 $1,237,000, $3,907,000 and $3,471,000, respectively. The
total allowance for loan losses related to those impaired loans is $374,000,
$890,000 and $585,000, at December 31, 1999, 1998 and 1997, 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 1999 1998
----------- ------- -------
<S> <C> <C> <C>
Land ............................................. -- $2,188 $2,371
Premises and leasehold improvements .............. 5-40 years 18,496 20,052
Furniture, computer software
and equipment .................................. 3-20 years 19,136 18,414
Construction in progress ......................... -- -- 194
------- -------
39,820 41,031
Less accumulated depreciation .................... (25,176) (24,215)
------- -------
$14,644 $16,816
======= =======
</TABLE>
Depreciation expense on premises and equipment charged to operations was
$1,913,000 in 1999, $1,950,000 in 1998 and $1,831,000 in 1997.
- ----------------------------www.omegafinancial.com---------------------[LOGO] 43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. BORROWINGS
Borrowings consist of the following (in thousands):
December 31,
SHORT-TERM BORROWINGS: 1999 1998
------- -------
Retail repurchase agreements .............................. $18,527 $17,638
Note payable to Federal Home Loan Bank, with variable rates
payable at Libor plus 2 basis points ................... 10,000 --
------- -------
$28,527 $17,638
======= =======
LONG-TERM DEBT:
Note payable to Federal Home Loan Bank, with variable rates
payable at Libor plus 5 basis points ................... $ 5,000 $ 5,000
Other note payable, with variable rate payable at Euro-rate
plus 1.25 basis points ................................. 2,000 --
------- -------
$ 7,000 $ 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, 1999, in the amount of
$10,000,000 with the Federal Home Loan Bank is scheduled to mature in March 2000
and was initiated to match fund a commercial loan. The $5,000,000 Federal Home
Loan Bank long-term note payable 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. The other long-term
note payable in the amount of $2,000,000 is to another financial institution.
This note is payable over the next five years, maturing in 2004 and has certain
financial covenants. As of December 31, 1999, Omega was in compliance with these
covenants. The payments due from the above borrowings in aggregate are as
follows: 2000 -- $28,670,000, 2001 -- $5,285,000, 2002 -- $286,000, 2003 --
$286,000 and 2004 -- $1,000,000.
Omega has lines of credit established with various financial institutions for
overnight funding needs. These lines provided a total availability of
$18,000,000 in 1999 and 1998, with interest payable at the daily federal funds
rate. There were no borrowings on December 31, 1999 or December 31, 1998 under
these credit facilities.
Omega also has credit with the Federal Home Loan Bank of Pittsburgh with a total
borrowing capacity of $64,962,000 (including overnight borrowing) as of December
31, 1999. If the Corporation were to purchase additional Federal Home Loan Bank
stock, the maximum borrowing capacity could be increased to $264,084,000. 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, 1999, 1998 and 1997 (in thousands, except per share data).
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
------------------------------- ---------------------------- -----------------------------
Shares Shares Shares
Income Denom- Per-Share Income Denom- Per-Share Income Denom- Per-Share
Numerator inator Amount Numerator inator Amount Numerator inator Amount
------------------------------- ---------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income .......................... $ 17,362 $ 17,092 $ 16,968
Less: Preferred stock dividends ..... (396) (396) (396)
Basic EPS
Income available to common
shareholders .................... 16,966 8,838 $ 1.92 16,696 8,949 $ 1.87 16,572 8,950 $ 1.85
======== ====== ======
Effect of Dilutive Securities
Impact of :
Assumed conversion of
preferred to common stock ..... 346 346 346
Assumed exercises of
outstanding options .......... 131 180 180
Preferred stock dividends
available to common
shareholders ................ 396 396 396
Elimination of tax benefit of
allocated preferred dividends (59) (51) (45)
Additional expense required to
fund ESOP debt .............. (44) (77) (111)
------------------ ----------------- ------------------
Diluted EPS
Income available to common
shareholders plus assumed
conversions .................... $ 17,259 9,315 $ 1.85 $ 16,964 9,475 $ 1.79 $ 16,812 9,476 $ 1.77
======== ===== ======== ======== ===== ====== ======== ===== ======
</TABLE>
44 [LOGO]---------------------www.omegafinancial.com----------------------------
<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, 1999 (in
thousands):
Years ending December 31,
2000.................................. $ 281
2001.................................. 254
2002.................................. 235
2003.................................. 206
2004.................................. 165
Later years........................... 782
--------
Total minimum payments required....... $ 1,923
========
Rental expense charged to operations, net of sublease income, was $133,000,
$106,000 and $73,000 in 1999, 1998 and 1997, respectively, which includes
short-term cancellable leases.
