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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 September 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 Exchange 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 October 29, 2003:
8,097,797 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,
2003 2002
------------- ------------
Assets
Cash and due from banks .......................... $ 36,987 $ 36,049
Interest bearing deposits with other banks ....... 2,737 8,757
Federal funds sold ............................... -- 33,900
Investment securities available for sale ......... 270,606 251,508
Total loans ...................................... 795,629 779,830
Less: Unearned discount ........................ (2) (11)
Allowance for loan losses ................ (10,876) (11,052)
----------- -----------
Net loans ........................................ 784,751 768,767
Premises and equipment, net ...................... 14,243 14,719
Bank-owned life insurance ........................ 32,842 31,739
Other assets ..................................... 9,995 9,118
----------- -----------
TOTAL ASSETS ..................................... $ 1,152,161 $ 1,154,557
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing ........................... $ 154,877 $ 148,498
Interest bearing ............................... 761,495 770,757
----------- -----------
Total deposits ................................... 916,372 919,255
Short-term borrowings ............................ 33,212 41,452
Other liabilities ................................ 7,212 11,909
ESOP debt ........................................ 2,601 2,832
Long-term debt ................................... 26,891 16,237
Other interest bearing liabilities ............... 776 762
----------- -----------
TOTAL LIABILITIES ................................ 987,064 992,447
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 ....... (1,689) (1,875)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares;
Issued -
9,664,589 shares at September 30, 2003;
9,607,076 shares at December 31, 2002 ........ 48,323 48,035
Outstanding -
8,080,044 shares at September 30, 2003;
8,099,778 shares at December 31, 2002
Capital surplus .................................. 11,733 10,529
Retained earnings ................................ 144,375 138,821
Accumulated other comprehensive income ........... 5,710 7,243
Cost of common stock in treasury:
1,584,545 shares at September 30, 2003;
1,507,298 shares at December 31, 2002 ......... (48,355) (45,643)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ....................... 165,097 162,110
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $ 1,152,161 $ 1,154,557
=========== ===========
2
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,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Interest Income:
Interest and fees on loans $ 11,716 $ 13,353 $ 36,238 $ 40,002
Interest and dividends on investment securities 2,269 2,821 6,725 8,973
Other interest income 42 64 264 314
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 14,027 16,238 43,227 49,289
Interest Expense:
Interest on deposits 2,897 4,257 9,536 13,997
Interest on short-term borrowings 68 184 265 574
Interest on long-term debt and
other interest bearing liabilities 273 196 768 601
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 3,238 4,637 10,569 15,172
---------- ---------- ---------- ----------
NET INTEREST INCOME 10,789 11,601 32,658 34,117
Provision for loan losses 100 150 350 630
---------- ---------- ---------- ----------
INCOME FROM CREDIT ACTIVITIES 10,689 11,451 32,308 33,487
Other Income:
Service fees on deposit accounts 1,452 1,423 4,318 3,575
Service fees on loans 350 291 1,131 787
Earnings on bank-owned life insurance 330 386 1,103 1,159
Trust fees 934 891 2,738 2,819
Gain (loss) on sale of loans and other assets 2 5 281 68
Net gains on investment securities 257 259 987 409
Other 829 786 2,477 2,367
---------- ---------- ---------- ----------
TOTAL OTHER INCOME 4,154 4,041 13,035 11,184
Other Expense:
Salaries and employee benefits 5,132 4,987 15,160 14,740
Net occupancy expense 587 564 1,773 1,690
Equipment expense 696 664 2,092 1,882
Data processing service 431 420 1,271 1,246
Other 2,248 2,305 8,206 7,314
---------- ---------- ---------- ----------
TOTAL OTHER EXPENSE 9,094 8,940 28,502 26,872
---------- ---------- ---------- ----------
Income before taxes 5,749 6,552 16,841 17,799
Income tax expense 1,409 1,652 4,047 4,191
---------- ---------- ---------- ----------
NET INCOME $ 4,340 $ 4,900 $ 12,794 $ 13,608
========== ========== ========== ==========
Net income per common share:
Basic $ 0.52 $ 0.59 $ 1.54 $ 1.62
Diluted $ 0.51 $ 0.57 $ 1.49 $ 1.57
Weighted average shares and equivalents:
Basic 8,086,052 8,183,890 8,096,768 8,214,545
Diluted 8,517,424 8,627,913 8,529,741 8,651,377
Dividends declared per share:
Common $ .29 $ .28 $ .87 $ .84
Preferred $ .45 $ .45 $ 1.35 $ 1.35
3
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
Nine Months Ended
