UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-13599
OMEGA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1420888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
366 Walker Drive, State College, PA 16801
(Address of principal executive offices)
(Zip Code)
(814) 231-7680
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
The number of shares outstanding of each of the issuer's classes of common stock
as of October 30, 2002:
8,111,525 shares of Common Stock, $5.00 par value
PART I. Financial Information
Item 1. Financial Statements
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Unaudited
September 30, December 31,
2002 2001
------------- ------------
Assets
Cash and due from banks $ 43,497 $ 39,072
Interest bearing deposits with other banks 2,638 31,812
Federal funds sold 6,780 14,450
Investment securities held to maturity (Market value:
$5,051 and $3,851, respectively) 5,051 3,851
Investment securities available for sale 258,626 263,501
Total loans 791,280 760,395
Less: Unearned discount (15) (41)
Allowance for loan losses (11,455) (11,224)
----------- -----------
Net loans 779,810 749,130
Premises and equipment, net 14,716 15,563
Other assets 41,322 41,250
----------- -----------
TOTAL ASSETS $ 1,152,440 $ 1,158,629
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 151,952 $ 138,433
Interest bearing 771,453 793,234
----------- -----------
Total deposits 923,405 931,667
Short-term borrowings 38,043 37,572
Other liabilities 10,872 12,093
ESOP debt 2,903 3,110
Long-term debt 16,452 17,234
Other interest bearing liabilities 722 703
----------- -----------
TOTAL LIABILITIES 992,397 1,002,379
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 (1,939) (2,125)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares;
Issued -
9,590,689 shares at September 30, 2002;
9,447,623 shares at December 31, 2001
Outstanding -
8,108,391 shares at September 30, 2002;
8,222,010 shares at December 31, 2001 47,953 47,238
Capital surplus 10,212 7,856
Retained earnings 136,510 129,774
Accumulated other comprehensive income 7,051 4,943
Cost of common stock in treasury:
1,482,298 shares at September 30, 2002;
1,225,613 shares at December 31, 2001 (44,744) (36,436)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 160,043 156,250
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,152,440 $ 1,158,629
=========== ===========
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Interest Income:
Interest and fees on loans $ 13,353 $ 15,229 $ 40,002 $ 46,812
Interest and dividends on investment securities 2,821 3,389 8,973 9,934
Other interest income 64 263 314 1,164
------------ ------------ ------------ ------------
TOTAL INTEREST INCOME 16,238 18,881 49,289 57,910
Interest Expense:
Interest on deposits 4,257 7,080 13,997 21,989
Interest on short-term borrowings 184 350 574 1,332
Interest on long-term debt and
other interest bearing liabilities 196 251 601 781
------------ ------------ ------------ ------------
TOTAL INTEREST EXPENSE 4,637 7,681 15,172 24,102
------------ ------------ ------------ ------------
NET INTEREST INCOME 11,601 11,200 34,117 33,808
Provision for loan losses 150 101 630 101
------------ ------------ ------------ ------------
INCOME FROM CREDIT ACTIVITIES 11,451 11,099 33,487 33,707
Other Income:
Service fees on deposit accounts 1,423 1,030 3,575 3,077
Trust fees 891 787 2,819 2,527
Gain (loss) on sale of loans and other assets 5 14 68 14
Net gains on investment securities 259 5 409 320
Other 1,463 1,337 4,313 3,901
------------ ------------ ------------ ------------
TOTAL OTHER INCOME 4,041 3,173 11,184 9,839
Other Expense:
Salaries and employee benefits 4,987 4,956 14,740 14,700
Net occupancy expense 564 537 1,690 1,729
Equipment expense 664 509 1,882 1,637
Data processing service 420 405 1,246 1,196
Other 2,305 2,418 7,314 7,235
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSE 8,940 8,825 26,872 26,497
------------ ------------ ------------ ------------
Income before taxes 6,552 5,447 17,799 17,049
Income tax expense 1,652 1,283 4,191 4,240
------------ ------------ ------------ ------------
NET INCOME $ 4,900 $ 4,164 $ 13,608 $ 12,809
============ ============ ============ ============