11. INCOME TAXES
The components of income tax expense for the three years ended December 31, 1999
were (in thousands):
1999 1998 1997
------ ------ ------
Current tax expense $6,994 $7,948 $7,625
Deferred tax expense ( 99) (326) (128)
------ ------ ------
Total tax expense $6,895 $7,622 $7,497
====== ====== ======
Income tax expense related to realized securities gains was $66,000 in 1999,
$1,020,000 in 1998 and $426,000 in 1997.
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,
-------------------------------------
1999 1998 1997
---- ---- ----
Federal tax at statutory rate 35.0% 35.0% 35.0%
Tax exempt income (5.9) (4.8) (3.8)
Low income housing credits (0.4) (0.4) (0.4)
Goodwill amortization -- 0.7 --
Other, net (0.3) 0.3 (0.2)
---- ---- ----
Effective rate 28.4% 30.8% 30.6%
==== ==== ====
- ----------------------------www.omegafinancial.com---------------------[LOGO] 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, 1999 and 1998. The
components giving rise to the net deferred tax asset are detailed below (in
thousands):
December 31,
1999 1998
---------- ---------
Deferred Tax Assets
Loan loss reserve $ 4,153 $ 4,120
Deferred compensation 702 659
Employee benefits 435 429
Interest on non-accrual loans 77 215
Other 2 3
---------- ---------
Total 5,369 5,426
Deferred Tax Liabilities
Depreciation (194) (309)
Unrealized net gains on securities (578) (2,746)
Auto leases (net) (519) (575)
Other (450) (490)
Total (1,741) (4,120)
Net deferred tax asset
---------- ---------
included in other assets $ 3,628 $ 1,306
========== =========
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 (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C> <C>
Net income ............................ As reported ......... $ 17,362 $ 17,092 $ 16,968
Pro forma ........... 16,705 16,350 16,336
Basic earnings per share .............. As reported ......... $ 1.92 $ 1.87 $ 1.85
Pro forma ........... 1.85 1.79 1.78
Diluted earnings per share ............ As reported ......... $ 1.85 $ 1.79 $ 1.77
Pro forma ........... 1.78 1.71 1.70
</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.
The above computations were derived using the Black-Scholes option pricing model
with the following weighted average assumptions used for options granted in
1999, 1998 and 1997:
46 [LOGO]---------------------www.omegafinancial.com----------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<TABLE>
<CAPTION>
Options Granted in 1999 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 ........................ 5.96% 6.44% 6.44%
Expected volatility ............................ 13.99% 15.35% 15.35%
Expected dividend yield ........................ 2.76% 2.76% 2.76%
Options Granted in 1998 Employee Employee Director
Stock Purchase Plan Stock Option Plan (1996) Stock Option Plan
------------------- ------------------------ -----------------
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%
Options Granted in 1997 Employee Employee Director
Stock Purchase Plan Stock Option Plan (1996) Stock Option Plan
------------------- ------------------------ -----------------
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%
</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, 2004. The aggregate number of shares which may be
issued upon the exercise of options under this plan is 1,125,000 shares. All
ESPP options outstanding at December 31, 1999 have current exercise prices of
$25.65 and a weighted average remaining contractual life of 4.17 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, 2009. 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, 1999 have
exercise prices between $10.00 and $33.50, with a weighted average exercise
price of $23.52 and a weighted average remaining contractual life of 6.42 years.
319,869 of these options are exercisable; their weighted average exercise price
is $21.97.
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, 2009. 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, 1999 have exercise prices between $16.33 and $38.13, with a
weighted average exercise price of $28.06 and a weighted average remaining
contractual life of 7.20 years. 11,900 of these options are exercisable; their
weighted average exercise price is $25.87.
