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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 March 31, 2003
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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.
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 May 7, 2003:
8,116,352 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
March 31, December 31,
Assets 2003 2002
----------- ------------
Cash and due from banks $ 39,790 $ 36,049
Interest bearing deposits with other banks 15,641 8,757
Federal funds sold 23,500 33,900
Investment securities available for sale 244,134 251,508
Total loans 792,919 779,830
Less: Unearned discount (8) (11)
Allowance for loan losses (11,034) (11,052)
----------- -----------
Net loans 781,877 768,767
Premises and equipment, net 14,474 14,719
Bank-owned life insurance 32,126 31,739
Other assets 10,369 9,118
----------- -----------
TOTAL ASSETS $ 1,161,911 $ 1,154,557
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 147,551 $ 148,498
Interest bearing 771,431 770,757
----------- -----------
Total deposits 918,982 919,255
Short-term borrowings 31,791 41,452
Other liabilities 20,875 11,909
ESOP debt 2,756 2,832
Long-term debt 22,460 16,237
Other interest bearing liabilities 755 762
----------- -----------
TOTAL LIABILITIES 997,619 992,447
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 (1,814) (1,875)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares;
Issued -
9,634,159 shares at March 31, 2003;
9,607,076 shares at December 31, 2002
Outstanding -
8,119,361 shares at March 31, 2003;
8,099,778 shares at December 31, 2002 48,171 48,035
Capital surplus 11,086 10,529
Retained earnings 140,604 138,821
Accumulated other comprehensive income 7,157 7,243
Cost of common stock in treasury:
1,514,798 shares at March 31, 2003;
1,507,298 shares at December 31, 2002 (45,912) (45,643)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 164,292 162,110
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,161,911 $ 1,154,557
=========== ===========
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Unaudited
Three Months Ended
March 31,
2003 2002
---------- ----------
Interest Income:
Interest and fees on loans $ 12,322 $ 13,355
Interest and dividends on investment securities 2,324 3,102
Other interest income 97 170
---------- ----------
TOTAL INTEREST INCOME 14,743 16,627
Interest Expense:
Interest on deposits 3,404 5,099
Interest on short-term borrowings 123 191
Interest on long-term debt and
other interest bearing liabilities 216 205
---------- ----------
TOTAL INTEREST EXPENSE 3,743 5,495
---------- ----------
NET INTEREST INCOME 11,000 11,132
Provision for loan losses 100 230
---------- ----------
INCOME FROM CREDIT ACTIVITIES 10,900 10,902
Other Income:
Service fees on deposit accounts 1,404 981
Service fees on loans 402 272
Earnings on bank-owned life insurance 386 389
Trust fees 892 1,051
Brokerage fees 110 --
Gain on sale of loans and other assets 4 64
Net gains on investment securities 31 92
Other 667 766
---------- ----------
TOTAL OTHER INCOME 3,896 3,615
Other Expense:
Salaries and employee benefits 4,939 4,884
Net occupancy expense 630 560
Equipment expense 715 570
Data processing service 419 407
Other 2,673 2,523
---------- ----------
TOTAL OTHER EXPENSE 9,376 8,944
---------- ----------
Income before taxes 5,420 5,573
Income tax expense 1,198 1,324
---------- ----------
NET INCOME $ 4,222 $ 4,249
========== ==========
Net income per common share:
Basic $ .51 $ .50
Diluted $ .49 $ .49
Weighted average shares and equivalents:
Basic 8,100,962 8,233,767
Diluted 8,528,178 8,681,610
Dividends declared per share:
Common $ .29 $ .28
Preferred $ .45 $ .45
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 4,222 $ 4,249
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 947 721
Provision for loan losses 100 230
Gain on sale of investment securities (31) (92)
Gain on sale of fixed assets
and other property owned (1) --
Gain on sale of loans (3) (64)
Increase in deferred tax asset (115) (82)
Increase in cash surrender value of bank owned life insurance (386) (389)
Increase in interest receivable and other assets (1,095) (1,791)
Decrease in interest payable (52) (211)
Increase in taxes payable 936 1,331
Amortization of deferred net loan fees (153) (75)
Deferral of net loan fees 216 143
Increase (decrease) in accounts payable
and accrued expenses 8,079 (1,233)
-------- --------
Total adjustments 8,442 (1,512)
-------- --------
Net cash provided by operating activities 12,664 2,737
Cash flows from investing activities:
Proceeds from the sale or maturity of
investment securities available for sale 28,229 39,867
Purchase of investment