Net income per common share:
Basic $ 0.59 $ 0.49 $ 1.62 $ 1.51
Diluted $ 0.57 $ 0.48 $ 1.57 $ 1.46
Weighted average shares and equivalents:
Basic 8,183,890 8,233,574 8,214,545 8,311,576
Diluted 8,627,913 8,677,456 8,651,377 8,743,789
Dividends declared per share:
Common $ .28 $ .27 $ .84 $ .80
Preferred $ .45 $ .45 $ 1.35 $ 1.35
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
---------------------
2002 2001
-------- ---------
Cash flows from operating activities:
Net income $ 13,608 $ 12,809
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,607 1,529
Provision for loan losses 630 101
Gain on sale of investment securities (409) (215)
Non-monetary exchange of cost-method investments -- (105)
Gain on sale of fixed assets
and other property owned (9) (43)
(Gain) loss on sale of loans (59) 29
Increase in deferred tax asset (245) (397)
Increase in cash surrender value of bank owned life insurance (1,159) (800)
(Increase) decrease in interest receivable and other assets (123) 746
Decrease in interest payable (452) (434)
Increase in taxes payable 555 39
Amortization of deferred net loan costs (204) (101)
Deferral of net loan fees 405 480
Decrease in accounts payable
and accrued expenses (1,378) (396)
-------- ---------
Total adjustments 159 433
-------- ---------
Net cash provided by operating activities 13,767 13,242
Cash flows from investing activities:
Proceeds from the sale or maturity of:
Investment securities available for sale 86,664 73,679
Investment securities held to maturity -- 55
Purchase of:
Investment securities available for sale (79,175) (112,978)
Investment securities held to maturity (1,208) (154)
Net change in interest bearing deposits with other banks 29,174 (170)
Increase in loans (36,232) (28,234)
Gross proceeds from sale of loans 4,780 87
Capital expenditures (727) (1,835)
Sale of fixed assets and other property owned 321 30
Net change in federal funds sold 7,670 35,450
-------- ---------
Net cash provided by (used in) investing activities 11,267 (34,070)
Cash flows from financing activities:
(Decrease) increase in deposits, net (8,262) 33,764
Net change in short-term borrowings 471 (8,116)
Issuance of long-term debt -- 10,872
Principal payment on long-term debt (782) (281)
Net change in other interest bearing liabilities 19 (6)
Dividends paid (7,120) (6,922)
Tax benefit from preferred stock dividend
and stock option activity 302 49
Issuance of common stock 3,071 2,192
Acquisition of treasury stock (8,308) (13,599)
-------- ---------
Net cash used in (used in) provided by financing activities (20,609) 17,953
-------- ---------
Net increase (decrease) in cash and due from banks $ 4,425 $ (2,875)
======== =========
Cash and due from banks at beginning of period $ 39,072 $ 40,340
Cash and due from banks at end of period 43,497 37,465
-------- ---------
Net increase (decrease) in cash and due from banks $ 4,425 $ (2,875)
======== =========
Interest paid $ 15,624 $ 24,536
Income taxes paid 3,622 4,350
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
A. Basis of Presentation:
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments,
including normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the nine months and
three months ended September 30, 2002 are not necessarily indicative of
the results that may be experienced for the year ending December 31, 2002
or any other interim period. For further information, refer to the
Consolidated Financial Statements and Footnotes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
The accompanying Consolidated Financial Statements include Omega Financial
Corporation (Omega), a bank holding company, and the combined results of
its wholly owned banking and non-banking subsidiaries.
B. Commitments and Contingent Liabilities:
In the ordinary course of business, Omega and its subsidiaries make
commitments to extend credit to their customers. At September 30, 2002 and
December 31, 2001, standby letters of credit issued and outstanding
amounted to $13,560,000 and $16,413,000, respectively. These letters of
credit are not reflected in the accompanying financial statements.
Management does not anticipate any significant losses as a result of these
transactions.
