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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-13599
OMEGA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1420888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
366 Walker Drive, State College, PA 16801
(Address of principal executive offices)
(Zip Code)
(814) 231-7680
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
The number of shares outstanding of each of the issuer's classes of
common stock as of May 2, 2004:
8,497,183 shares of Common Stock, $5.00 par value
PART I. Financial Information
Item 1. Financial Statements
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Unaudited
March 31, December 31,
2004 2003
----------- ------------
Assets
Cash and due from banks $ 31,353 $ 32,420
Interest bearing deposits with other banks 15,317 10,682
Federal funds sold 29,100 17,850
Investment securities available for sale 216,675 240,539
Total loans 787,216 788,144
Less: Allowance for loan losses (10,451) (10,569)
----------- -----------
Net loans 776,765 777,575
Premises and equipment, net 14,323 14,348
Bank-owned life insurance 37,488 37,134
Other assets 10,849 9,618
----------- -----------
TOTAL ASSETS $ 1,131,870 $ 1,140,166
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 149,662 $ 155,702
Interest bearing 748,825 751,878
----------- -----------
Total deposits 898,487 907,580
Short-term borrowings 31,516 33,263
Other liabilities 7,464 6,950
ESOP debt 2,441 2,521
Long-term debt 21,305 21,600
Other interest bearing liabilities 807 813
----------- -----------
TOTAL LIABILITIES 962,020 972,727
Shareholders' Equity
Preferred stock, par value $5.00 per share:
Authorized - 5,000,000 shares, none issued
Unearned compensation related to ESOP debt (1,564) (1,624)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares;
Issued -
10,080,443 shares at March 31, 2004;
10,048,368 shares at December 31, 2003 50,402 50,242
Outstanding -
8,490,898 shares at March 31, 2004;
8,458,823 shares at December 31, 2003
Capital surplus 16,481 15,711
Retained earnings 147,501 146,430
Accumulated other comprehensive income 5,559 5,209
Cost of common stock in treasury:
1,589,545 shares at March 31, 2004 and December 31, 2003 (48,529) (48,529)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 169,850 167,439
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,131,870 $ 1,140,166
=========== ===========
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Unaudited
Three Months Ended
March 31,
2004 2003
----------- -----------
Interest Income:
Interest and fees on loans $ 11,197 $ 12,322
Interest and dividends on investment securities 1,853 2,324
Other interest income 56 97
----------- -----------
TOTAL INTEREST INCOME 13,106 14,743
Interest Expense:
Interest on deposits 2,692 3,404
Interest on short-term borrowings 76 123
Interest on long-term debt and
other interest bearing liabilities 248 216
----------- -----------
TOTAL INTEREST EXPENSE 3,016 3,743
----------- -----------
NET INTEREST INCOME 10,090 11,000
Provision for loan losses -- 100
----------- -----------
INCOME FROM CREDIT ACTIVITIES 10,090 10,900
Other Income:
Service fees on deposit accounts 1,339 1,404
Service fees on loans 281 402
Earnings on bank-owned life insurance 354 386
Trust fees 915 892
Gain on sale of loans and other assets (1) 4
Net gains on investment securities 8 31
Other 842 777
----------- -----------
TOTAL OTHER INCOME 3,738 3,896
Other Expense:
Salaries and employee benefits 4,955 4,939
Net occupancy expense 627 630
Equipment expense 702 715
Data processing service 423 419
Other 2,526 2,673
----------- -----------
TOTAL OTHER EXPENSE 9,233 9,376
----------- -----------
Income before taxes 4,595 5,420
Income tax expense 991 1,198
----------- -----------
NET INCOME $ 3,604 $ 4,222
=========== ===========
Net income per common share:
Basic $ .43 $ .51
Diluted $ .42 $ .49
Weighted average shares and equivalents:
Basic 8,470,961 8,100,962
Diluted 8,559,206 8,528,178
Dividends declared per share:
Common $ .30 $ .29
Preferred -- $ .45
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
Three Months Ended
March 31,
---------------------
2004 2003
-------- --------
Cash flows from operating activities:
Net income $ 3,604 $ 4,222
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,027 947
Provision for loan losses -- 100
Gain on sale of investment securities (8) (31)
Gain on sale of fixed assets