securities available for sale (21,348) (70,761)
Net change in interest bearing deposits with other banks (6,884) 23,385
(Increase) decrease in loans (14,302) 3,747
Gross proceeds from sale of loans 1,032 4,603
Capital expenditures (330) (236)
Sale of fixed assets and other property owned -- 64
Net change in federal funds sold 10,400 (11,550)
-------- --------
Net cash used in investing activities (3,203) (10,881)
Cash flows from financing activities:
(Decrease) increase in deposits, net (273) 1,782
Net change in short-term borrowings (9,661) (583)
Issuance of long term debt 6,500 --
Principal payment on long-term debt (277) (257)
Net change in other interest bearing liabilities (7) (5)
Dividends paid (2,449) (2,319)
Tax benefit from preferred stock dividend
and stock option activity 13 15
Issuance of common stock 703 1,483
Acquisition of treasury stock (269) (967)
-------- --------
Net cash used by financing activities (5,720) (851)
-------- --------
Net increase (decrease) in cash and due from banks $ 3,741 $ (8,995)
======== ========
Cash and due from banks at beginning of period $ 36,049 $ 39,072
Cash and due from banks at end of period 39,790 30,077
-------- --------
Net increase (decrease) in cash and due from banks $ 3,741 $ (8,995)
======== ========
Interest paid $ 3,795 $ 5,706
Income taxes paid 365 60
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
A. Basis of Presentation:
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments,
including normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the three months
ended March 31, 2003 are not necessarily indicative of the results that
may be experienced for the year ending December 31, 2003 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, 2002.
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, Contingent Liabilities and Guarantees:
In the ordinary course of business, Omega makes commitments to extend
credit to their customers through letters of credit and lines of credit.
Two types of standby letters of credit are issued by Omega. Performance
standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. These are generally
contingent upon the failure of the customer to perform according to the
terms of the underlying contract with the third party. Financial standby
letters of credit are conditional commitments issued to guarantee the
payment of a specified amount by a customer to a third party. These are
generally contingent upon the failure of the customer to make payment of
its financial obligation according to the terms of the underlying contract
with the third party. At March 31, 2003 performance standby letters of
credit issued and outstanding amounted to $3,999,000 as compared to
$4,543,000 on December 31, 2002. Financial standby letters of credit
issued and outstanding on March 31, 2003 amounted to $8,563,000 compared
to $8,932,000 on December 31, 2002. These letters of credit are not
reflected in the accompanying financial statements. Management does not
anticipate any significant losses as a result of these transactions.
At March 31, 2003, the Corporation had $166,538,000 outstanding in loan
commitments and other unused lines of credit extended to its customers. Of
this amount, $42,110,000, or 25.3%, are commitments to consumers for
mortgage and home equity loans and personal lines of credit. The remaining
amount of $124,428,000, are commercial commitments.
Omega's Employee Stock Ownership Plan (ESOP) incurred debt in 1990 of
$5,000,000, which is collateralized by a mortgage on the Corporation's
administrative center and the Corporation's guarantee. As of March 31,
2003, the balance of the ESOP debt was $2,756,000 as compared to
$2,832,000 at December 31, 2002.
C. Comprehensive Income:
Components of other comprehensive income consist of the following:
Three Months Ended March 31, 2003 Three Months Ended March 31, 2002
Before Tax Expense Before Tax Expense
Tax or Net-of-Tax Tax or Net-of-Tax
Amount (Benefit) Amount Amount (Benefit) Amount
------- ----------- ---------- ------- ----------- ----------
Net income $ 5,420 $ 1,198 $ 4,222 $ 5,573 $ 1,324 $ 4,249
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized holding gains (losses) arising
during the period (101) (35) (66) (977) (342) (635)
Less reclassification adjustment for
gains included in net income (31) (11) (20) (92) (32) (60)
------- ------- ------- ------- ------- -------
Other comprehensive income (loss) (132) (46) (86) (1,069) (374) (695)
------- ------- ------- ------- ------- -------
Total comprehensive income $ 5,288 $ 1,152 $ 4,136 $ 4,504 $ 950 $ 3,554
======= ======= ======= ======= ======= =======
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.