At September 30, 2002, the Corporation had $162,244,000 outstanding in
unused lines of credit commitments extended to its customers. Of this
amount, $38,870,000, or 24.0%, are commitments to consumers for home
equity and other lines of credit. The remaining amount of $123,374,000,
are commercial commitments.
C. Comprehensive Income:
Components of other comprehensive income consist of the following:
Nine Months Ended Sep 30, 2002 Nine Months Ended Sep 30, 2001
Before Tax Expense Before Tax Expense
Tax or Net-of-Tax Tax or Net-of-Tax
Amount (Benefit) Amount Amount (Benefit) Amount
------ --------- ------ ------ --------- ------
Net income $ 17,799 $ 4,191 $ 13,608 $ 17,049 $ 4,240 $ 12,809
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized holding gains (losses)
arising during the period 3,652 1,278 2,374 6,966 2,438 4,528
Less reclassification adjustment for
gains included in net income (409) (143) (266) (320) (112) (208)
-------- ------- -------- -------- ------- --------
Other comprehensive income (loss) 3,243 1,135 2,108 6,646 2,326 4,320
-------- ------- -------- -------- ------- --------
Total comprehensive income $ 21,042 $ 5,326 $ 15,716 $ 23,695 $ 6,566 $ 17,129
======== ======= ======== ======== ======= ========
Three Months Ended Sep 30, 2002 Three Months Ended Sep 30, 2001
Before Tax Expense Before Tax Expense
Tax or Net-of-Tax Tax or Net-of-Tax
Amount (Benefit) Amount Amount (Benefit) Amount
------ --------- ------ ------ --------- ------
Net income $ 6,552 $ 1,652 $ 4,900 $ 5,447 $ 1,283 $ 4,164
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized holding gains (losses)
arising during the period 1,647 576 1,071 3,390 1,187 2,203
Less reclassification adjustment for
gains included in net income (259) (91) (168) (5) (2) (3)
--------- --------- --------- --------- --------- ---------
Other comprehensive income (loss) 1,388 485 903 3,385 1,185 2,200
--------- --------- --------- --------- --------- ---------
Total comprehensive income $ 7,940 $ 2,137 $ 5,803 $ 8,832 $ 2,468 $ 6,364
========= ========= ========= ========= ========= =========
D. Earnings Per Share Data:
Basic earnings per share are computed by dividing income available to
common stockholders by the weighted average number of shares outstanding
for the period. On a diluted basis, both earnings and shares outstanding
are adjusted to assume the conversion of all potentially dilutive
securities into common stock.
Nine Months Ended September 30, 2002 Nine Months Ended September 30, 2001
-------------------------------------- ------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
-------------------------------------- ------------------------------------
Net income $ 13,608 $ 12,809
Less: Preferred stock dividends (297) (297)
----------- -----------
Basic EPS
Income available to common
shareholders 13,311 8,214 $ 1.62 12,512 8,312 $ 1.51
=========== ===========
Effect of Dilutive Securities
Impact of :
Assumed conversion of preferred
to common stock 346 346
Assumed exercises of outstanding
options 91 86
Preferred stock dividends
available to common
shareholders 297 297
Elimination of tax benefit of
allocated preferred dividends (60) (55)
Additional expense required to fund
ESOP debt, net of tax impact (4) (12)
-------------------------- --------------------------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $ 13,544 8,651 $ 1.57 $ 12,742 8,744 $ 1.46
======================================== ========================================
Three Months Ended September 30, 2002 Three Months Ended September 30, 2001
---------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ------ --------- ----------- ------
Net income $ 4,900 $ 4,165
Less: Preferred stock dividends (99) (99)
----------- -----------
Basic EPS
Income available to common
shareholders 4,801 8,184 $ 0.59 4,066 8,234 $ 0.49
=========== ===========
Effect of Dilutive Securities
Impact of :
Assumed conversion of preferred
to common stock 346 346
Assumed exercises of outstanding
options 98 97
Preferred stock dividends
available to common
shareholders 99 99
Elimination of tax benefit of
allocated preferred dividends (20) (18)
Additional expense required to fund
ESOP debt, net of tax impact (1) (3)
-------------------------- --------------------------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $ 4,879 8,628 $ 0.57 $ 4,144 8,677 $ 0.48
======================================== ========================================
E. Recent Accounting Pronouncements:
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal
difference between this Statement and Issue No. 94-3 relates to its
requirements for recognition of a liability for a cost associated with an
exit or disposal activity. Statement 146 requires that such a liability be
recognized when the liability is incurred as opposed to the date of an
