Back to GetFilings.com
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 June 30, 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 July 28, 2003:
8,094,338 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
June 30, December 31,
Assets 2003 2002
----------- -----------
Cash and due from banks $ 40,779 $ 36,049
Interest bearing deposits with other banks 19,919 8,757
Federal funds sold 13,550 33,900
Investment securities available for sale 266,834 251,508
Total loans 784,631 779,830
Less: Unearned discount (4) (11)
Allowance for loan losses (10,980) (11,052)
----------- -----------
Net loans 773,647 768,767
Premises and equipment, net 14,473 14,719
Bank-owned life insurance 32,512 31,739
Other assets 9,013 9,118
----------- -----------
TOTAL ASSETS $ 1,170,727 $ 1,154,557
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 153,516 $ 148,498
Interest bearing 772,844 770,757
----------- -----------
Total deposits 926,360 919,255
Short-term borrowings 26,151 41,452
Other liabilities 22,761 11,909
ESOP debt 2,679 2,832
Long-term debt 27,177 16,237
Other interest bearing liabilities 784 762
----------- -----------
TOTAL LIABILITIES 1,005,912 992,447
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 (1,752) (1,875)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares;
Issued -
9,660,162 shares at June 30, 2003;
9,607,076 shares at December 31, 2002
Outstanding -
8,100,064 shares at June 30, 2003;
8,099,778 shares at December 31, 2002 48,301 48,035
Capital surplus 11,621 10,529
Retained earnings 142,438 138,821
Accumulated other comprehensive income 6,705 7,243
Cost of common stock in treasury:
1,560,098 shares at June 30, 2003;
1,507,298 shares at December 31, 2002 (47,498) (45,643)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 164,815 162,110
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,170,727 $ 1,154,557
=========== ===========
2
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---------- ----------- ---------- ----------
Interest Income:
Interest and fees on loans $ 12,200 $ 13,294 $ 24,522 $ 26,649
Interest and dividends on investment securities 2,132 3,050 4,456 6,152
Other interest income 125 80 222 250
---------- ----------- ---------- ----------
TOTAL INTEREST INCOME 14,457 16,424 29,200 33,051
Interest Expense:
Interest on deposits 3,235 4,641 6,639 9,740
Interest on short-term borrowings 74 199 197 390
Interest on long-term debt and
other interest bearing liabilities 279 200 495 405
---------- ----------- ---------- ----------
TOTAL INTEREST EXPENSE 3,588 5,040 7,331 10,535
---------- ----------- ---------- ----------
NET INTEREST INCOME 10,869 11,384 21,869 22,516
Provision for loan losses 150 250 250 480
---------- ----------- ---------- ----------
INCOME FROM CREDIT ACTIVITIES 10,719 11,134 21,619 22,036
Other Income:
Service fees on deposit accounts 1,462 1,171 2,866 2,152
Service fees on loans 379 224 781 496
Earnings on bank-owned life insurance 387 384 773 773
Trust fees 912 877 1,804 1,928
Gain on sale of loans and other assets 275 (1) 279 63
Net gains on investment securities 699 58 730 150
Other 871 815 1,648 1,581
---------- ----------- ---------- ----------
TOTAL OTHER INCOME 4,985 3,528 8,881 7,143
Other Expense:
Salaries and employee benefits 5,089 4,869 10,028 9,753
Net occupancy expense 556 566 1,186 1,126
Equipment expense 681 648 1,396 1,218
Data processing service 421 419 840 826
Other 3,285 2,486 5,958 5,009
---------- ----------- ---------- ----------
TOTAL OTHER EXPENSE 10,032 8,988 19,408 17,932
---------- ----------- ---------- ----------
Income before taxes 5,672 5,674 11,092 11,247
Income tax expense 1,440 1,215 2,638 2,539
---------- ----------- ---------- ----------
NET INCOME $ 4,232 $ 4,459 $ 8,454 $ 8,708
========== =========== ========== ==========
Net income per common share:
Basic $ .51 $ .53 $ 1.02 $ 1.03
Diluted $ .49 $ .51 $ 0.99 $ 1.00
Weighted average shares and equivalents:
Basic 8,103,453 8,226,527 8,102,215 8,230,127
Diluted 8,541,569 8,867,300 8,531,939 8,676,669
Dividends declared per share:
Common $ .29 $ .28 $ .58 $ .56
Preferred $ .45 $ .45 $ .90 $ .90
3
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
Six Months Ended
June 30,
-----------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 8,454 $ 8,708
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,739 1,663
Provision for loan losses 250 480
Gain on sale of investment securities (730) (150)
Non-monetary gift 48 --
Gain on sale of fixed assets
and other property owned (4) --
Gain on sale of loans (275) (63)
Increase in deferred tax asset (359) (206)
Increase in cash surrender value of bank owned life insurance (773) (773)
Increase in interest receivable and other assets (65) (626)