and other property owned (1) (1)
Loss (gain) on sale of loans 2 (3)
Decrease (increase) in deferred tax asset 38 (115)
Increase in cash surrender value of bank owned life insurance (354) (386)
Increase in interest receivable and other assets (1,471) (1,095)
Increase (decrease) in interest payable 8 (52)
Increase in taxes payable 937 936
Amortization of deferred net loan fees (72) (153)
Deferral of net loan fees 763 216
(Decrease) Increase in accounts payable and accrued expenses (431) 8,079
-------- --------
Total adjustments 438 8,442
-------- --------
Net cash provided by operating activities 4,042 12,664
Cash flows from investing activities:
Proceeds from the sale or maturity of
investment securities available for sale 29,502 28,229
Purchase of investment
securities available for sale (5,559) (21,348)
Net change in interest bearing deposits with other banks (4,635) (6,884)
Decrease (increase) in loans 119 (14,302)
Gross proceeds from sale of loans (2) 1,032
Capital expenditures (552) (330)
Sale of fixed assets and other property owned 12 --
Net change in federal funds sold (11,250) 10,400
-------- --------
Net cash provided by (used in) investing activities 7,635 (3,203)
Cash flows from financing activities:
Decrease in deposits, net (9,093) (273)
Net change in short-term borrowings (1,747) (9,661)
Issuance of long term debt -- 6,500
Principal payment on long-term debt (295) (277)
Net change in other interest bearing liabilities (6) (7)
Dividends paid (2,545) (2,449)
Tax benefit from preferred stock dividend
and stock option activity 12 13
Issuance of common stock 930 703
Acquisition of treasury stock -- (269)
-------- --------
Net cash used by financing activities (12,744) (5,720)
-------- --------
Net increase (decrease) in cash and due from banks $ (1,067) $ 3,741
======== ========
Cash and due from banks at beginning of period $ 32,420 $ 36,049
Cash and due from banks at end of period 31,353 39,790
-------- --------
Net increase (decrease) in cash and due from banks $ (1,067) $ 3,741
======== ========
Interest paid $ 3,008 $ 3,795
Income taxes paid -- 365
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
A. Basis of Presentation:
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments,
including normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the three months
ended March 31, 2004 are not necessarily indicative of the results that
may be experienced for the year ending December 31, 2004 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, 2003.
The accompanying Consolidated Financial Statements include Omega Financial
Corporation (Omega), a bank holding company, and the combined results of
its wholly owned banking and non-banking subsidiaries.
B. Commitments, Contingent Liabilities and Guarantees:
In the ordinary course of business, Omega makes commitments to extend
credit to their customers through letters of credit and lines of credit.
Standby letters of credit are instruments issued by the Corporation that
guarantee the beneficiary payment by the bank in the event of default by
the Corporation's customer in the non-performance of an obligation or
service. Most standby letters of credit are extended for one-year periods.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The
Corporation holds collateral supporting those commitments for which
collateral is deemed necessary. At March 31, 2004 standby letters of
credit issued and outstanding amounted to $13,152,000 as compared to
$13,118,000 on December 31, 2003. The fair market value of the standby
letters of credit at March 31, 2004 and December 31, 2003 was $88,000 and
$72,000, respectively. The fair market value of standby letters of credit
is recorded as a liability in accordance with FIN 45.
At March 31, 2004, the Corporation had $159,893,000 outstanding in loan
commitments and other unused lines of credit extended to its customers. Of
this amount, $49,167,000, or 30.7%, are commitments to consumers for
mortgage and home equity loans and personal lines of credit. The remaining
amounts of $110,726,000 are commercial commitments.
Omega's Employee Stock Ownership Plan (ESOP) incurred debt in 1990 of
$5,000,000, which is collateralized by a mortgage on the Corporation's
administrative center and the Corporation's guarantee. As of March 31,
2004, the balance of the ESOP debt was $2,441,000 as compared to
$2,521,000 at December 31, 2003.