A summary of the status of Omega's three stock-based compensation plans as of
December 31, 1999, 1998 and 1997, and changes during the years ending on those
dates is presented below:
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
Employee Stock Purchase Plans Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Share Exercise Price Shares Exercise Price
------- ---------------- ------- ---------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ................. 183,423 $ 27.01 169,175 $ 25.28 187,123 $ 19.17
Granted .......................................... 82,670 25.65 86,929 27.23 86,603 30.15
Exercised ........................................ (73,997) 24.80 (69,346) 22.91 (103,414) 18.33
Forfeited ........................................ (2,016) 28.61 (3,335) 25.10 (1,137) 22.37
-------- -------- --------
Outstanding at end of year ....................... 190,080 25.65 183,423 27.01 169,175 25.28
======== ======== ========
Options exercisable at year-end .................. 190,080 183,423 169,175
Weighted-average fair value of
options granted during the year ............. $ 6.23 $ 7.48 $ 4.18
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
Employee Stock Purchase Plans Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Share Exercise Price Shares Exercise Price
------- ---------------- ------- ---------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ................. 380,065 $ 20.63 321,897 $ 17.33 283,090 $ 15.45
Granted .......................................... 75,877 30.25 73,952 33.50 67,902 23.33
Exercised ........................................ (60,196) 13.54 (15,784) 13.87 (29,095) 13.03
Forfeited ........................................ (2,250) 30.25 -- -- -- --
-------- -------- --------
Outstanding at end of year ....................... 393,496 23.52 380,065 20.63 321,897 17.33
======== ======== ========
Options exercisable at year-end .................. 319,869 306,113 253,995
Weighted-average fair value of
options granted during the year ............. $ 6.40 $ 6.35 $ 5.13
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
Director Stock Purchase Plans Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Share Exercise Price Shares Exercise Price
------- ---------------- ------- ---------------- --------------------------
Outstanding at beginning of year ................. 11,900 $ 25.87 10,800 $ 20.78 10,800 $ 18.28
Granted .......................................... 3,500 35.50 3,500 38.13 2,700 28.28
Exercised ........................................ -- -- (2,400) 20.77 (2,700) 18.28
Forfeited ........................................ -- -- --
------- ------- -------
Outstanding at end of year ....................... 15,400 28.06 11,900 25.87 10,800 20.78
======= ======= =======
Options exercisable at year-end .................. 11,900 8,400 8,100
Weighted-average fair value of
options granted during the year ............. $ 7.51 $ 7.15 $ 5.61
</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,
1999, 1998 and 1997, expenses incurred under this plan were $1,515,000,
$1,521,000 and $1,623,000, respectively. The level of annual contributions are
based upon a percentage of employee salary expense. 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 1999, 29,919 shares of
Omega common stock were acquired at a cost of $947,000 and $93,000 was applied
to debt service. 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. At December 31, 1999 the ESOP holds 479,285 shares of Omega common
stock and 219,781 shares of preferred stock. Of the preferred stock, 93,917 of
the shares have been allocated to participants of the plan as of December 31,
1999, based upon principal repayment of the debt outstanding. 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 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 the
Corporation's guarantee.
48 [LOGO]---------------------www.omegafinancial.com----------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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
1999, the debt service required was $489,000, of which $263,000 represented
interest expense incurred by the ESOP. In 1998, the debt service required was
$512,000, of which $315,000 represented interest expense incurred by the ESOP.
Outstanding ESOP debt as of December 31, 1999 was $3,611,000. Scheduled
principal repayments on the ESOP debt are as follows:
2000 ....................... $ 242,000
2001 ....................... 259,000
2002 ....................... 278,000
2003 ....................... 298,000
2004 ....................... 319,000
Later years ................ 2,215,000
DEFINED CONTRIBUTION PLAN
Omega maintains a defined contribution plan for eligible employees as defined.
Contributions to the plan totaled $152,000, $160,000 and $142,000 for the years
ended December 31, 1999, 1998 and 1997, 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, 1999, three
officers were designated to be paid these supplemental retirement benefits. The
liability for these future ESI obligations was $1,405,000 and $1,299,000 at
December 31, 1999 and 1998, respectively. For the years ended December 31, 1999,
1998 and 1997, $129,000, $131,000 and $133,000, respectively, were charged to
operations in connection with this program.