September 30,
--------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 12,794 $ 13,608
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,839 2,607
Provision for loan losses 350 630
Gain on sale of investment securities (987) (409)
Non-monetary gift 48 --
Gain on sale of fixed assets
and other property owned (5) (9)
Gain on sale of loans (276) (59)
Increase in deferred tax asset (384) (245)
Increase in cash surrender value of bank owned life insurance (1,103) (1,159)
Increase in interest receivable and other assets (507) (123)
Decrease in interest payable (164) (452)
Increase in taxes payable 36 555
Amortization of deferred net loan costs (557) (204)
Deferral of net loan fees 623 405
Decrease in accounts payable
and accrued expenses (4,569) (1,378)
-------- --------
Total adjustments (3,656) 159
-------- --------
Net cash provided by operating activities 9,138 13,767
Cash flows from investing activities:
Proceeds from the sale or maturity of:
Investment securities available for sale 73,985 86,664
Purchase of:
Investment securities available for sale (95,844) (79,175)
Investment securities held to maturity -- (1,208)
Net change in interest bearing deposits with other banks 6,020 29,174
Increase in loans (28,735) (36,232)
Gross proceeds from sale of loans 12,611 4,780
Capital expenditures (1,235) (727)
Sale of fixed assets and other property owned 23 321
Net change in federal funds sold 33,900 7,670
-------- --------
Net cash provided by investing activities 725 11,267
Cash flows from financing activities:
Decrease in deposits, net (2,883) (8,262)
Net change in short-term borrowings (8,240) 471
Issuance of long-term debt 11,500 --
Principal payment on long-term debt (846) (782)
Net change in other interest bearing liabilities 14 19
Dividends paid (7,344) (7,120)
Tax benefit from preferred stock dividend
and stock option activity 94 302
Issuance of common stock 1,492 3,071
Acquisition of treasury stock (2,712) (8,308)
-------- --------
Net cash used in financing activities (8,925) (20,609)
-------- --------
Net increase in cash and due from banks $ 938 $ 4,425
======== ========
Cash and due from banks at beginning of period $ 36,049 $ 39,072
Cash and due from banks at end of period 36,987 43,497
-------- --------
Net increase in cash and due from banks $ 938 $ 4,425
======== ========
Interest paid $ 10,733 $ 15,624
Income taxes paid 4,970 3,622
4
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NINE AND THREE MONTHS ENDED SEPTEMBER 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 nine months and
three months ended September 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 September 30, 2003, performance standby letters
of credit issued and outstanding amounted to $6,027,000 as compared to
$4,588,000 on December 31, 2002. Financial standby letters of credit
issued and outstanding on September 30, 2003 amounted to $8,859,000
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 September 30, 2003, the Corporation had $162,052,000 outstanding in
loan commitments and other unused lines of credit extended to its
customers. Of this amount, $112,422,000, or 69.4%, were commercial
commitments. The remaining amount of $49,630,000, were commitments to
consumers for mortgage and home equity loans and personal lines of credit.
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 September 30,
2003, the balance of the ESOP debt was $2,601,000 as compared to
$2,832,000 at December 31, 2002.
5
C. Comprehensive Income:
Components of comprehensive income consist of the following:
Three Months Ended Sept. 30, 2003 Three Months Ended Sept. 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 $ 5,749 $ 1,409 $ 4,340 $ 6,552 $ 1,652 $ 4,900
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized holding gains (losses)
arising during the period (1,259) (441) (818) 1,647 576 1,071
Less reclassification adjustment for
gains included in net income (257) (90) (167) (259) (91) (168)
-------- -------- -------- -------- -------- --------
Other comprehensive income (loss) (1,516) (531) (985) 1,388 485 903
-------- -------- -------- -------- -------- --------
Total comprehensive income $ 4,233 $ 878 $ 3,355 $ 7,940 $ 2,137 $ 5,803
======== ======== ======== ======== ======== ========
Nine Months Ended Sept. 30, 2003 Nine Months Ended Sept. 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 $ 16,841 $ 4,047 $ 12,794 $ 17,799 $ 4,191 $ 13,608
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized holding gains (losses)
arising during the period (1,370) (479) (891) 3,652 1,278 2,374
Less reclassification adjustment for
gains included in net income (987) (345) (642) (409) (143) (266)
-------- -------- -------- -------- -------- --------
Other comprehensive income (loss) (2,357) (824) (1,533) 3,243 1,135 2,108
-------- -------- -------- -------- -------- --------
Total comprehensive income $ 14,484 $ 3,223 $ 11,261 $ 21,042 $ 5,326 $ 15,716
======== ======== ======== ======== ======== ========
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.