C. Comprehensive Income:
Components of other comprehensive income consist of the following (in
thousands):
Three Months Ended March 31, 2004 Three Months Ended March 31, 2003
Before Tax Expense Before Tax Expense
Tax or Net-of-Tax Tax or Net-of-Tax
Amount (Benefit) Amount Amount (Benefit) Amount
-------- ----------- ---------- -------- ----------- ----------
Net income $ 4,595 $ 991 $ 3,604 $ 5,420 $ 1,198 $ 4,222
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized holding gains (losses)
arising during the period 546 191 355 (101) (35) (66)
Less reclassification adjustment for
gains included in net income (8) (3) (5) (31) (11) (20)
-------- -------- -------- -------- -------- --------
Other comprehensive income (loss) 538 188 350 (132) (46) (86)
-------- -------- -------- -------- -------- --------
Total comprehensive income $ 5,133 $ 1,179 $ 3,954 $ 5,288 $ 1,152 $ 4,136
======== ======== ======== ======== ======== ========
D. Earnings Per Share Data:
Basic earnings per share are computed by dividing income available to
common stockholders by the weighted average number of shares outstanding
for the period. On a diluted basis, both earnings and shares outstanding
are adjusted to assume the conversion of all potentially dilutive
securities into common stock.
(in thousands, except per share data)
Quarter Ended March 31, 2004 Quarter Ended March 31, 2003
---------------------------------- -----------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
-------- ----------- --------- -------- ----------- ---------
Net income $ 3,604 $ 4,222
Less: Preferred stock dividends -- (99)
-------- --------
Basic EPS
Income available to common
shareholders 3,604 8,471 $ 0.43 4,123 8,101 $ 0.51
======== ========
Effect of Dilutive Securities
Impact of:
Assumed conversion of preferred
to common stock -- 346
Assumed exercises of outstanding
options 88 81
Preferred stock dividends
available to common
shareholders -- 99
Elimination of tax benefit of
allocated preferred dividends -- (21)
Additional expense required to fund
ESOP debt, net of tax impact -- 1
--------------------- ----------------------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $ 3,604 8,559 $ 0.42 $ 4,202 8,528 $ 0.49
================================== ===================================
E. Summary of Significant Accounting Policies:
Stock-based compensation
Omega accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees", and has adopted the disclosure
provisions of FASB No. 148, "Accounting for Stock-Based Compensation". The
following proforma information regarding net income and earnings per share
assumes the adoption of Statement No. 123 for stock options granted
subsequent to December 31, 1994. The estimated fair value of the options
is amortized to expense over the vesting period.
The fair value was estimated at the date of grant using a Black-Scholes
option-pricing model utilizing various assumptions. Compensation expense,
net of related tax, amounted to $103,000 and $107,000 in the first quarter
of 2004 and 2003, respectively and is included in the proforma net income
reported below (in thousands, except per share data).
Quarter ended March 31,
2004 2003
-------- --------
Net income As reported $ 3,604 $ 4,222
Pro forma 3,501 4,115
Basic earnings per share As reported $ 0.43 $ 0.51
Pro forma 0.42 0.50
Diluted earnings per share As reported $ 0.42 $ 0.49
Pro forma 0.41 0.48
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because Omega's employee stock options
have characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
F. Recent Accounting Pronouncements:
In January 2003, the FASB issued 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. In December 2003, the FASB reissued FIN
46 with certain modifications and clarifications. Application of this
guidance was effective for interest in certain VIEs commonly referred to
as special-purpose entities as of December 31, 2003. Omega adopted FIN 46
on March 31, 2004. The Corporation does not expect the application of FIN
46 to have a material impact on financial condition or results of
operations.
G. Subsequent Event:
On April 20, 2004, Omega and Sun Bancorp, Inc., parent company of SunBank,
Mid-Penn Insurance Associates, Sun Investment Services, Bank Capital
Services and Sentry Trust Company, announced that Omega had agreed to
acquire Sun Bancorp, Inc. Under the terms of the merger agreement, Sun
Bancorp shareholders will be entitled to receive either 0.664 shares of
Omega common stock for each share of Sun Bancorp common stock or $23.25 in
cash for each share held subject to pro rata allocation such that 20% of
Sun Bancorp common stock shall be paid in cash and 80% will be in the form
of Omega common stock. The definitive merger agreement has been approved
unanimously by the Boards of Directors of both companies. The transaction
is subject to all required regulatory approvals and approvals by Omega
Financial Corporation and Sun Bancorp shareholders and certain other
customary conditions. The transaction is anticipated to close late in the
third quarter or early fourth quarter 2004.
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, 2003. 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 2003 Annual Report to Shareholders or in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003. Copies of these
reports may be obtained from Omega upon request and without charge (except
for the exhibits thereto) as described above.