Decrease in interest payable (119) (356)
Increase (decrease) in taxes payable 43 (155)
Amortization of deferred net loan costs (390) (128)
Deferral of net loan fees 413 320
Increase in accounts payable
and accrued expenses (1,860) (999)
-------- --------
Total adjustments (1,082) (993)
-------- --------
Net cash provided by operating activities 7,372 7,715
Cash flows from investing activities:
Proceeds from the sale or maturity of
investment securities available for sale 52,290 65,469
Purchase of:
Investment securities available for sale (55,783) (78,642)
Investment securities held to maturity -- (1,208)
Net change in interest bearing deposits with other banks (11,162) 29,230
Increase in loans (16,886) (22,209)
Gross proceeds from sale of loans 12,008 4,775
Capital expenditures (900) (505)
Sale of fixed assets and other property owned 10 69
Net change in federal funds sold 20,350 (4,400)
-------- --------
Net cash used in investing activities (73) (7,421)
Cash flows from financing activities:
Increase in deposits, net 7,105 1,220
Net change in short-term borrowings (15,301) 2,168
Issuance of long term debt 11,500 --
Principal payment on long-term debt (560) (518)
Net change in other interest bearing liabilities 22 (5)
Dividends paid (4,903) (4,729)
Tax benefit from preferred stock dividend
and stock option activity 65 132
Issuance of common stock 1,358 2,319
Acquisition of treasury stock (1,855) (4,169)
-------- --------
Net cash used in financing activities (2,569) (3,582)
-------- --------
Net increase (decrease) in cash and due from banks $ 4,730 $ (3,288)
======== ========
Cash and due from banks at beginning of period $ 36,049 $ 39,072
Cash and due from banks at end of period 40,779 35,784
-------- --------
Net increase (decrease) in cash and due from banks $ 4,730 $ (3,288)
======== ========
Interest paid $ 7,450 $ 10,891
Income taxes paid 3,555 2,812
4
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX AND THREE MONTHS ENDED JUNE 30, 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 six months and
three months ended June 30, 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 and Contingent Liabilities:
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 June 30, 2003 performance standby letters of
credit issued and outstanding amounted to $6,931,000 as compared to
$4,588,000 on December 31, 2002. Financial standby letters of credit
issued and outstanding on June 30, 2003 amounted to $7,981,000 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 June 30, 2003, the Corporation had $158,183,000 outstanding in loan
commitments and other unused lines of credit extended to its customers. Of
this amount, $47,973,000, or 30.3%, are commitments to consumers for
mortgage and home equity loans and personal lines of credit. The remaining
amount of $110,210,000, 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 June 30,
2003, the balance of the ESOP debt was $2,679,000 as compared to
$2,832,000 at December 31, 2002.
C. Comprehensive Income:
Components of comprehensive income consist of the following:
Three Months Ended June 30, 2003 Three Months Ended June 30, 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 $ 5,672 $ 1,440 $ 4,232 $ 5,674 $ 1,215 $ 4,459
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized holding gains (losses)
arising during the period 3 1 2 2,982 1,044 1,938
Less reclassification adjustment for
gains included in net income (699) (245) (454) (58) (20) (38)
-------- ------- ------- -------- ------- -------
Other comprehensive income (loss) (696) (244) (452) 2,924 1,024 1,900
-------- ------- ------- -------- ------- -------
Total comprehensive income $ 4,976 $ 1,196 $ 3,780 $ 8,598 $ 2,239 $ 6,359
======== ======= ======= ======== ======= =======
Six Months Ended June 30, 2003 Six Months Ended June 30, 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 $ 11,092 $ 2,638 $ 8,454 $ 11,247 $ 2,539 $ 8,708
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized holding gains (losses)
arising during the period (98) (34) (64) 2,005 702 1,303
Less reclassification adjustment for
gains included in net income (730) (256) (474) (150) (53) (97)
-------- ------- ------- -------- ------- -------
Other comprehensive income (loss) (828) (290) (538) 1,855 649 1,206
-------- ------- ------- -------- ------- -------
Total comprehensive income $ 10,264 $ 2,348 $ 7,916 $ 13,102 $ 3,188 $ 9,914
======== ======= ======= ======== ======= =======
D. Earnings Per Share Data:
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding
for the period. On a diluted basis, both earnings and shares outstanding
are adjusted to assume the conversion of all potentially dilutive
securities into common stock.
