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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 June 30, 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 August 3, 2004:
8,443,996 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,
2004 2003
----------- ------------
Assets
Cash and due from banks $ 31,494 $ 32,420
Interest bearing deposits with other banks 19,650 10,682
Federal funds sold 28,200 17,850
Investment securities available for sale 242,976 240,539
Total loans 773,829 788,144
Less: Allowance for loan losses (10,226) (10,569)
----------- -----------
Net loans 763,603 777,575
Premises and equipment, net 13,934 14,348
Bank-owned life insurance 37,818 37,134
Other assets 12,195 9,618
----------- -----------
TOTAL ASSETS $ 1,149,870 $ 1,140,166
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 157,656 $ 155,702
Interest bearing 759,002 751,878
----------- -----------
Total deposits 916,658 907,580
Short-term borrowings 27,989 33,263
Other liabilities 14,502 6,950
ESOP debt 2,360 2,521
Long-term debt 21,005 21,600
Other interest bearing liabilities 840 813
----------- -----------
TOTAL LIABILITIES 983,354 972,727
Shareholders' Equity
Preferred stock, par value $5.00 per share:
Authorized - 5,000,000 shares, none issued
Unearned compensation related to ESOP debt (1,502) (1,624)
Common stock, par value $5.00 per share:
Authorized - 25,000,000 shares;
Issued -
10,100,065 shares at June 30, 2004;
10,048,368 shares at December 31, 2003 50,500 50,242
Outstanding -
8,440,520 shares at June 30, 2004;
8,458,823 shares at December 31, 2003
Capital surplus 16,915 15,711
Retained earnings 148,956 146,430
Accumulated other comprehensive income 2,643 5,209
Cost of common stock in treasury:
1,659,545 shares at June 30, 2004;
1,589,545 shares at December 31, 2003 (50,996) (48,529)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 166,516 167,439
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,149,870 $ 1,140,166
=========== ===========
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,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Interest Income:
Interest and fees on loans $ 10,995 $ 12,200 $ 22,192 $ 24,522
Interest and dividends on investment securities 1,759 2,132 3,612 4,456
Other interest income 91 125 147 222
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 12,845 14,457 25,951 29,200
Interest Expense:
Interest on deposits 2,643 3,235 5,335 6,639
Interest on short-term borrowings 72 74 148 197
Interest on long-term debt and
other interest bearing liabilities 244 279 492 495
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 2,959 3,588 5,975 7,331
---------- ---------- ---------- ----------
NET INTEREST INCOME 9,886 10,869 19,976 21,869
Provision for loan losses -- 150 -- 250
---------- ---------- ---------- ----------
INCOME FROM CREDIT ACTIVITIES 9,886 10,719 19,976 21,619
Other Income:
Service fees on deposit accounts 1,577 1,462 2,916 2,866
Service fees on loans 366 379 647 781
Earnings on bank-owned life insurance 330 387 684 773
Trust fees 884 912 1,799 1,804
Gain on sale of loans and other assets 2 275 1 279
Net gains on investment securities 203 699 211 730
Other 922 871 1,764 1,648
---------- ---------- ---------- ----------
TOTAL OTHER INCOME 4,284 4,985 8,022 8,881
Other Expense:
Salaries and employee benefits 4,802 5,089 9,757 10,028
Net occupancy expense 559 556 1,186 1,186
Equipment expense 729 681 1,431 1,396
Data processing service 430 421 853 840
Other 2,524 3,285 5,050 5,958
---------- ---------- ---------- ----------
TOTAL OTHER EXPENSE 9,044 10,032 18,277 19,408
---------- ---------- ---------- ----------
Income before taxes 5,126 5,672 9,721 11,092
Income tax expense 1,195 1,440 2,186 2,638
---------- ---------- ---------- ----------
NET INCOME $ 3,931 $ 4,232 $ 7,535 $ 8,454
========== ========== ========== ==========
Net income per common share:
Basic $ 0.46 $ 0.51 $ 0.89 $ 1.02
Diluted $ 0.46 $ 0.49 $ 0.88 $ 0.99
Weighted average shares and equivalents:
Basic 8,469,327 8,103,453 8,470,144 8,102,215
Diluted 8,532,528 8,541,569 8,545,729 8,531,939
Dividends declared per share:
Common $ 0.30 $ 0.29 $ 0.60 $ 0.58
Preferred -- $ 0.45 -- $ 0.90
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
Six Months Ended
June 30,
---------------------
2004 2003
-------- --------
Cash flows from operating activities:
Net income $ 7,535 $ 8,454
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,076 2,739
Provision for loan losses 250
Gain on sale of investment securities (211) (730)
Non-monetary gift -- 48
Gain on sale of fixed assets
and other property owned (1) (4)
Loss (Gain) on sale of loans 2 (275)
Decrease (Increase) in deferred tax asset 66 (359)
Increase in cash surrender value of bank owned life insurance (684) (773)
Increase in interest receivable and other assets (1,278) (65)
Decrease in interest payable (20) (119)
Increase in taxes payable 197 43
Amortization of deferred net loan costs (185) (390)
Deferral of net loan fees 148 413
Increase in accounts payable
and accrued expenses (658) (1,860)
-------- --------
Total adjustments (548) (1,082)
-------- --------
Net cash provided by operating activities 6,987 7,372
Cash flows from investing activities:
Proceeds from the sale or maturity of