- --------------------------------------------------------------------------------
1. Comparison of the Three Months Ended March 31, 2004 and 2003
Operations Overview
Three months ended March 31, 2004 and 2003
The first quarter's income before income taxes in 2004 decreased $825,000,
or 15.2%, when compared to the same period in 2003. Net interest income
decreased $910,000, or 8.3% and the loan loss provision decreased by
$100,000, or 100%. Non-interest income decreased by $158,000 or 4.1% in
the first quarter of 2004 when compared to the same period in 2003, while
non-interest expense decreased by $143,000 or 1.5% during the same time
period.
After the income tax provision (which decreased by $207,000, or 17.3%
compared to the same period in 2003) was deducted from earnings, net
income was $618,000, or 14.6%, lower than the first quarter of 2003. The
effective tax rate for the first quarter of 2004 was 21.6%, as compared to
the first quarter of 2003 of 22.1%.
Following are selected key ratios for the period:
--------------------------------------------------------------------------
Three Months Ended
March 31
--------------------
2004 2003
-------- --------
Return on average assets (annualized)............. 1.28% 1.48%
Return on average equity (annualized)............. 8.48 10.25
Dividend payout ratio (common).................... 70.63 55.74
Average equity to average assets.................. 15.09 14.48
--------------------------------------------------------------------------
Net Interest Income
Three months ended March 31, 2004 and 2003
The net interest margin, at 3.89% for the first quarter of 2004, was 31
basis points lower than the first quarter of 2003, with a $14,247,000 or
1.4% decrease in average earning assets in the first quarter of 2004 from
the first quarter of 2003. Changes in volumes, net of differences caused
by number of days in the period, resulted in a $74,000 increase in net
interest income. Yield on earning assets in the first quarter of 2004
decreased by 58 basis points when compared to 2003's first quarter, while
cost of funding decreased by 27 basis points; these changes in rates
resulted in a decrease in net interest income of $984,000. In order to
maximize net income, Omega invests in certain loans and securities whose
earnings are exempt from federal income taxation and therefore have rates
that are generally lower than rates on taxable instruments. During the
first quarter of 2004, average tax-free assets owned were $8,197,000 more
than in the first quarter of 2003, with average rates of 67 basis points
less. When the net interest margin is adjusted for the tax benefit
received from owning these instruments, it is referred to as the net
interest margin on a fully tax-equivalent basis. Taking effect of the
increased balances and decreased rates on tax-free assets in the first
quarter of 2004, the net interest margin on a fully tax-equivalent basis
was 4.12% compared to 4.46% in the first quarter of 2003.
Following are key net interest margin ratios (annualized):
----------------------------------------------------------------
Three Months Ended
March 31,
---------------------
2004 2003
---------------------
Yield on average earning assets......... 5.06% 5.64%
----------------------------------------------------------------
Cost to fund earning assets............. 1.17 1.44
----------------------------------------------------------------
Net interest margin..................... 3.89 4.20
----------------------------------------------------------------
Net interest margin - tax equivalent.... 4.12 4.46
----------------------------------------------------------------
At March 31, 2004, Omega had $472,997,000 of earning assets scheduled to
reprice over the next twelve months as compared to $474,511,000 in
interest-sensitive liabilities, resulting in a negative gap of $1,514,000,
or 0.1% 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, assuming that interest
rates would increase and decrease by 100 and 200 basis points. These
simulations assume no volume or mix changes in the balance sheet. As the
table below indicates, Omega is exposed to a loss of income over the next
twelve months if interest rates fall. There have been no material changes
in reported interest rate risk since December 31, 2003. For example, net
interest income at risk for an immediate 100 basis point decrease in rates
as of March 31, 2004 was $1,620,000, or 4.2%, of net interest income,
compared to $1,541,000, or 3.9%, of net interest income at risk on
December 31, 2003. Conversely, the results suggest that an immediate 100
basis point increase in interest rates would increase net interest income
by approximately $1,608,000, or 4.2%, over a 12-month period.