Quarter Ended March 31, 2003 Quarter Ended March 31, 2002
---------------------------------- ----------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
---------------------------------- ----------------------------------
Net income $ 4,222 $ 4,249
Less: Preferred stock dividends (99) (99)
-------- --------
Basic EPS
Income available to common
shareholders 4,123 8,101 $ 0.51 4,150 8,234 $ 0.50
======== ========
Effect of Dilutive Securities
Impact of :
Assumed conversion of preferred
to common stock 346 346
Assumed exercises of outstanding
options 81 102
Preferred stock dividends
available to common
shareholders 99 99
Elimination of tax benefit of
allocated preferred dividends (21) (20)
Additional expense required to fund
ESOP debt, net of tax impact 1 (1)
-------- --------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $ 4,202 8,528 $ 0.49 $ 4,228 8,682 $ 0.49
================================= =================================
E. Summary of Significant Accounting Policies:
Stock-based compensation
Omega accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees", and has adopted the disclosure
provisions of FASB No. 148, "Accounting for Stock-Based Compensation". The
following proforma information regarding net income and earnings per share
assumes the adoption of Statement No. 123 for stock options granted
subsequent to December 31, 1994. The estimated fair value of the options
is amortized to expense over the vesting period.
The fair value was estimated at the date of grant using a Black-Scholes
option-pricing model utilizing various assumptions. Compensation expense,
net of related tax, amounted to $107,000 and $96,000 in the first quarter
of 2003 and 2002, respectively and is included in the proforma net income
reported below (in thousands, except per share data).
Quarter ended March 31, 2003
2003 2002
----------- -----------
Net income As reported $ 4,222 $ 4,249
Pro forma 4,115 4,153
Basic earnings per share As reported $ 0.51 $ 0.50
Pro forma 0.50 0.49
Diluted earnings per share As reported $ 0.49 $ 0.49
Pro forma 0.48 0.48
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because Omega's employee stock options
have characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
F. Recent Accounting Pronouncements:
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," (FIN 46). The objective of
FIN 46 is to provide guidance on how to identify a variable interest
entity (VIE) and determine when the assets, liabilities, noncontrolling
interests, and results of operations of a VIE need to be included in a
company's consolidated financial statements. A company that holds variable
interests in an entity will need to consolidate the entity if the
company's interest in the VIE is such that the company will absorb a
majority of the VIE's expected losses and/or receive a majority of the
VIE's expected residual returns, if they occur. FIN 46 also requires
additional disclosures by primary beneficiaries and other significant
variable interest holders. The provisions of this interpretation were
effective upon issuance for all new variable interest entities and as of
July 1, 2003, and for all variable interest entities that existed at the
date of its issuance. The provisions of FIN 46 are not expected to have a
material impact on the Corporation's finanical condition or results of
operations.
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, 2002. 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 2002 Annual Report or in Omega's
Annual Report on Form 10-K for the year ended December 31, 2002. Copies of
these reports may be obtained from Omega upon request and without charge
(except for the exhibits thereto) as described above.
- --------------------------------------------------------------------------------
1. Comparison of the Three Months Ended March 31, 2003 and 2002
Operations Overview
Three months ended March 31, 2003 and 2002
The first quarter's income before income taxes in 2003 decreased $153,000,
or 2.8%, when compared to the same period in 2002. Net interest income
decreased $132,000, or 1.2% and the loan loss provision decreased by
$130,000, or 56.5%. Non-interest expense, net of non-interest income,
increased by $151,000 in the first quarter of 2003 when compared to the
same period in 2002.
After the income tax provision (which decreased by $126,000, or 9.5%
compared to the same period in 2002) was deducted from earnings, net
income was $27,000, or 0.6%, lower than the first quarter of 2002. The
effective tax rate for the first quarter of 2003 was 22.1%, as compared to
the first quarter of 2002 of 23.8%.