investment securities available for sale 69,996 52,290
Purchase of:
Investment securities available for sale (69,092) (55,783)
Net change in interest bearing deposits with other banks (8,968) (11,162)
Decrease (increase) in loans 14,009 (16,886)
Gross proceeds from sale of loans (2) 12,008
Capital expenditures (740) (900)
Sale of fixed assets and other property owned 12 10
Net change in federal funds sold (10,350) 20,350
-------- --------
Net cash used in investing activities (5,135) (73)
Cash flows from financing activities:
Increase in deposits, net 9,078 7,105
Net change in short-term borrowings (5,274) (15,301)
Issuance of long term debt -- 11,500
Principal payment on long-term debt (595) (560)
Net change in other interest bearing liabilities 27 22
Dividends paid (5,077) (4,903)
Tax benefit from preferred stock dividend and stock option activity 68 65
Issuance of common stock 1,462 1,358
Acquisition of treasury stock (2,467) (1,855)
-------- --------
Net cash used in financing activities (2,778) (2,569)
-------- --------
Net (decrease) increase in cash and due from banks $ (926) $ 4,730
======== ========
Cash and due from banks at beginning of period $ 32,420 $ 36,049
Cash and due from banks at end of period 31,494 40,779
-------- --------
Net (decrease) increase in cash and due from banks $ (926) $ 4,730
======== ========
Interest paid $ 5,975 $ 7,450
Income taxes paid 1,916 3,555
OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SIX AND THREE MONTHS ENDED JUNE 30, 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 six months and
three months ended June 30, 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 its customers through letters of credit and lines of credit.
Standby letters of credit are instruments issued by the Corporation's bank
subsidiary that guarantee the beneficiary payment by the bank in the event
of default by the bank'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 bank holds collateral supporting those commitments for
which collateral is deemed necessary. At June 30, 2004 standby letters of
credit issued and outstanding amounted to $12,870,000 as compared to
$13,118,000 on December 31, 2003. The fair market value of the standby
letters of credit at June 30, 2004 and December 31, 2003 was $97,000 and
$72,000, respectively. The fair market value of standby letters of credit
is recorded as a liability in accordance with FIN 45.
At June 30, 2004, the bank had $165,913,000 outstanding in loan
commitments and other unused lines of credit extended to its customers. Of
this amount, $113,663,000, or 68.5%, were commercial commitments. The
remaining amounts of $52,250,000 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 June 30,
2004, the balance of the ESOP debt was $2,360,000 as compared to
$2,521,000 at December 31, 2003.
C. Investment Securities:
In accordance with the disclosure requirements of EITF 03-01, the
following table shows gross unrealized losses and fair value, aggregated
by category and length of time that individual investment securities have
been in a continuous unrealized loss position, at June 30, 2004 (in
thousands):
Less Than 12 Months 12 Months or Longer
------------------------ ------------------------
Fair Unrealized Fair Unrealized
Value Losses Value Losses
---------- ---------- ---------- ----------
Description of Securities
U.S. Treasury securities and obligations of other
U.S. Government agencies and corporations .......... $ 78,017 $ 943 $ 16,168 $ 696
Obligations of state and political subdivisions ....... 25,569 342 2,310 61
Corporate and other securities ........................ 1,081 18 882 18
Mortgage-backed securities ............................ 15,637 165 -- --
---------- ---------- ---------- ----------
Subtotal, debt securities ............................. 120,304 1,468 19,360 775
========== ========== ========== ==========
Common stock........................................... 226 4 -- --
---------- ---------- ---------- ----------
Total temporarily impaired securities ................. $ 120,530 $ 1,472 $ 19,360 $ 775
========== ========== ========== ==========
The unrealized losses noted above are considered to be temporary
impairments, as the majority of the investments are debt securities whose
decline in value is due only to interest rate fluctuations. As a result,
the payment of contractual cash flows, including principal repayment, is
not at risk. Management has the intent and ability to hold these
investments until market recovery or maturity. Debt securities with
unrealized losses for a period of less than 12 months includes 46
investments in US Government agency debt securities, 9 investments in
mortgage-backed securities, 7 investments in corporate securities and 60
investments in obligations of state and municipal subdivisions. Debt
securities with unrealized losses for a period of 12 months or longer
includes 9 investments in US Government agency debt securities, 6
investments in corporate securities and 5 investments in obligations of
state and municipal subdivisions. Debt securities included in the above
table have maturity or pre-refund dates ranging from October 2004 to
December 2017. The unrealized loss position for each security ranges from
.01% to 5.20% of the securities' amortized cost as of June 30, 2004.