Effect of Interest Rate Risk on Net Interest Income
(in $ thousands)
March 31, 2004 December 31, 2003
- -------------------------------------- ---------------------------------------
Change in Change in Net Change in Change in Net
Interest Rates Interest Percent Interest Rates Interest Percent
(Basis Points) Income Change (Basis Points) Income Change
- -------------------------------------- ---------------------------------------
200 3,261 8.5% 200 2,936 7.5%
100 1,629 4.3% 100 1,465 3.7%
0 -- 0 --
(100) (1,667) 4.4% (100) (1,541) 3.9%
(200) (4,161) 10.9% (200) (4,045) 10.3%
Loan Loss Provision
In the first quarter of 2004, no loan loss provision was recorded, as
compared to the $100,000 loan loss provision that was recorded in the
first quarter of 2003. The change in the loan loss provision is reflective
of the movement in non-performing loans from the previous quarter and an
analysis of the adequacy of the allowance for loan loss reserve. In the
first quarter of 2004, non-performing loans decreased by $131,000, or
3.8%, from $3,418,000 on December 31, 2003 to $3,287,000 on March 31,
2004.
Other Income and Expense
Three months ended March 31, 2004 and 2003
Other income decreased $158,000, or 4.1%, in the first quarter of 2004 as
compared to the same period in 2003. Service fee income on deposit
accounts decreased by $65,000, or 4.6%. This has occurred primarily as a
result of the Free Checking product introduced in the latter part of 2002.
The product continues to gain popularity among Omega's customers, reducing
traditional service fee income on deposits. Service fees on loans
decreased by $121,000, or 30.1% due to reduced activity in loan rate
modifications and refinancings. The lower rate environment has also caused
a reduction in the rate earned on bank owned life insurance, causing a
$32,000 decline in earnings on BOLI when comparing the first quarter
results of 2004 and 2003. Trust fees increased in the first quarter of
2004 by $23,000, or 2.6% when compared to the same time period in 2003.
Other non-interest income increased by a total of $65,000, due primarily
to two factors. Fee income from commissions received from investment
services and insurance sales increased by $105,000, or 100% in the first
quarter of 2004. These are services offered by Omega Financial
Corporation, beginning in December 2002. Omega representatives function as
agents and registered representatives in placing business with a
broker-dealer and insurance brokers. This increase in other non-interest
income was offset by a reduction of $69,000 in premium earnings from
Omega's reinsurance subsidiary. Gains on the sale of investment
securities, loans and other assets were $28,000 lower in the first quarter
of 2004 than in the first quarter of 2003.
As a percentage of average assets, annualized other income net of gains on
securities, loans and other assets was 1.33 % for the first quarter of
2004 as compared to 1.36 % for the same period in 2003.
Other expenses decreased $143,000, or 1.5%, in the first quarter of 2004
as compared to the same period in 2003. Salaries and employee benefits
increased $16,000, or 0.3%, in 2004 as compared to the same period in
2003. Occupancy and equipment expense in total decreased by $16,000, or
1.2%. Other non-interest expenses decreased by $147,000 or 5.5%, compared
to the same period in 2003 as a result of cost saving initiatives by
management.
As a percentage of average assets, annualized expenses for the quarter
ended March 31, 2004 were 3.28% and were 3.30% for the same period in
2003.
Federal Income Tax
The effective tax rate for the three months ended March 31, 2004 was 21.6%
compared to the same period in 2003 when the effective tax rate was 22.1%.
This improvement was due primarily to the Corporation receiving increased
tax deductions for dividends it paid on company stock held by the Employee
Stock Ownership Plan.
2. Investment Securities
Management of the investment portfolio entails evaluation and realignment
of the size and mix of the portfolio in order to balance various
characteristics of the balance sheet, including asset quality, liquidity,
yield relationships, maturity and tax planning. The following schedule
details characteristics of the investment portfolio as of March 31, 2004
and December 31, 2003 (in thousands).