Following are selected key ratios for the period:
- --------------------------------------------------------------------------------
Three Months Ended
March 31
-----------------------
2003 2002
---------- ----------
Return on average assets (annualized)................ 1.48% 1.48%
Return on average equity (annualized)................ 10.25 10.71
Dividend payout ratio (common)....................... 55.74 54.41
Average equity to average assets..................... 14.48 13.81
- --------------------------------------------------------------------------------
Net Interest Income
Three months ended March 31, 2003 and 2002
The net interest margin, at 4.20% for the first quarter of 2003, was 1
basis point higher than the first quarter of 2002, with a $12,663,000 or
1.2% decrease in average earning assets in the first quarter of 2003 from
the first quarter of 2002. Yield on earning assets in the first quarter of
2003 decreased by 64 basis points when compared to 2002's first quarter,
while cost of funding decreased by 65 basis points, resulting in a
decrease in net interest income of $132,000, or 1.2%. In order to maximize
net income, Omega invests in certain loans and securities whose earnings
are exempt from federal income taxation and therefore have rates that are
generally lower than rates on taxable instruments. During the first
quarter of 2003, average tax-free assets owned were $6,676,000 less than
in the first quarter of 2002. When the net interest margin is adjusted for
the tax benefit received from owning these instruments, it is referred to
as the net interest margin on a fully tax-equivalent basis. Because of the
reduction in tax free investments and loans in the first quarter of 2003,
the net interest margin on a fully tax-equivalent basis dropped by 2 basis
points to 4.46% as compared to the first quarter of 2002 when it was
4.48%.
Following are key net interest margin ratios (annualized):
- ------------------------------------------------------------------
Three Months Ended
March 31,
----------------------
2003 2002
----------------------
Yield on average earning assets......... 5.64% 6.28%
- ------------------------------------------------------------------
Cost to fund earning assets............. 1.44 2.09
- ------------------------------------------------------------------
Net interest margin..................... 4.20 4.19
- ------------------------------------------------------------------
Net interest margin - tax equivalent.... 4.46 4.48
- ------------------------------------------------------------------
At March 31, 2003, Omega had $481,841,000 of earning assets scheduled to
reprice over the next twelve months as compared to $455,900,000 in
interest bearing liabilities, resulting in a positive gap of $25,941,000,
or 2.2% 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 2.8%, or $1,191,000.
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 $1,552,000, or 3.6% 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, 2002.
Loan Loss Provision
In the first quarter of 2003, a loan loss provision of $100,000 was
recorded, as compared to the $230,000 loan loss provision that was
recorded in the first quarter of 2002. The change in the loan loss
provision is reflective of the movement in non-performing loans from the
previous quarter. In the first quarter of 2003, the provision increased by
$100,000 as compared to the fourth quarter of 2002, as non-performing
loans increased from $3,751,000 on December 31, 2002 to $4,091,000 on
March 31, 2003. In the first quarter of 2002, non-performing loans
decreased from $3,968,000 on December 31, 2001 to $2,943,000 at March 31,
2002, prompting the reduction in the loan loss provision by $170,000 when
comparing first quarter 2002 to fourth quarter 2001.
Other Income and Expense
Three months ended March 31, 2003 and 2002
Other income increased $281,000, or 7.8%, in the first quarter of 2003 as
compared to the same period in 2002. Service fee income on deposit
accounts increased by $423,000, or 43.1%, as a result of an overdraft
coverage service that was initiated in the second quarter of 2002. Service
fees on loans
increased by $130,000, or 47.8% due to fees generated from increased
activity in loan refinancings in the current rate environment. Trust fees
declined in the first quarter of 2003 by $159,000, or 15.1% when compared
to the same time period in 2002. Fee income from brokerage services added
$110,000 to non-interest income in the first quarter of 2003. This is a
new service offered by Omega Financial Corporation, beginning in December
2002. Gains on the sale of investment securities, loans and other assets
were $121,000 lower in the first quarter of 2003 than in the first quarter
of 2002. Other non-interest income was $102,000 lower in 2003 than in
2002, due mostly to a reduction of $88,000 in ATM-related fees.