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
$42,937,000 and $38,886,000 at December 31, 1999 and 1998, respectively. In
addition, the Corporation had $97,849,000 and $89,765,000 outstanding in unused
lines of credit commitments extended to its customers at December 31, 1999 and
1998, respectively.
There were no financial guarantees or options outstanding at December 31, 1999.
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.
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, 1999 and 1998, standby letters of credit issued and outstanding
amounted to $17,022,000 and $18,289,000, respectively.
- ----------------------------www.omegafinancial.com---------------------[LOGO] 49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Omega has used interest rate contracts to help manage its interest rate risk
associated with its commercial loans whose rates float with the prime rate.
These contracts have included 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, the Corporation had the following interest rate swap
agreements in place:
Notional Amount
Maturity Fixed Rate (in thousands)
-------- ---------- --------------
2/26/99 8.14% 10,000
3/1/99 8.47 10,000
3/4/99 8.47 10,000
On these agreements the Corporation paid the prime rate and received the fixed
rate.
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, 1999, 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 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.
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.
During the first quarter of 1999, Omega announced a board-approved share
repurchase program. Omega is authorized to buy back up to 5% of its common stock
over a twelve-month period. The program may be discontinued at any time. On
February 22, 1999, when the repurchase program was initiated, there were
8,959,319 common shares outstanding, with 447,966 shares eligible to be
repurchased through this program. As of December 31, 1999, 296,586 shares have
been repurchased under this program, representing 66% of the approved level.
50 [LOGO]---------------------www.omegafinancial.com----------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. OTHER COMPREHENSIVE INCOME
Components of other comprehensive income (loss) consist of the following (in
thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1999
-------------------------------------------------
Before Tax (Expense)
Tax or Net-of-Tax
Amount Benefit Amount
------- ------- -------
<S> <C> <C> <C>
Unrealized gains on available for sale securities:
Unrealized holding losses arising during the period .................... $(6,301) $ 2,205 $(4,096)
Cumulative effect of change in accounting principle .................... 653 (228) 425
Less reclassification adjustment for
gains included in net income ....................................... (346) 121 (225)
------- ------- -------
Other comprehensive income (loss) ...................................... $(5,994) $ 2,098 $(3,896)
======= ======= =======
<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
======= ======= =======
</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 $13,461,000, $13,873,000 and $13,020,000 at
December 31, 1999, 1998 and 1997, respectively. During 1999, $3,067,000 of new
loans were made and repayments totaled $3,479,000. None of these loans were past
due, in non-accrual status or restructured at December 31, 1999.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. OMEGA FINANCIAL CORPORATION (PARENT COMPANY ONLY)
Financial information (in thousands):
CONDENSED BALANCE SHEETS
(Unaudited)
December 31,
----------------------
1999 1998
-------- --------
ASSETS:
Cash ............................................. $ 3,217 $ 7,042
Investment in bank subsidiaries .................. 137,803 132,434
Investment in non-bank subsidiaries .............. 10,946 13,460
Premises and equipment, net ...................... 6,848 7,053
Other assets ..................................... 1,508 1,225
-------- --------
TOTAL ASSETS ....................................... $160,322 $161,214
======== ========
LIABILITIES:
Dividends payable ................................ $ 2,192 $ 1,976
Accounts payable and other liabilities ........... 1,368 1,421
Long-term debt ................................... 2,000 --
ESOP debt ........................................ 3,611 3,837
-------- --------
TOTAL LIABILITIES .................................. 9,171 7,234
SHAREHOLDERS' EQUITY ............................... 151,151 153,980
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $160,322 $161,214
======== ========
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INCOME:
Dividends from:
Bank subsidiaries ............................ $ 10,706 $ 7,739 $ 4,864
Non-bank subsidiaries ........................ -- -- --
Management fees from subsidiaries .............. 10,820 10,038 9,250