7
Computations of Earnings per Share
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, 2003 Three Months Ended June 30, 2002
------------------------------------------ -------------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
------------------------------------------ -------------------------------------------
Net income $ 4,232 $ 4,459
Less: Preferred stock dividends (99) (99)
---------- ----------
Basic EPS
Income available to common
shareholders 4,133 8,103 $ 0.51 4,360 8,227 $ 0.53
========= ==========
Effect of Dilutive Securities
Impact of:
Assumed conversion of preferred
to common stock 346 346
Assumed exercises of outstanding
options 92 114
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 $ 4,212 8,541 $ 0.49 $ 4,438 8,687 $ 0.51
========== ========== ========= ========== ========= ==========
Six Months Ended June 30, 2003 Six Months Ended June 30, 2002
------------------------------------------- ------------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
------------------------------------------- ------------------------------------------
Net income $ 8,454 $ 8,708
Less: Preferred stock dividends (198) (198)
---------- ----------
Basic EPS
Income available to common
shareholders 8,256 8,102 $ 1.02 8,510 8,230 $ 1.03
========= ==========
Effect of Dilutive Securities
Impact of:
Assumed conversion of preferred
to common stock 346 346
Assumed exercises of outstanding
options 84 100
Preferred stock dividends
available to common
shareholders 198 198
Elimination of tax benefit of
allocated preferred dividends (43) (40)
Additional expense required to fund
ESOP debt, net of tax impact 2 (2)
---------- ----------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $ 8,413 8,532 $ 0.99 $ 8,666 8,676 $ 1.00
========== ========== ========= ========== ========= ==========
8
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, is included in the proforma net income reported below
(in thousands, except per share data).
Quarter ended June 30 Year To Date
2003 2002 2003 2002
----------- ----------- ----------- ---------
Net income As reported $ 4,232 $ 4,459 $ 8,454 $ 8,708
Pro forma 4,125 4,362 8,239 8,516
Compensation expense, net of tax 107 97 215 192
Basic earnings per share As reported $ 0.51 $ 0.53 $ 1.02 $ 1.03
Pro forma 0.50 0.52 0.99 1.01
Diluted earnings per share As reported $ 0.49 $ 0.51 $ 0.99 $ 1.00
Pro forma 0.48 0.50 0.96 0.98
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 financial condition or results of
operations.
9
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 Six and Three Months Ended June 30, 2003 and 2002
Operations Overview
A. Six months ended June 30, 2003 and 2002
For the first six months of 2003, income before taxes decreased by
$155,000, or 1.4%, compared to the same period in 2002. Income from credit
activities decreased $417,000, or 1.9%. Non-interest income increased
$1,738,000 or 24.3% while non-interest expense increased $1,476,000, or
8.2%.
The tax provision for the first six months of 2003 increased by $99,000,
or 3.9% when compared to the first six months of 2002. The effective tax
rate for this period rose from 22.6% in 2002 to 23.8% for the
corresponding period in 2003. Net income decreased by $254,000, or 2.9%,
in the first six months of 2003 as compared to the same period in 2002.
B. Three months ended June 30, 2003 and 2002
The second quarter's income before income taxes decreased $2,000 when
compared to the same period in 2002. Income from credit activities
decreased by $415,000, from $11,134,000 in the second quarter of 2002 to
$10,719,000 in the second quarter of 2003. Non-interest income increased
$1,457,000, or 41.3% and non-interest expense increased by $1,044,000, or
18.4%.