6
Computations of Earnings per Share
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30, 2003 Three Months Ended September 30, 2002
-------------------------------------- -------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
-------------------------------------- -------------------------------------
Net income $ 4,340 $ 4,900
Less: Preferred stock dividends (99) (99)
------- -------
Basic EPS
Income available to common
shareholders 4,241 8,086 $ 0.52 4,801 8,184 $ 0.59
======= =======
Effect of Dilutive Securities
Impact of :
Assumed conversion of preferred
to common stock 346 346
Assumed exercises of outstanding
options 85 98
Preferred stock dividends
available to common
shareholders 99 99
Elimination of tax benefit of
allocated preferred dividends (22) (20)
Additional expense required to fund
ESOP debt, net of tax impact 1 (1)
------- -------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $ 4,319 8,517 $ 0.51 $ 4,879 8,628 $ 0.57
======= ======= ======= ======= ======= =======
Nine Months Ended September 30, 2003 Nine Months Ended September 30, 2002
------------------------------------- ------------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
------------------------------------- ------------------------------------
Net income $12,794 $13,608
Less: Preferred stock dividends (297) (297)
------- -------
Basic EPS
Income available to common
shareholders 12,497 8,097 $ 1.54 13,311 8,214 $ 1.62
======= =======
Effect of Dilutive Securities
Impact of :
Assumed conversion of preferred
to common stock 346 346
Assumed exercises of outstanding
options 87 91
Preferred stock dividends
available to common
shareholders 297 297
Elimination of tax benefit of
allocated preferred dividends (65) (60)
Additional expense required to fund
ESOP debt, net of tax impact 3 (4)
------- -------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $12,732 8,530 $ 1.49 $13,544 8,651 $ 1.57
======= ======= ======= ======= ======= =======
7
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 September 30 Year To Date
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income As reported $ 4,340 $ 4,900 $ 12,794 $ 13,608
Pro forma 4,231 4,802 12,470 13,317
Compensation expense, net of tax 109 98 324 291
Basic earnings per share As reported $ 0.52 $ 0.59 $ 1.54 $ 1.62
Pro forma 0.51 0.58 1.50 1.58
Diluted earnings per share As reported $ 0.51 $ 0.57 $ 1.49 $ 1.57
Pro forma 0.50 0.56 1.45 1.54
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 requirements of Interpretation 46 applied
upon issuance to VIEs created after January 31, 2003. Public companies
must complete their evaluations of VIEs that existed prior to February 1,
2003, and the consolidation of those for which they are the primary
beneficiary for financial statements issued for the first period ending
after December 15, 2003. The provisions of FIN 46 are not expected to have
a material impact on the Corporation's financial condition or results of
operations.
G. Subsequent Event:
On October 15, 2003, the Trustee for the Employee Stock Ownership Plan
(ESOP) (holder of all outstanding shares of Series A Convertible Preferred
Stock) exercised its right to convert all 219,781 shares to common shares
at a conversion ratio of 1.575 shares of common stock for one share of
preferred stock. This resulted in the issuance of 346,155 common shares to
the ESOP.
8
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 the
Company's 2002 Annual Report to Shareholders or in the Company'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 Nine and Three Months Ended September 30, 2003 and 2002
Operations Overview
A. Nine months ended September 30, 2003 and 2002
For the first nine months of 2003, income before taxes decreased by
$958,000, or 5.4%, compared to the same period in 2002. Income from credit
activities decreased $1,179,000, or 3.5%. Non-interest income increased
$1,851,000 or 16.6%, while non-interest expense increased $1,630,000, or
6.1%.
The tax provision for the first nine months of 2003 decreased by $144,000,
or 3.4% when compared to the first nine months of 2002. The effective tax
rate for this period rose from 23.5% in 2002 to 24.0% for the
corresponding period in 2003. Net income decreased by $814,000, or 6.0%,
in the first nine months of 2003 as compared to the same period in 2002.