As a percentage of average assets, annualized other income net of gains on
securities, loans and other assets was 1.36 % for the first quarter of
2003 as compared to 1.20 % for the same period in 2002.
Other expenses increased $432,000, or 4.8%, in the first quarter of 2003
as compared to the same period in 2002. Salaries and employee benefits
increased $55,000, or 1.1%, in 2003 as compared to the same period in
2002. Occupancy and equipment expense in total increased by $215,000, or
19.0%. Increased costs for building maintenance and utilities caused
occupancy expense to increase by $61,000 and computer and other technical
related purchases and maintenance accounted for higher equipment expense
of $145,000 in 2003 as compared to 2002's first quarter. Other
non-interest expenses increased by $162,000 or 5.5%, compared to the same
period in 2002 as a result of generally higher costs on such items as
advertising, employee training and licensing and charitable donations.
As a percentage of average assets, annualized expenses for the quarter
ended March 31, 2003 were 3.30% and were 3.11% for the same period in
2002.
Federal Income Tax
The effective tax rate for the three months ended March 31, 2003 was 22.1%
compared to the same period in 2002 when the effective tax rate was 23.8%.
This improvement was due primarily to the Corporation receiving tax
deductions for dividends it paid on company stock held by the Employee
Stock Ownership Plan.
2. Investment Securities
Management of the investment portfolio entails evaluation and realignment
of the size and mix of the portfolio in order to balance various
characteristics of the balance sheet, including asset quality, liquidity,
yield relationships, maturity and tax planning. The following schedule
details characteristics of the investment portfolio as of March 31, 2003
and December 31, 2002.
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 2003 Cost Gains Losses Value
----------------------------------------------
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $114,079 $ 2,887 $ 0 $116,966
Obligations of state and
political subdivisions 99,665 2,890 (4) 102,551
Corporate securities 4,587 64 -- 4,651
Mortgage backed securities 2,979 94 -- 3,073
Equity securities 11,819 5,133 (59) 16,893
----------------------------------------------
Total $233,129 $ 11,068 ($63) $244,134
==============================================
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 2002 Cost Gains Losses Value
----------------------------------------------
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $131,970 $ 3,408 $ 0 $135,378
Obligations of state and
political subdivisions 86,058 3,118 -- 89,176
Corporate securities 7,233 84 -- 7,317
Mortgage backed securities 4,130 120 (4) 4,246
Equity securities 10,980 4,453 (42) 15,391
----------------------------------------------
Total $240,371 $ 11,183 ($46) $251,508
==============================================
Total investment securities as a percentage of total assets at March 31,
2003 and December 31, 2002 were 21.0% and 21.8%, respectively. Securities
maturing or repricing in one year or less comprised 42.0% of the total
investment securities of $244,134,000 as of March 31, 2003, as compared to
40.3% of total investment securities of $251,508,000 as of December 31,
2002. There was $210,000 in investments in instruments of foreign
countries on March 31, 2003.
3. Loans
Net loans in the first three months of 2003 increased by $13,110,000, or
1.7% from the balance at December 31, 2002, bringing the total to
$781,877,000 at March 31, 2003. From December 31, 2002 to March 31, 2003,
commercial and mortgage loans increased by $12,579,000 and $7,425,000,
respectively. Offsetting this increase is the decline in personal loan
outstanding balances of $6,913,000 during the same time period.
Changes in the allowance for loan losses for the three months ended March
31, 2003 and 2002 were as follows (in thousands):
- --------------------------------------------------------------------------------
2003 2002
-------- --------
Balance at January 1 .......................... $ 11,052 $ 11,224
Charge-offs ................................... (160) (219)
Recoveries .................................... 42 36
-------- --------
Net charge-offs ........................... (118) (183)
Provision for loan losses ..................... 100 230
-------- --------
Balance at March 31 ........................... $ 11,034 $ 11,271
======== ========
- --------------------------------------------------------------------------------
Management performs a quantitative analysis to support the adequacy of the
allowance for loan losses. This analysis includes review of historical
charge-off rates for loan categories, fluctuations and trends in the
amount of classified loans and economic factors. Significant to this
analysis is any change in observable trends that may be occurring relative
to loans, to assess potential credit weaknesses. Current economic factors
and trends in risk ratings are considered in the determination and
allocation of the allowance for loan losses. The allowance for loan losses
at March 31, 2003 and 2002 represented 1.39% and 1.50%, respectively, of
the total loans outstanding, net of unearned interest.