entity's commitment to an exit plan, as defined in Issue No. 94-3. The
provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application
encouraged. The adoption of this Statement is not expected to have a
material impact on the Company's results of operations or financial
position.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of
FASB Statement No. 13, and Technical Corrections (Statement 145). Among
other things, Statement 145 eliminates the requirement under FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt to
report gains and losses from extinguishments of debt as extraordinary
items in the income statement. Similarly, FASB Statement No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements has been
rescinded. Accordingly, gains or losses from extinguishments of debt for
fiscal years beginning after May 15, 2002 shall not be reported as
extraordinary items unless the extinguishment qualifies as an
extraordinary item under the provisions of APB Opinion No. 30. Statement
145 also amends Statement 13 to require certain modifications to capital
leases be treated as a sale-leaseback and modifies the accounting for
sub-leases when the original lessee remains a secondary obligor (or
guarantor). The adoption of this Statement is not expected to have a
material impact on the Company's results of operations or financial
condition.
In October 2002, the Financial Accounting Standards Board issued Statement
No. 147, Acquisitions of Certain Financial Institutions. The Statement
provides guidance on the accounting for the acquisition of a
financial institution, which had previously been addressed in FASB
Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions. Statement 72 required that the excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable
intangible assets be recognized as an unidentifiable intangible asset.
That asset was to be amortized over a period no greater than the life of
the long-term interest-bearing assets acquired. Statement 147 states that
this excess, if acquired in a business combination, represents goodwill
that should be accounted for in accordance with FASB Statement No. 142,
Goodwill and Other Intangible Assets. The balance of previously recognized
unidentifiable intangible assets arising from a business combination
should be reclassified to goodwill as of the date the company initially
adopted Statement 142. Companies that reclassify goodwill in accordance
with the Statement are then required to restate previously issued
financial statements to present the balance sheet and income statement as
if the unidentifiable intangible asset had been reclassified as of the
date the company adopted Statement 142. The provisions of Statement 147
are effective October 1, 2002. The Company's adoption of this Statement
does not have a material impact on its results of operations or financial
position.
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Investment Considerations
In analyzing whether to make, or to continue to make, an investment in
Omega, investors should consider, among other factors, certain investment
considerations more particularly described in "Item 1: Business -
Investment Considerations" in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001. A copy of this report can be obtained
from David N. Thiel, Senior Vice President, Omega Financial Corporation,
366 Walker Drive, State College, Pennsylvania 16801.
Forward Looking Statements
The information in this Report on Form 10-Q contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934
and the regulations thereunder), including without limitation, statements
as to the future loan and deposit volumes, the allowance and provision for
possible loan losses, future interest rates and their effect on Omega's
financial condition or results of operations, the classification of
Omega's investment portfolio or as to trends or management's beliefs,
expectations or opinions and other statements other than historical facts.
Such forward looking statements are subject to risks and uncertainties and
may be affected by various factors which may cause actual results to
differ materially from those in the forward looking statements. In
addition to the factors discussed in this report, certain risks,
uncertainties and other factors, including without limitation, risks
arising from economic conditions and related uncertainties, changes in
interest rates, federal and state regulation, competition and the adequacy
of the allowance and provision for loan losses, are discussed in this
Report on Form 10-Q, the Corporation's 2001 Annual Report or in Omega's
Annual Report on Form 10-K for the year ended December 31, 2001. Copies of
these reports may be obtained from Omega upon request and without charge
(except for the exhibits thereto) as described above.