B. Three months ended September 30, 2003 and 2002
The third quarter's income before income taxes decreased $803,000, or
12.3% when compared to the same period in 2002. Income from credit
activities decreased by $762,000, from $11,451,000 in the third quarter of
2002 to $10,689,000 in the third quarter of 2003. Non-interest income
increased $113,000, or 2.8% and non-interest expense increased by
$154,000, or 1.7%.
After the income tax provision (which decreased by $243,000, or 14.7%
compared to the same period in 2002) was deducted from earnings, net
income was $560,000, or 11.4%, lower than the third quarter of 2002. The
effective tax rate for the third quarter of 2003 was 24.5%, as compared to
the third quarter of 2002 of 25.2%.
9
Following are selected key ratios for the period:
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Return on average assets (annualized) .. 1.50% 1.71% 1.49% 1.57%
Return on average equity (annualized) .. 10.39 12.12 10.28 11.35
Dividend payout ratio (common) ......... 54.00 46.38 55.08 50.53
Average equity to average assets ....... 14.45 14.08 14.47 13.87
- --------------------------------------------------------------------------------
Net Interest Income
A. Nine months ended September 30, 2003 and 2002
Omega's net interest income for the first nine months of 2003 declined by
$1,459,000, or 4.3%. Average earning assets decreased by $6,869,000, or
0.6% when compared to September 2002. Yield on earning assets was 5.44% in
the first nine months of 2003 as compared to 6.17% in the first nine
months of 2002. Cost to fund earning assets was 1.33% in the first nine
months of 2003, 57 basis points lower than the 1.90% in the first nine
months of 2002. On a fully tax equivalent basis, the net interest margin
dropped by 20 basis points to 4.37% in the first nine months of 2003 from
4.57% in the same period in 2002. See the chart below for a comparison of
the components of the net interest margin.
B. Three months ended September 30, 2003 and 2002
The net interest spread, at 4.03% for the third quarter of 2003, was 33
basis points lower than the third quarter of 2002, with a $6,155,000 or
0.6% increase in average earning assets resulting in a 7.0% decrease in
net interest income. Yield on earning assets in the third quarter of 2003
declined by 86 basis points when compared to 2002's third quarter, while
cost of funding decreased by 53 basis points.
Following are key net interest margin ratios (annualized):
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Yield on average earning assets ........ 5.23% 6.09% 5.44% 6.17%
Cost to fund earning assets ............ 1.20 1.73 1.33 1.90
Net interest margin .................... 4.03 4.36 4.11 4.27
Net interest margin - tax equivalent ... 4.29 4.66 4.37 4.57
- --------------------------------------------------------------------------------
At September 30, 2003, Omega had $461,921,000 of earning assets scheduled
to reprice over the next twelve months as compared to $445,808,000 in
interest-sensitive liabilities, resulting in a positive gap of
$16,113,000, or 1.4% 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 3.0%,
or $1,206,000. 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 $1,163,000, or 2.9% over a
twelve-month period. These simulations assume no volume or mix changes in
the balance sheet.
Loan Loss Provision
In the third quarter of 2003, a loan loss provision of $100,000 was
recorded, as compared to the $150,000 loan loss provision that was
recorded in the third quarter of 2002. The change in the loan loss
provision was reflective of the movement in non-performing loans during
the quarter. In the third quarter of 2003,
10
the provision decreased by $50,000 as compared to the second quarter of
2003, as non-performing loans decreased from $4,732,000 on June 30, 2003
to $3,911,000 on September 30, 2003. On September 30, 2002, non-performing
loans were $4,426,000 and the provision for loan losses for the quarter
was $150,000.
Other Income and Expense
A. Nine months ended September 30, 2003 and 2002
Other income increased $1,851,000, or 16.6% in the first nine 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 $1,060,000, or 9.9%. Service fee
income on deposit accounts increased by $743,000, or 20.8%, as a result of
an overdraft coverage service that was initiated in the second quarter of
2002. Service fees on loans increased by $344,000, or 43.7% due to fees
generated from increased activity in loan refinancings in the current rate
environment. Trust fees declined in the first nine months of 2003 by
$81,000, or 2.9% when compared to the same time period in 2002. Fee income
from commissions received from insurance sales and investment services
added $484,000 to non-interest income in the first nine months of 2003.
These are new services offered by Omega, having begun in December 2002.