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 2004 Cost Gains Losses Value
-----------------------------------------------------
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $ 104,141 $ 886 ($ 167) $ 104,860
Obligations of state and
political subdivisions 88,072 1,959 (12) 90,019
Corporate securities 2,793 28 (4) 2,817
Mortgage backed securities 1,123 29 -- 1,152
Equity securities 11,993 5,834 -- 17,827
-----------------------------------------------------
Total $ 208,122 $ 8,736 ($ 183) $ 216,675
=====================================================
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 2003 Cost Gains Losses Value
-----------------------------------------------------
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $ 117,928 $ 985 ($ 583) $ 118,330
Obligations of state and
political subdivisions 99,002 1,965 (139) 100,828
Corporate securities 2,901 23 (13) 2,911
Mortgage backed securities 1,298 34 -- 1,332
Equity securities 11,397 5,741 -- 17,138
-----------------------------------------------------
Total $ 232,526 $ 8,748 ($ 735) $ 240,539
=====================================================
Total investment securities as a percentage of total assets at March 31,
2004 and December 31, 2003 were 19.1% and 21.1%, respectively. Amortized
cost of securities maturing or repricing in one year or less comprised
39.6% of the total amortized cost of investment securities of $208,122,000
as of March 31, 2004, as compared to 43.6% of total investment securities
of $232,526,000 as of December 31, 2003. There was $210,000 in investments
in instruments of foreign countries on March 31, 2004.
3. Loans
Net loans in the first three months of 2004 decreased by $810,000, or 0.1%
from the balance at December 31, 2003, bringing the total to $776,765,000
at March 31, 2004. From December 31, 2003 to March 31, 2004, commercial
loans increased by $6,464,000. Offsetting this increase was the decline in
consumer mortgage and home equity loan outstanding balances of $6,594,000
during the same time period. Other consumer loan balances declined by
$799,000 from December 31, 2003 to March 31, 2004.
Changes in the allowance for loan losses for the three months ended March
31, 2004 and 2003 were as follows (in thousands):
- --------------------------------------------------------------------------------
2004 2003
-------- --------
Balance at January 1 ............................. $ 10,569 $ 11,052
Charge-offs ...................................... (143) (160)
Recoveries ....................................... 25 42
-------- --------
Net charge-offs .............................. (118) (118)
Provision for loan losses ........................ -- 100
-------- --------
Balance at March 31 .............................. $ 10,451 $ 11,034
======== ========
- --------------------------------------------------------------------------------
Management performs a quantitative analysis to support the adequacy of the
allowance for loan losses. This analysis includes review of historical
charge-off rates for loan categories, fluctuations and trends in the
amount of classified loans and economic factors. Significant to this
analysis is any change in observable trends that may be occurring relative
to loans, to assess potential credit weaknesses. Current economic factors
and trends in risk ratings are considered in the determination and
allocation of the allowance for loan losses. The allowance for loan losses
at March 31, 2004 and 2003 represented 1.33% and 1.39%, respectively, of
the total loans outstanding, net of unearned interest.
Set forth below is an analysis of Omega's non-performing loans as of March
31, 2004 as compared to December 31, 2003.
- --------------------------------------------------------------------------------
Non-performing Loans
(In thousands)
March 31, December 31,
2004 2003
-------- ------------
Non-accrual loans ................................... $ 2,623 $ 2,588
Accruing loans past due 90 days or more ............. 444 607
Restructured loans .................................. 220 223
-------- --------
Total non-performing loans .......................... $ 3,287 $ 3,418
======== ========
Non-performing loans as percent of allowance ........ 31.5% 32.3%
- --------------------------------------------------------------------------------
The decrease in non-performing loans from December 31, 2003 to March 31,
2004 is primarily due to the decrease in loans delinquent by 90 days or
more.
4. Deposits and Other Sources of Funds
Deposits provide the primary source of funding for loans and investment
securities. At March 31, 2004, total deposits decreased by $9,093,000 as
compared to December 31, 2003. As of March 31, 2004, interest bearing
deposits decreased by $3,053,000, or 0.4% and non-interest bearing
accounts decreased by $6,040,000 or 3.9%, when compared to December 31,
2003.
Borrowed funds are used as an additional source of funding for loans and
investment securities as well as to fund the Corporation's Stock
Repurchase Program. As of March 31, 2004, Omega had short-term borrowings
(maturities within one year) in the amount of $31,516,000 and long-term
debt in the amount of $21,305,000. At December 31, 2003, short-term
borrowings were $33,263,000 and long-term debt was $21,600,000. This
represents an overall decrease in outstanding debt of $2,042,000, with
long-term debt decreasing by $295,000 and short-term borrowings decreasing
by $1,747,000.