1. Comparison of the Nine and Three Months Ended September 30, 2002 and 2001
Operations Overview
A. Nine months ended September 2002 and 2001
For the first nine months of 2002, income before income taxes increased by
$750,000, or 4.4%, compared to the same period in 2001. Income from credit
activities decreased $220,000, or 0.7%. Non-interest income increased
$1,345,000 or 13.7% while non-interest expense increased $375,000, or
1.4%, compared to the same period in 2001.
The tax provision for the first nine months of 2002 decreased by $49,000,
or 1.2% when compared to the first nine months of 2001. The effective tax
rate for this period fell to 23.5% in 2002 from 24.9% for the
corresponding period in 2001. Net income increased by $799,000, or 6.2%,
in the first nine months of 2002 as compared to the same period in 2001.
B. Three months ended September 30, 2002 and 2001
The third quarter's income before income taxes increased $1,105,000, or
20.3%, when compared to the same period in 2001. Non-interest income
increased $868,000, or 27.4%, income from credit activities increased by
$352,000, or 3.2%, and non-interest expense increased by $115,000, or
1.3%, compared to the same period in 2001.
After the income tax provision (which increased by $369,000, or 28.8%
compared to the same period in 2001) was deducted from earnings, net
income was $736,000, or 17.7%, higher than the third quarter of
2001. The effective tax rate for the third quarter of 2002 was 25.2%, as
compared to the third quarter of 2001 of 23.6%.
Following are selected key ratios for the period:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Return on average assets (annualized) .......................... 1.71% 1.46% 1.57% 1.51%
Return on average equity (annualized) .......................... 12.12 10.89 11.35 11.20
Dividend payout ratio (common) ................................. 46.38 53.36 50.53 51.61
Average equity to average assets ............................... 14.08 13.38 13.87 13.50
Net Interest Income
A. Nine months ended September 30, 2002 and 2001
Omega's net interest income for the first nine months of 2002 increased by
$309,000, or 0.9%. Average earning assets increased by $14,160,000 when
compared to the first nine months of 2001. Composite yield on earning
assets was 6.17%, or 117 basis points lower than the comparable period in
2001, while cost to fund earning assets decreased by 116 basis points to
1.90%. On a fully tax equivalent basis, net interest margin was 4.57% for
both periods. See the chart below for a comparison of the components of
the net interest margin.
B. Three months ended September 30, 2002 and 2001
The net interest margin on a fully tax equivalent basis, at 4.66% for the
third quarter of 2002, was 14 basis points higher than the third quarter
of 2001, with a $3,920,000 or 0.4% decrease in average earning assets in
the third quarter of 2002 from the third quarter of 2001. Yield on earning
assets in the third quarter of 2002 decreased by 97 basis points when
compared to 2001's third quarter, while cost of funding decreased by 112
basis points, resulting in an increase in net interest income of $401,000,
or 3.6%.
Following are key net interest margin ratios (annualized):
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Yield on average earning assets ................................ 6.09% 7.06% 6.17% 7.34%
Cost to fund earning assets .................................... 1.73 2.85 1.90 3.06
Net interest margin ............................................ 4.36 4.21 4.27 4.28
Net interest margin - tax equivalent ........................... 4.66 4.52 4.57 4.57
At September 30, 2002, Omega had $444,921,000 of earning assets scheduled
to reprice over the next twelve months as compared to $472,685,000 in
interest bearing liabilities, resulting in a negative gap of $27,764,000,
or 2.4% of assets. In order to predict net interest income at risk over
the next twelve months based on hypothetical rate movements, a rate shock
simulation was performed on the balance sheet. In the event that interest
rates would decrease immediately by 100 basis points, results of the rate
shock simulation indicate that Omega's net interest income over the next
twelve months would decrease by approximately 3.0%, or $806,000.
Conversely, the results of a rate shock simulation of an immediate 100
basis point increase in interest rates indicates an increase in net
interest income of approximately $835,000, or 1.8% over a twelve-month
period. These simulations assume no volume or mix changes in the balance
sheet. There have been no material changes in reported market risk since
December 31, 2001.