After the income tax provision (which increased by $225,000, or 18.4%
compared to the same period in 2002) was deducted from earnings, net
income was $227,000, or 5.1%, lower than the second quarter of 2002. The
effective tax rate for the second quarter of 2003 was 25.4%, as compared
to the second quarter of 2002 of 21.4%.
10
Following are selected key ratios for the period:
Three Months Ended Six Months Ended
June 30 June 30
---------------------- --------------------
2003 2002 2003 2002
-------- --------- --------- ---------
Return on average assets (annualized)......... 1.47% 1.54% 1.48% 1.51%
Return on average equity (annualized)......... 10.18 11.21 10.22 10.96
Dividend payout ratio (common)................ 55.53 51.41 55.64 52.87
Average equity to average assets.............. 14.47 13.72 14.48 13.76
Net Interest Income
A. Six months ended June 30, 2003 and 2002
Omega's net interest income for the first six months of 2003 declined by
$647,000, or 2.9%. Average earning assets decreased by $13,503,000, or
1.3% when compared to June 2002. Yield on earning assets was 5.54% in 2003
as compared to 6.20% in 2002. Cost to fund earning assets was 1.40% in
2003, 58 basis points lower than the 1.98% in 2002. On a fully tax
equivalent basis, the net interest margin dropped by 13 basis points to
4.39% in 2003 from 4.52% in 2002. See the chart below for a comparison of
the components of the net interest margin.
B. Three months ended June 30, 2003 and 2002
The net interest spread, at 4.10% for the second quarter of 2003, was 14
basis points lower than the second quarter of 2002, with a $14,346,000 or
1.3% decrease in average earning assets resulting in a 4.5% decrease in
net interest income. Yield on earning assets in the second quarter of 2003
declined by 66 basis points when compared to 2002's second quarter, while
cost of funding decreased by 52 basis points.
Following are key net interest margin ratios (annualized):
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------
Yield on average earning assets......... 5.45% 6.11% 5.54% 6.20%
- --------------------------------------------------------------------------------------------------
Cost to fund earning assets............. 1.35 1.87 1.40 1.98
- --------------------------------------------------------------------------------------------------
Net interest margin..................... 4.10 4.24 4.14 4.22
- --------------------------------------------------------------------------------------------------
Net interest margin - tax equivalent.... 4.35 4.55 4.39 4.52
- --------------------------------------------------------------------------------------------------
At June 30, 2003, Omega had $476,118,000 of earning assets scheduled to
reprice over the next twelve months as compared to $436,657,000 in
interest bearing liabilities, resulting in a positive gap of $39,461,000,
or 3.4% 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 suggest that Omega's net interest income over the next
twelve months would decrease by approximately 3.3%, or $1,360,000.
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 $1,281,000, or 3.1% over a twelve-month
period. These simulations assume no volume or mix changes in the balance
sheet.
Loan Loss Provision
In the second quarter of 2003, a loan loss provision of $150,000 was
recorded, as compared to the $250,000 loan loss provision that was
recorded in the second quarter
11
of 2002. The change in the loan loss provision is reflective of the
movement in non-performing loans during the quarter. In the second quarter
of 2003, the provision increased by $50,000 as compared to the first
quarter of 2003, as non-performing loans increased from $4,091,000 on
March 31, 2003 to $4,732,000 on June 30, 2003. In the second quarter of
2002, non-performing loans increased from $2,943,000 on March 31, 2002 to
$3,925,000 at June 30, 2002, prompting the increase in the loan loss
provision by $20,000 when comparing second quarter 2002 to first quarter
2002.
Other Income and Expense
A. Six months ended June 30, 2003 and 2002
Other income increased $1,738,000, or 24.3% in the first six months of
2003 as compared to the same period in 2002. Excluding gains resulting
from sales of investment securities, loans and other assets, normal
operating non-interest income rose by $942,000, or 13.6%. Service fee
income on deposit accounts increased by $714,000, or 33.2%, as a result of
an overdraft coverage service that was initiated in the second quarter of
2002. Service fees on loans increased by $285,000, or 57.5% due to fees
generated from increased activity in loan refinancings in the current rate
environment. Trust fees declined in the first six months of 2003 by
$124,000, or 6.4% when compared to the same time period in 2002. Fee
income from commissions received from insurance sales and investment
services added $283,000 to non-interest income in the first six months of
2003. These are new services offered by Omega Financial Corporation,
having begun in December 2002. Omega acts as a third party, connecting its
customers with a broker-dealer and insurance brokers. Other non-interest
income was $216,000 lower in 2003 than in 2002, due mostly to a reduction
of premiums earned on the sale of credit life insurance.