5. Regulatory Capital Compliance
Bank regulatory authorities in the United States issue risk-based capital
standards. These capital standards relate a banking company's capital to
the risk profile of its assets and provide the basis by which all banking
companies and banks are evaluated in terms of capital adequacy. The
risk-based capital standards require all banks to have Tier 1 capital of
at least 4% and total capital, including Tier 1 capital, of at least 8% of
risk-adjusted assets. Tier 1 capital includes common stockholders' equity
and qualifying perpetual preferred stock together with related surpluses
and retained earnings. Total capital is comprised of Tier 1 capital,
limited life preferred stock, qualifying debt instruments, and the
reserves for possible loan losses. Banking regulators have also issued
leverage ratio requirements. The leverage ratio requirement is measured as
the ratio of Tier 1 capital to adjusted average assets.
At March 31, 2004, 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 March of 2004, the Board approved a new share repurchase program to
begin immediately, authorizing management to buy back up to 10% of Omega's
outstanding common stock. At that time, there were 8,483,950 common shares
outstanding with 848,395 shares eligible to be repurchased. This program
will remain in effect through December 31, 2004, or until the 10% limit is
reached; however, it may be discontinued at any time. As of March 31,
2004, no shares have been repurchased in conjunction with this program.
7. Recent Development
On April 20, 2004, Omega and Sun Bancorp, Inc., parent company of SunBank,
Mid-Penn Insurance Associates, Sun Investment Services, Bank Capital
Services and Sentry Trust Company, announced that Omega had agreed to
acquire Sun Bancorp, Inc. Under the terms of the merger agreement, Sun
Bancorp shareholders will be entitled to receive either 0.664 shares of
Omega common stock for each share of Sun Bancorp common stock or $23.25 in
cash for each share held subject to pro rata allocation such that 20% of
Sun Bancorp common stock shall be paid in cash and 80% will be in the form
of Omega common stock. The definitive merger agreement has been approved
unanimously by the Boards of Directors of both companies. The transaction
is subject to all required regulatory approvals and approvals by Omega
Financial Corporation and Sun Bancorp shareholders and certain other
customary conditions. The transaction is anticipated to close late in the
third quarter or early fourth quarter 2004.
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 2003
Annual Report to Shareholders. To the knowledge of Omega, there have been
no material changes in the market risks that impact Omega or its
procedures relative to these risks, since December 31, 2003.
Item 4. CONTROLS AND PROCEDURES
Quarterly evaluation of the Company's Disclosure Controls and Internal
Controls. The Company's management, with the participation of its chief
executive officer and chief financial officer, conducted an evaluation of
the effectiveness of our disclosure controls and procedures, as defined in
Exchange Act Rule 13a-15(e), as of March 31, 2004. Based on that
evaluation, the Company's chief executive officer and chief financial
officer concluded that the Company's disclosure controls and procedures
were effective in reaching a reasonable level of assurance that management
is timely alerted to material information relating to the Company during
the period when the Company's periodic reports are being prepared.
During the quarter ended March 31, 2004, there has not occurred any change
in the Company's internal control over financial reporting, as defined in
Exchange Act Rule 13a-15(f), that has materially affected, or is
reasonably likely to materially affect, the Company's internal control
over financial reporting.
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. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or fraud may occur and not be detected.
PART II. Other Information
Item 1. Legal Proceedings
None of a material nature.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
In March of 2004, Omega's Board approved a new share repurchase program to
begin immediately, authorizing management to buy back up to 10% of Omega's
outstanding common stock. At that time, there were 8,483,950 common shares
outstanding with 848,395 shares eligible to be repurchased. This program
will remain in effect through December 31, 2004, or until the 10% limit is
reached; however, it may be discontinued at any time. As of March 31,
2004, no shares have been repurchased in conjunction with this program.
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
The Company filed a Form 8-K (Items 9 and 12) on January 26, 2004
regarding its financial earnings press release.
The Company filed a Form 8-K (Items 9 and 12) on March 24, 2004 regarding
a press release announcing a share repurchase program approved by the Board of
Directors.
Exhibits:
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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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMEGA FINANCIAL CORPORATION
-----------------------------------
(Registrant)
May 5, 2004 By: /s/ David B. Lee
- ------------------------- -----------------------------------
Date David B. Lee
Chairman and
Chief Executive Officer
May 5, 2004 /s/ Daniel L. Warfel
- ------------------------- -----------------------------------
Date Daniel L. Warfel
Executive Vice President and
Chief Financial Officer