Omega representatives function as agents and registered representatives in
placing business with a broker-dealer and insurance brokers. Other
non-interest income was $374,000 lower in the first nine months of 2003
than in the same period 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, representing the majority of the total gain on the sale of
loans and other assets of $281,000 for the first nine months of 2003. This
represents an increase of $213,000 over the same period in 2002. Certain
investment securities were sold during the first nine months of 2003,
resulting in gains of $987,000, $578,000 higher than in the same period in
2002.
As a percentage of average assets, annualized other income net of gains on
assets sold was 1.37% for the first nine months of 2003 as compared to
1.24 % in the same period in 2002.
Other expenses increased $1,630,000, or 6.1%, in the first nine months of
2003 as compared to the same period in 2002. Salaries and employee
benefits increased $420,000, or 2.8%, in 2003 as compared to the same
period in 2002, due primarily to normal salary and benefit increases.
Occupancy and equipment expense in total increased by $293,000, or 8.2%.
Increased costs for building maintenance, real estate tax and utilities
caused occupancy expense to increase by $87,000 and computer and other
technical related purchases and maintenance accounted for higher equipment
expense of $208,000 in the first nine months of 2003 as compared to the
same period in 2002. Other occupancy and equipment expenses netted to a
decrease of $2,000 when comparing the two periods. Other non-interest
expenses increased by $917,000 or 10.7%, compared to the same period in
2002. The bulk of this increase was related to accelerated amortization of
$802,000 recorded in the second quarter of 2003 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 reflected costs associated with supporting new revenue-generating
services.
As a percentage of average assets, annualized expenses for the nine months
ended September 30, 2003 were 3.31% and were 3.11% for the same period in
2002.
B. Three months ended September 30, 2003 and 2002
Other income increased $113,000, or 2.8% in the third quarter of 2003 as
compared to the same period in 2002. Excluding gains on assets sold, other
income improved by $118,000 or 3.1% when comparing the quarters. Service
fees on deposit accounts increased by $29,000, or 2.0% while service fees
on loans increased by $59,000, or 20.3%. Trust fees increased by $43,000,
or 4.8%, in the third quarter of 2003 as compared to the same period in
2002. Earnings on bank-owned life insurance declined by $56,000, or 14.5%,
as lower rates prevailed during the more recent period. Commissions from
investment services and insurance sales added $201,000 to the quarter's
revenues, but other non-interest income declined by $158,000, caused
primarily by reduced premiums received on the sale of credit life
insurance. Gains on the sale of securities and other assets were $5,000
lower during the third quarter of 2003 than 2002.
11
As a percentage of average assets, annualized other income net of gains
and losses was 1.35% for the third quarter of 2003 as compared to 1.32 %
in the third quarter of 2002.
Other expenses were $154,000, or 1.7% higher for the third quarter of 2003
than for the same period in 2002. Salaries and employee benefits were
$145,000, or 2.9% higher in the third quarter of 2003 than the
corresponding period in 2002.
As a percentage of average assets, annualized expenses for the quarter
ended September 30, 2003 were 3.15% and were 3.11% for the same period in
2002.
Federal Income Tax
The effective tax rate for the nine months ended September 30, 2003 was
24.0%, compared to the same period in 2002 when the effective tax rate was
23.5%. For the third quarter of 2003, the effective tax rate was 24.5%
compared to 25.2% in the third quarter of 2002.
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,
2003 and December 31, 2002.
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
September 30, 2003 Cost Gains Losses Value
--------------------------------------------------
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $ 135,677 $ 1,767 ($ 315) $ 137,129
Obligations of state and
political subdivisions 108,917 2,454 (123) 111,248
Corporate securities 3,873 50 (6) 3,917
Mortgage backed securities 1,682 42 -- 1,724
Equity securities 11,673 4,929 (14) 16,588
--------- --------- --------- ---------
Total $ 261,822 $ 9,242 ($ 458) $ 270,606
========= ========= ========= =========
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 September
30, 2003 and December 31, 2002 were 23.5% and 21.8%, respectively.
Amortized cost of securities maturing or repricing in one year or less was
$125,201,000 as of September 30, 2003, as compared to $101,388,000 on
December 31, 2002. There was $210,000 in investments in instruments of
foreign countries on September 30, 2003.