Set forth below is an analysis of Omega's non-performing loans as of March
31, 2003 as compared to December 31, 2002.
- --------------------------------------------------------------------------------
Non-performing Loans
(In thousands)
March 31, December 31,
2003 2002
--------- ------------
Non-accrual loans .................................... $ 2,618 $ 3,125
Accruing loans past due 90 days or more .............. 1,455 614
Restructured loans ................................... 18 12
------- -------
Total non-performing loans ........................... $ 4,091 $ 3,751
======= =======
Non-performing loans as percent of allowance ......... 37.1% 33.9%
- --------------------------------------------------------------------------------
The increase in non-performing loans from December 31, 2002 to March 31,
2003 is primarily due to an increase in several commercial loans
delinquent by more than 90 days as a result of experiencing a difficult
business environment.
4. Deposits and Other Sources of Funds
Deposits provide the primary source of funding for loans and investment
securities. At March 31, 2003, total deposits decreased by $273,000 as
compared to December 31, 2002. As of March 31, 2003, interest bearing
deposits have increased by $674,000, or 0.1% and non-interest bearing
accounts have decreased by $947,000 or 0.6%, when compared to December 31,
2002.
Borrowed funds are used as an additional source of funding for loans and
investment securities as well as to fund the Corporation's Stock
Repurchase Program. As of March 31, 2003, Omega had short-term borrowings
(maturities within one year) in the amount of $31,791,000 and long-term
debt in the amount of $22,460,000. At December 31, 2002, short-term
borrowings were $41,452,000 and long-term debt was $16,237,000. This
represents an overall decrease in outstanding debt of $3,438,000, with
Long-term debt increasing by $6,223,000 and short-term borrowings
decreasing by $9,661,000.
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 March 31, 2003, 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 2003, the Board approved a new share repurchase program to
begin immediately, authorizing management to buy back 10% of its common
stock. At that time, there were 8,099,778 common shares outstanding with
809,978 shares eligible to be repurchased. This program will remain in
effect through December 31, 2003, or until the 10% limit is reached;
however, it may be discontinued at any time. As of April 10, 2003, 13,500
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 2002
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, 2002.
Item 4. CONTROLS AND PROCEDURES
Quarterly evaluation of the Company's Disclosure Controls and Internal
Controls.
Within the 90 days prior to the date of this Quarterly Report on Form
10-Q, the Company evaluated the effectiveness of the design and operation
of its "disclosure controls and procedures" ("Disclosure Controls"). This
evaluation ("Controls Evaluation") was done under the supervision and with
the participation of management, including the Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO").
Limitations on the Effectiveness of Controls.
The Company's management, including the CEO and CFO, does not expect that
its Disclosure Controls or its "internal controls and procedures for
financial reporting" ("Internal Controls") will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of
the control. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions; over time, control may become
inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or fraud may occur and not be detected.
Conclusions.
Based upon the Controls Evaluation, the CEO and CFO have concluded that,
subject to the limitations noted above, the Disclosure Controls are
effective to timely alert management to material information relating to
the Company during the period when its periodic reports are being
prepared.
In accordance with SEC requirements, the CEO and CFO note that, since the
date of the Controls Evaluation to the date of this Quarterly Report,
there have been no significant changes in Internal Controls or in other
factors that could significantly affect Internal Controls, 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)
May 9, 2003 By: /s/ David B. Lee
- -------------------- ----------------------------------------
Date David B. Lee
Chairman and
Chief Executive Officer
May 9, 2003 /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: May 9, 2003 /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: May 9, 2003 /s/ Daniel L. Warfel
---------------------------------------
Daniel L. Warfel
Executive Vice President and
Chief Financial Officer
(principal financial officer)