Loan Loss Provision
In the third quarter of 2002, a loan loss provision of $150,000 was
recorded, bringing the year to date provision to $630,000 in 2002. In
2001, $101,000 was recorded as a provision for loan losses for the third
quarter and year to date. The increase in non-performing loans and the
analysis of loans on Omega's watch list was responsible for the increase.
Other Income and Expense
A. Nine months ended September 30, 2002 and 2001
Other income increased $1,345,000, or 13.7% in the first nine months of
2002 as compared to the same period in 2001. Excluding gains resulting
from sales of investment securities and other assets, normal operating
non-interest income rose by $1,202,000, or 12.6%. During the second
quarter of 2002, a new product was introduced to provide overdraft
coverage services to customers. Use of this product has helped to generate
an increase in fee income of $440,000. Other increases in service fee
income on deposit accounts boosted this category to a total of $498,000,
or 16.2% improvement in 2002 over the same period in 2001. Trust fee
income increased by $292,000, or 11.6% in the first nine months of 2002 as
compared to the first nine months of 2001. Earnings on the cash surrender
value of Bank Owned Life Insurance (BOLI) improved non-interest income by
$358,000 in 2002 when compared to 2001. Additionally, increases in service
fees onloans accounted for $57,000 of the total increase in non-interest
income. Investment security gains in the first nine months of 2002
exceeded those recorded in the first nine months of 2001 by $143,000, or
42.8%.
As a percentage of average assets, annualized other income net of gains
from the sale of securities and other assets was 1.24% for the first nine
months of 2002 as compared to 1.12% for 2001.
Other expenses were $375,000, or 1.4%, higher for the first nine months of
2002 than for the same period in 2001. Salaries and employee benefits were
$40,000, or 0.3% higher in the first nine months of 2002 than in the same
period in 2001. Combined occupancy and equipment expenses increased by
$206,000 compared to the same period in 2001. Data processing fees
increased by $50,000 or 4.2% because of additional new servicing needed.
Other expense increased by $79,000, or 1.1% in the first nine months of
2002 as compared to the same period in 2001, due primarily to costs
associated with setup of the new Omega Insurance Agency subsidiary.
As a percentage of average assets, annualized expenses for the period
ended September 30, 2002 were 3.11% and were 3.13% for the same period in
2001.
B. Three months ended September 30, 2002 and 2001
Other income increased $868,000, or 27.4%, in the third quarter of 2002 as
compared to the same period in 2001. Service fee income increased by
$393,000, or 38.2%, primarily as a result of the new overdraft coverage
product initiated in the second quarter of 2002. Trust fees were $104,000,
or 11.7%, higher in the third quarter of 2002 as compared to the same
period in 2001. Gains on the sale of investment securities, loans and
other assets were $245,000 higher in the third quarter of 2002 than in the
third quarter of 2001. Other non-interest income was $126,000 higher in
2002 than in 2001, primarily resulting from increases in BOLI income.
As a percentage of average assets, annualized other income net of gains on
securities, loans and other assets was 1.31 % for the third quarter of
2002 as compared to 1.11 % for the same period in 2001.
Other expenses increased $115,000, or 1.3%, in the third quarter of 2002
as compared to the same period in 2001. Salaries and employee benefits
increased $31,000, or 0.6%, in 2002 as compared to the same period in
2001. Occupancy and equipment expense in total increased by $182,000, or
17.4%, while data processing expense increased $15,000, or 3.7%, compared
to the same period in 2001. Other non-interest expenses decreased by
$113,000 or 4.7%, compared to the same period in 2001 as a result of lower
claims incurred on credit insurance.
As a percentage of average assets, annualized expenses for the quarter
ended September 30, 2002 were 3.11% and were 3.09% for the same period in
2001.
Federal Income Tax
Income tax expense decreased by $49,000, or 1.2%, in the first nine months
of 2002 compared to the same period in 2001. The effective tax rate for
the nine months ended September 30, 2002 was 23.5% compared to the same
period in 2001 when the effective tax rate was 24.9%. This improvement was
due primarily to the 12.9% increase in average outstanding tax-free
investments and loans year to date.