During the second quarter of 2003, Omega sold $10.1 million of first
mortgage loans with servicing retained. A gain of $269,000 was recorded on
that sale, bringing the total gain on the sale of loans and other assets
to $279,000 for the first six months of 2003. This represents an increase
of $216,000 over the same period in 2002. Certain investment securities
were sold during the first six months of 2003, resulting in gains of
$730,000, $580,000 higher than in the same period in 2002.
As a percentage of average assets, annualized other income net of gains on
assets sold was 1.38% for the first six months of 2003 as compared to 1.20
% in 2002.
Other expenses increased $1,476,000, or 18.6%, in the first six months of
2003 as compared to the same period in 2002. Salaries and employee
benefits increased $275,000, or 2.8%, in 2003 as compared to the same
period in 2002, due primarily to staffing increases. Occupancy and
equipment expense in total increased by $238,000, or 10.2%. Increased
costs for building maintenance and utilities caused occupancy expense to
increase by $54,000 and computer and other technical related purchases and
maintenance accounted for higher equipment expense of $169,000 in 2003 as
compared to 2002's year-to-date. Other non-interest expenses increased by
$963,000 or 16.5%, compared to the same period in 2002. The bulk of this
increase was related to accelerated amortization of $802,000 recorded on
investments in limited partnership low-income housing projects, due to
declines in estimated residual values. The remainder of the increase in
other non-interest expense reflects costs associated with supporting new
revenue-generating services.
As a percentage of average assets, annualized expenses for the period
ended June 30, 2003 were 3.40% and were 3.11% for the same period in 2002.
B. Three months ended June 30, 2003 and 2002
Other income increased $1,457,000, or 41.3% in the second quarter of 2003
as compared to the same period in 2002. Excluding gains on assets sold,
other income improved by $540,000 or 15.6% when comparing the quarters.
Service fees on deposit accounts increased by $291,000, or 24.8% while
service fees on loans increased by $155,000, or 69.2%. Brokerage fees
added $173,000 to the quarter's revenues, but other non-interest income
declined by $117,000, caused primarily by reduced premiums received on the
sale of credit life insurance. Gains on the sale of securities and other
assets were $917,000 higher during the second quarter of 2003 than 2002.
As a percentage of average assets, annualized other income net of gains
and losses was 1.40% for the second quarter of 2003 as compared to 1.20 %
in 2002.
12
Other expenses were $1,044,000, or 11.6% higher for the second quarter of
2003 than for the same period in 2002. Salaries and employee benefits were
$220,000, or 4.5% higher in the second quarter of 2003 than the
corresponding period in 2002. Amortization on the investments in
low-income housing projects resulted in an increase in other non-interest
expense of $802,000.
As a percentage of average assets, annualized expenses for the quarter
ended June 30, 2003 were 3.49% and were 3.10% for the same period in 2002.
Federal Income Tax
The effective tax rate for the six months ended June 30, 2003 was 23.8%,
compared to the same period in 2002 when the effective tax rate was 22.6%.
For the second quarter of 2003, the effective tax rate was 25.4% compared
to 21.4% in the second quarter of 2002. These increases in effective tax
rates from 2002 to 2003 are the effect of decreased balances of tax-exempt
investments owned.
13
2. Investment Securities
Management of the investment portfolio entails evaluation and realignment
of the size and mix of the portfolio in order to balance various
characteristics of the balance sheet, including asset quality, liquidity,
yield relationships, maturity and tax planning. The following schedule
details characteristics of the investment portfolio as of June 30, 2003
and December 31, 2002.
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
June 30, 2003 Cost Gains Losses Value
-----------------------------------------------------
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $121,819 $ 2,330 ($72) $124,077
Obligations of state and
political subdivisions
116,720 2,985 (5) 119,700
Corporate securities
4,187 65 -- 4,252
Mortgage backed securities
2,189 59 -- 2,248
Equity securities
11,608 4,971 (22) 16,557
-----------------------------------------------------
Total $256,523 $ 10,410 ($99) $266,834
=====================================================
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 June 30,
2003 and December 31, 2002 were 22.8% and 21.8%, respectively. Securities
maturing or repricing in one year or less comprised 45.1% of the total
investment securities of $266,834,000 as of June 30, 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 June 30, 2003.