Other income ................................... 1 -- --
-------- -------- --------
TOTAL INCOME ..................................... 21,527 17,777 24,114
EXPENSE:
Interest expense ............................... 73 6 4
Other .......................................... 10,968 10,038 9,250
-------- -------- --------
TOTAL EXPENSE .................................... 11,041 10,044 9,254
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES .... 10,486 7,733 14,860
Income tax expense (benefit) ..................... (126) 93 33
-------- -------- --------
10,612 7,640 14,827
Equity in undistributed net income of subsidiaries 6,750 9,452 2,141
-------- -------- --------
NET INCOME ....................................... $ 17,362 $ 17,092 $ 16,968
======== ======== ========
</TABLE>
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 17,362 $ 17,092 $ 16,968
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................................... 1,072 1,040 926
Decrease (increase) in tax receivable ................................. 81 (9) (80)
Decrease (increase) in interest and other receivable .................. (364) 184 360
Increase (decrease) in taxes payable .................................. (77) 351 (246)
Increase in accounts payable and accrued expenses ..................... 8 673 642
Undistributed earnings of subsidiaries ................................ (6,751) (10,453) (2,291)
-------- -------- --------
Total adjustments ................................................... (6,031) (8,214) (689)
-------- -------- --------
Net cash provided by operating activities ................................. 11,331 8,878 16,279
Cash flows from investing activities:
Capital expenditures .................................................... (843) (758) (1,157)
-------- -------- --------
Net cash used in investing activities ..................................... (843) (758) (1,157)
Cash flows from financing activities:
Dividends paid .......................................................... (8,563) (7,185) (6,027)
Net change in interest bearing liabilities .............................. 16 5 38
Increase in borrowings .................................................. 2,000 -- --
Tax benefit from preferred stock dividend
and stock option activity ............................................. 336 332 414
Issuance of common stock ................................................ 2,229 1,815 616
Acquisition of treasury stock ........................................... (10,331) (705) (8,428)
-------- -------- --------
Net cash used in financing activities ..................................... (14,313) (5,738) (13,387)
-------- -------- --------
Net (decrease) increase in cash and due from banks ........................ $ (3,825) $ 2,382 $ 1,735
======== ======== ========
Cash and due from banks at beginning of period ............................ $ 7,042 $ 4,660 $ 2,925
Cash and due from banks at end of period .................................. 3,217 7,042 4,660
-------- -------- --------
Net (decrease) increase in cash and due from banks ........................ $ (3,825) $ 2,382 $ 1,735
======== ======== ========
Income taxes paid ......................................................... $ 6,981 $ 7,364 $ 7,015
</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, 1999, the total dividends which could
be paid to Omega without permission from the Comptroller of the Currency was
$28,889,000.
Under Federal Reserve restrictions, the banking subsidiaries are limited to the
amount they may loan to their affiliates, including Omega. At December 31, 1999,
Omega's banks had an aggregate lending limit to affiliates of $22,642,000 and no
amount was outstanding with Omega.
- ----------------------------www.omegafinancial.com---------------------[LOGO] 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,
1999 and 1998 follow (in thousands, except per share data).
<TABLE>
<CAPTION>
1999 Quarter ended
-------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total interest income .............................. $19,006 $18,506 $18,609 $18,372
Net interest income ................................ 12,261 11,588 11,596 11,343
Provision for loan losses .......................... 265 340 265 190
Income before income taxes ......................... 6,359 6,909 5,729 5,260
Applicable income taxes ............................ 1,880 1,969 1,597 1,449
Net income ......................................... 4,479 4,940 4,132 3,811
Basic earnings per share ........................... $ .49 $ .55 $ .46 $ .42
Diluted earnings per share ......................... .47 .53 .44 .41
<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
</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, 1999 and 1998, that Omega and its bank subsidiaries meet all
capital adequacy requirements to which they were subject.