2. Investment Securities
Management of the investment portfolio entails evaluation and realignment
of the size and mix of the portfolio in order to balance various
characteristics of the balance sheet, including asset quality, liquidity,
yield relationships, maturity and tax planning. The following schedule
details characteristics of the investment portfolio as of September 30,
2002 and December 31, 2001.
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------
September 30, 2002
U.S. Treasury securities and obligations of other U.S.
Government agencies and corporations $ 134,304 $ 3,609 $ 0 $ 137,913
Obligations of state and
political subdivisions 91,670 3,425 -- 95,095
Corporate securities 9,078 136 -- 9,214
Mortgage backed securities 6,013 132 (10) 6,135
Equity securities 6,724 3,585 (40) 10,269
--------------------------------------------------
Total $ 247,789 $ 10,887 $ (50) $ 258,626
==================================================
Securities Classified as Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------
September 30, 2002
Investment in low-income housing $ 748 -- -- $ 748
Equity securities (non-marketable) 4,303 -- -- 4,303
--------------------------------------------------
Total $ 5,051 $ -- $ -- $ 5,051
==================================================
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------
December 31, 2001
U.S. Treasury securities and obligations of other U.S. Govern-
ment agencies and corporations $ 114,261 $ 2,227 $ 0 $ 116,488
Obligations of state and
political subdivisions 107,383 1,728 (6) 109,105
Corporate securities 19,439 396 (49) 19,786
Mortgage backed securities 8,020 212 -- 8,232
Equity securities 6,804 3,152 (66) 9,890
--------------------------------------------------
Total $ 255,907 $ 7,715 ($ 121) $ 263,501
==================================================
Securities Classified as Held to Maturity
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------
December 31, 2001
Investment in low-income housing $ 694 -- -- $ 694
Equity securities (non-marketable) 3,157 -- -- 3,157
--------------------------------------------------
Total $ 3,851 $ -- $ -- $ 3,851
==================================================
Total investment securities as a percentage of total assets at September
30, 2002 and December 31, 2001 were 22.9% and 23.1%, respectively.
Securities maturing or repricing in one year or less comprised 31.8% of
the total investment securities of $263,677,000 as of September 30, 2002,
as compared to 32.0% of total investment securities of $267,352,000 as of
December 31, 2001. There was $210,000 in investments in instruments of
foreign countries on September 30, 2002.
3. Loans
Net loans in the first nine months of 2002 increased by $30,680,000, or
4.1% from the balance at December 31, 2001, bringing the total to
$779,810,000 at September 30, 2002. The growth in the loan portfolio is
primarily in the commercial mortgage loan category. Residential mortgage
loans have not changed, while other personal consumer loans have declined
by $20,000,000.
Changes in the allowance for loan losses for the nine months ended
September 30, 2002 and 2001 were as follows (in thousands):
2002 2001
---------- ----------
Balance at January 1 ..................... $ 11,224 $ 11,622
Charge-offs .............................. (478) (522)
Recoveries ............................... 79 278
---------- ----------
Net charge-offs ...................... (399) (244)
Provision for loan losses ................ 630 101
---------- ----------
Balance at September 30 .................. $ 11,455 $ 11,479
========== ==========
Management believes that the allowance for loan losses is adequate, based
upon its analysis of the loans, current economic conditions and certain
risk characteristics of the loan portfolio. This determination is made
through a structured review of impaired loans, non-performing loans and
certain performing loans designated as potential problems. The allowance
for loan losses at September 30, 2002 and 2001 represented 1.45% and
1.47%, respectively, of the total loans outstanding, net of unearned
interest.
Set forth below is an analysis of Omega's non-performing loans as of
September 30, 2002 as compared to December 31, 2001.