14
3. Loans
Net loans in the first six months of 2003 increased by $4,880,000, or 0.6%
from the balance at December 31, 2002, bringing the total to $773,647,000
at June 30, 2003. Mortgage loans increased $3.4 million since December 31,
2002 after giving effect to the sale by the company of $10.1 million of
mortgage loans to the secondary market. Commercial loan outstandings grew
by $15.6 million over the same period. Personal consumer loans, however,
declined by $14.3 million since year-end 2002. Management believes that
the general state of the regional economy, including some significant job
losses has affected the personal consumer loan business during the
reporting period.
Changes in the allowance for loan losses for the six months ended June 30,
2003 and 2002 were as follows (in thousands):
2003 2002
-------- --------
Balance at January 1 ............. $ 11,052 $ 11,224
Charge-offs ...................... (396) (324)
Recoveries ....................... 74 56
-------- --------
Net charge-offs .............. (322) (268)
Provision for loan losses ........ 250 480
-------- --------
Balance at June 30 ............... $ 10,980 $ 11,436
======== ========
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 June 30, 2003 and 2002 represented 1.40% 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 June
30, 2003 as compared to December 31, 2002.
Non-performing Loans
(In thousands)
June 30, December 31,
2003 2002
-------- ------------
Non-accrual loans .......................... $3,054 $3,125
Accruing loans past due 90 days or more .... 1,457 614
Restructured loans ......................... 221 12
------ ------
Total non-performing loans ................. $4,732 $3,751
====== ======
Non-performing loans as percent of allowance 43.1% 33.9%
The increase in non-performing loans from December 31, 2002 to June 30,
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 June 30, 2003, total deposits increased by $7,105,000, or
0.8%, as compared to December 31, 2002. As of June 30, 2003,
15
interest bearing deposits have increased by $2,087,000, or 0.3% and
non-interest bearing accounts have increased by $5,018,000 or 3.4%, 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 share
repurchase program. As of June 30, 2003, Omega had short-term borrowings
(maturities within one year) in the amount of $26,151,000 and long-term
debt in the amount of $27,177,000. 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 $4,361,000, with
long-term debt increasing by $10,940,000 and short-term borrowings
decreasing by $15,301,000.
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 June 30, 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%.
7. 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 the earlier of December 31, 2003, or until the 10% limit is
reached; however, it may be discontinued at any time. As of July 15, 2003,
52,800 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
16
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
The Annual Meeting of Shareholders of Omega was held on April 28, 2003. At
the Annual Meeting, the shareholders elected a class of directors for a
term of three years, as described below.
---------------------------------------------------------------------
Name For Withhold Authority
---------------------------------------------------------------------
Raymond F. Agostinelli 5,862,717 72,554
---------------------------------------------------------------------
David B. Lee 5,574,266 361,005
---------------------------------------------------------------------
The terms of the following directors continued after the annual meeting:
Robert N. Oliver, Stanton R. Sheetz, Robert A. Szeyller, Philip E.
Gingerich, D. Stephen Martz and James W. Powers, Sr.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8K
The Company filed a Form 8-K (Items 9 and 12) on April 25, 2003
regarding a financial earnings press release.
Exhibits:
17
- --------------------------------------------------------------------------------
Exhibit
Number Description
- --------------------------------------------------------------------------------
31.1 Chief Executive Officer's Certificate for Section 302 Certification
- --------------------------------------------------------------------------------
31.2 Chief Financial Officer's Certificate for Section 302 Certification
- --------------------------------------------------------------------------------
32.1 Section 906 Certification by Chief Executive Officer
- --------------------------------------------------------------------------------
32.2 Section 906 Certification by Chief Financial Officer
- --------------------------------------------------------------------------------
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)
July 30, 2003 By: /s/ David B. Lee
Date ---------------------------------
David B. Lee
Chairman and
Chief Executive Officer
July 30, 2003 /s/ Daniel L. Warfel
Date ---------------------------------
Daniel L. Warfel
Executive Vice President and
Chief Financial Officer
18