12
3. Loans
Net loans in the first nine months of 2003 increased by $15,984,000, or
2.1% from the balance at December 31, 2002, bringing the total to
$784,751,000 at September 30, 2003. Mortgage and home equity loans
increased $12.0 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 $25.7 million over the same
period. Personal consumer loans, however, declined by $11.8 million since
year-end 2002. Of this decline, $4.7 million was a reduction in indirect,
dealer-originated loans, due to aggressive competition with
factory-financing opportunites in the automobile industry. Management
believes that the general state of the regional economy, including some
significant job losses, has also negatively affected the personal consumer
loan business during the reporting period.
Changes in the allowance for loan losses for the six months ended
September 30, 2003 and 2002 were as follows (in thousands):
--------------------------------------------------------------------------
2003 2002
-------- --------
Balance at January 1 ........................... $ 11,052 $ 11,224
Charge-offs .................................... (618) (478)
Recoveries ..................................... 92 79
-------- --------
Net charge-offs ............................ (526) (399)
Provision for loan losses ...................... 350 630
-------- --------
Balance at September 30 ........................ $ 10,876 $ 11,455
======== ========
--------------------------------------------------------------------------
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 September 30, 2003 and 2002 represented 1.37% and 1.45%, 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, 2003 as compared to December 31, 2002.
--------------------------------------------------------------------------
Non-performing Loans
(In thousands)
September 30, December 31,
2003 2002
------------- ------------
Non-accrual loans ............................. $ 2,708 $ 3,125
Accruing loans past due 90 days or more ....... 976 614
Restructured loans ............................ 227 12
-------- --------
Total non-performing loans .................... $ 3,911 $ 3,751
======== ========
Non-performing loans as percent of allowance .. 36.0% 33.9%
--------------------------------------------------------------------------
The increase in non-performing loans from December 31, 2002 to September
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.
13
4. Deposits and Other Sources of Funds
Deposits provide the primary source of funding for loans and investment
securities. At September 30, 2003, total deposits decreased by $2,883,000,
or 0.3%, as compared to December 31, 2002. As of September 30, 2003,
interest bearing deposits have decreased by $9,262,000, or 1.2% and
non-interest bearing accounts have increased by $6,379,000 or 4.3%, when
compared to December 31, 2002. Management believes that the decline in
interest bearing deposits reflects the consumers' desire to maintain
liquidity in the current low-rate environment.
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 September 30, 2003, Omega had short-term
borrowings (maturities within one year) in the amount of $33,212,000 and
long-term debt in the amount of $26,891,000. At December 31, 2002,
short-term borrowings were $41,452,000 and long-term debt was $16,237,000.
This represents an overall increase in outstanding debt of $2,414,000,
with long-term debt increasing by $10,654,000 and short-term borrowings
decreasing by $8,240,000.
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 September 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%.
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 the earlier of December 31, 2003, or until the 10% limit is
reached; however, it may be discontinued at any time. As of October 28,
2003, 82,247 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 under the supervision
and with the participation of management, including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO").
Based on this evaluation, the CEO and CFO concluded that the Company's
disclosure controls and procedures are effective in reaching a reasonable
level of assurance that information required to be disclosed by the
Company in the reports that it files or submits under the Securities
Exchange Act of 1934
14
is recorded, processed, summarized and reported within the time period
specified in the Securities and Exchange Commission's rules and forms.
The CEO and CFO also conducted an evaluation of internal control over
financial reporting ("Internal Control") to determine whether any changes
in Internal Controls occurred during the quarter that have materially
affected or which are reasonably likely to materially affect Internal
Controls. Based on that evaluation, there has been no such change during
the quarter covered by this report.
Limitations on the Effectiveness of Controls.
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. The Company conducts periodic
evaluations of its internal controls to enhance, where necessary, its
procedures and controls.
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
(a) Reports on Form 8-K
The Company filed a Form 8-K (Items 9 and 12) on July 21, 2003
regarding it's financial earnings press release.
Exhibits:
Exhibit
Number Description
------- -----------
31.1 Chief Executive Officer's Rule 13a-14/15d-14(a) (Section
302) Certification
31.2 Chief Financial Officer's Rule 13a-14/15d-14(a) (Section
302) Certification
32.1 Section 1350 (Section 906) Certification by Chief
Executive Officer
32.2 Section 1350 (Section 906) Certification by Chief
Financial Officer
15
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 29, 2003 By: /s/ David B. Lee
------------------------ -------------------------------
Date David B. Lee
Chairman and
Chief Executive Officer
October 29, 2003 /s/ Daniel L. Warfel
------------------------ -------------------------------
Date Daniel L. Warfel
Executive Vice President and
Chief Financial Officer
16