As of December 31, 1999, 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 [LOGO]---------------------www.omegafinancial.com----------------------------
<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 (in thousands):
<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, 1999:
Total Capital ....................................... $158,528 22.5% $ 56,420 8.0% $ 70,525 10.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 149,671 21.2% 28,210 4.0% 42,315 6.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 149,671 14.1% 42,508 4.0% 53,135 5.0%
(to Average Assets)
As of December 31, 1998:
Total Capital ....................................... $158,160 22.1% $ 57,334 8.0% $ 71,668 10.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 149,162 20.8% 28,667 4.0% 43,001 6.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 149,162 14.5% 41,067 4.0% 51,334 5.0%
(to Average Assets)
OMEGA BANK
As of December 31, 1999:
Total Capital ....................................... $ 85,099 21.3% $ 31,976 8.0% $ 39,970 10.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 80,097 20.0% 15,988 4.0% 23,982 6.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 80,097 13.6% 23,536 4.0% 29,420 5.0%
(to Average Assets)
As of December 31, 1998:
Total Capital ....................................... $ 80,438 19.9% $ 32,333 8.0% $ 40,416 10.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 75,385 18.7% 16,166 4.0% 24,250 6.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 75,385 13.2% 22,798 4.0% 28,498 5.0%
(to Average Assets)
HOLLIDAYSBURG TRUST COMPANY
As of December 31, 1999:
Total Capital ....................................... $ 37,171 20.5% $ 14,536 8.0% $ 18,170 10.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 34,885 19.2% 7,268 4.0% 10,902 6.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 34,885 12.9% 10,780 4.0% 13,476 5.0%
(to Average Assets)
As of December 31, 1998:
Total Capital ....................................... $ 34,168 18.9% $ 14,478 8.0% $ 18,098 10.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 31,893 17.6% 7,239 4.0% 10,859 6.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 31,893 12.5% 10,206 4.0% 12,757 5.0%
(to Average Assets)
PENN CENTRAL NATIONAL BANK
As of December 31, 1999:
Total Capital ....................................... $ 25,452 24.0% $ 8,502 8.0% $ 10,627 10.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 24,105 22.7% 4,251 4.0% 6,376 6.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 24,105 13.1% 7,349 4.0% 9,186 5.0%
(to Average Assets)
As of December 31, 1998:
Total Capital ....................................... $ 25,169 22.8% $ 8,837 8.0% $ 11,046 10.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 23,764 21.5% 4,418 4.0% 6,628 6.0%
(to Risk Weighted Assets)
Tier I Capital ...................................... 23,764 13.0% 7,297 4.0% 9,121 5.0%
(to Average Assets)
</TABLE>
- ----------------------------www.omegafinancial.com---------------------[LOGO] 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,
1999 and 1998, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ Arthur Anderson LLP
Lancaster, Pa.
January 21, 2000
56 [LOGO]---------------------www.omegafinancial.com----------------------------
EXHIBIT 21.1
SUBSIDIARIES OF OMEGA FINANCIAL CORPORATION
Name of Subsidiary State or Jurisdiction Trade Name
of Incorporation (if any)
- --------------------------------------------------------------------------------
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 -
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN L.L.P.
<PAGE>
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 21, 2000, 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, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000705671
<NAME> OMEGA FINANCIAL CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 36,580
<INT-BEARING-DEPOSITS> 872
<FED-FUNDS-SOLD> 1,975
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 4,951
<INVESTMENTS-MARKET> 267,718
<LOANS> 704,948
<ALLOWANCE> 11,865
<TOTAL-ASSETS> 1,053,403
<DEPOSITS> 851,595
<SHORT-TERM> 28,527
<LIABILITIES-OTHER> 15,130
<LONG-TERM> 7,000
0
2,375
<COMMON> 148,776
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,053,403
<INTEREST-LOAN> 58,634
<INTEREST-INVEST> 14,305
<INTEREST-OTHER> 1,554
<INTEREST-TOTAL> 74,493
<INTEREST-DEPOSIT> 26,255
<INTEREST-EXPENSE> 27,705
<INTEREST-INCOME-NET> 46,788
<LOAN-LOSSES> 1,060
<SECURITIES-GAINS> 345
<EXPENSE-OTHER> 33,597
<INCOME-PRETAX> 24,257
<INCOME-PRE-EXTRAORDINARY> 17,362
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,362
<EPS-BASIC> 1.92
<EPS-DILUTED> 1.85
<YIELD-ACTUAL> 4.65
<LOANS-NON> 2,640
<LOANS-PAST> 619
<LOANS-TROUBLED> 184
<LOANS-PROBLEM> 3,443
<ALLOWANCE-OPEN> 11,772
<CHARGE-OFFS> 1,128
<RECOVERIES> 161
<ALLOWANCE-CLOSE> 11,865
<ALLOWANCE-DOMESTIC> 11,865
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