Non-performing Loans
(In thousands)
September 30, December 31,
2002 2001
---------- ----------
Non-accrual loans ........................ $ 2,436 $ 2,327
Accruing loans past due 90 days or more .. 1,976 1,209
Restructured loans ....................... 14 32
---------- ----------
Total non-performing loans ............... $ 4,426 $ 3,568
========== ==========
Non-performing loans as percent of allowance 38.6% 31.8%
The increase in non-performing loans from December 31, 2001 to September
30, 2002 is primarily due to an increase in loans delinquent by more than
90 days.
4. Deposits and Other Sources of Funds
Deposits provide the primary source of funding for loans and investment
securities. At September 30, 2002, total deposits decreased by $8,262,000
or 0.9%, as compared to December 31, 2001. As of September 30, 2002,
interest bearing deposits have decreased by $21,781,000, or 2.7% and
non-interest bearing accounts have increased by $13,519,000 or 9.8%, when
compared to September 30 2001.
5. Regulatory Capital Compliance
Bank regulatory authorities in the United States issue risk-based capital
standards. These capital standards relate a banking company's capital to
the risk profile of its assets and provide the basis by which all banking
companies and banks are evaluated in terms of capital adequacy. The
risk-based capital standards require all banks to have Tier 1 capital of
at least 4% and total capital, including Tier 1 capital, of at least 8% of
risk-adjusted assets. Tier 1 capital includes common stockholders' equity
and qualifying perpetual preferred stock together with related surpluses
and retained earnings. Total capital is comprised of Tier 1 capital,
limited life preferred stock, qualifying debt instruments, and the
reserves for possible loan losses. Banking regulators have also issued
leverage ratio requirements. The leverage ratio requirement is measured as
the ratio of Tier 1 capital to adjusted average assets.
At September 30, 2002, Omega and each of its banking subsidiaries met the
regulatory definition of a "well capitalized" financial institution, i.e.,
a leverage ratio exceeding 5%, Tier 1 capital exceeding 6% and total
capital exceeding 10%.
6. Share Repurchase Program
In January of 2002, the Board approved a new share repurchase program to
begin immediately, authorizing management to buy back an additional 10% of
its common stock. At that time, there were 8,222,010 common shares
outstanding with 822,201 shares eligible to be repurchased. This program
will remain in effect through December 31, 2002, or until the 10% limit is
reached; however, it may be discontinued at any time. As of October 21,
2002, 252,267 shares have been repurchased in conjunction with this
program.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omega is impacted by market risks, and has procedures in place to evaluate
and mitigate these risks. These market risks and Omega's procedures are
described in the Management's Discussion and Analysis section of the 2001
Annual Report to Shareholders. To the knowledge of Omega, there have been
no material changes in the market risks that impact Omega or their
procedures relative to these risks, since December 31, 2001.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14(c) and 15d-14(c) as of a date within 90 days
of the filing date of this Quarterly Report on Form 10-Q, the Company's
principal executive officer and principal financial officer have concluded
that the Company's disclosure controls and procedures are effective.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the principal executive
officer's and principal financial officer's evaluation referred to above,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
PART II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period.
Exhibits:
Exhibit
Number Description
99.1 Chief Executive Officer's Certificate
99.2 Chief Financial Officer's Certificate
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMEGA FINANCIAL CORPORATION
---------------------------
(Registrant)
October 31, 2002 By: /s/ David B. Lee
- ---------------- ----------------------------
Date David B. Lee
Chairman and
Chief Executive Officer
October 31, 2002 /s/ Daniel L. Warfel
- ---------------- ----------------------------
Date Daniel L. Warfel
Executive Vice President and
Chief Financial Officer
Certifications
I, David B. Lee, certify that:
1. I have reviewed the quarterly report on Form 10-Q of Omega Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered in this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 31, 2002 /s/ David B. Lee
------------------------------------
David B. Lee
Chairman and Chief Executive Officer
(principal executive officer)
I, Daniel L. Warfel, certify that:
1. I have reviewed the quarterly report on Form 10-K of Omega Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered in this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 31, 2002 /s/ Daniel L. Warfel
------------------------------------
Daniel L. Warfel
Executive Vice President and
Chief Financial Officer (principal
financial officer)