Unrealized losses for a period of less than 12 months on common stock
include investment in 2 equity issues.
D. Income Taxes:
The effective tax rate for the six months ended June 30, 2004 was 22.5%,
compared to the same period in 2003 when the effective tax rate was 23.8%.
For the second quarter of 2004, the effective tax rate was 23.3% compared
to 25.4% in the second quarter of 2003. These decreases in effective tax
rates from 2003 to 2004 are the effect of the Corporation receiving
increased tax deductions for dividends it paid on company stock held by
the Employee Stock Ownership Plan.
E. Comprehensive Income:
Components of other comprehensive income consist of the following (in
thousands):
Three Months June 30, 2004 Three Months June 30, 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 $ 5,126 $ 1,195 $ 3,931 $ 5,672 $ 1,440 $ 4,232
Other comprehensive income:
Unrealized gains on available for sale
securities:
Unrealized holding losses arising
during the period (4,283) (1,499) (2,784) 3 1 2
Less reclassification adjustment for
gains included in net income (203) (71) (132) (699) (245) (454)
---------- ---------- ---------- ---------- ---------- ----------
Other comprehensive income (loss) (4,486) (1,570) (2,916) (696) (244) (452)
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income $ 640 $ (375) $ 1,015 $ 4,976 $ 1,196 $ 3,780
========== ========== ========== ========== ========== ==========
Six Months June 30, 2004 Six Months June 30, 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 $ 9,721 $ 2,186 $ 7,535 $ 11,092 $ 2,638 $ 8,454
Other comprehensive income:
Unrealized gains on available for sale
securities:
Unrealized holding losses arising
during the period (3,737) (1,308) (2,429) (98) (34) (64)
Less reclassification adjustment for
gains included in net income (211) (74) (137) (730) (256) (474)
---------- ---------- ---------- ---------- ---------- ----------
Other comprehensive income (loss) (3,948) (1,382) (2,566) (828) (290) (538)
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income $ 5,773 $ 804 $ 4,969 $ 10,264 $ 2,348 $ 7,916
========== ========== ========== ========== ========== ==========
F. 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.
Computations of Earnings per Share
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, 2004 Three Months Ended June 30, 2003
---------------------------------- -----------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
---------------------------------- -----------------------------------
Net income $ 3,931 $ 4,232
Less: Preferred stock dividends -- (99)
-------- --------
Basic EPS
Income available to common
shareholders 3,931 8,469 $ 0.46 4,133 8,103 $ 0.51
======== ========
Effect of Dilutive Securities
Impact of:
Assumed conversion of preferred
to common stock -- 346
Assumed exercises of outstanding
options 63 92
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 $ 3,931 8,532 $ 0.46 $ 4,212 8,541 $ 0.49
================================== ===================================
Six Months Ended June 30, 2004 Six Months Ended June 30, 2003
---------------------------------- -----------------------------------
Income Shares Per-Share Income Shares Per-Share
Numerator Denominator Amount Numerator Denominator Amount
---------------------------------- -----------------------------------
Net income $ 7,535 $ 8,454
Less: Preferred stock dividends -- (198)
-------- --------
Basic EPS
Income available to common
shareholders 7,535 8,470 $ 0.89 8,256 8,102 $ 1.02
======== ========
Effect of Dilutive Securities
Impact of :
Assumed conversion of preferred
to common stock -- 346
Assumed exercises of outstanding
options 76 84
Preferred stock dividends
available to common
shareholders -- 198
Elimination of tax benefit of
allocated preferred dividends -- (43)
Additional expense required to fund
ESOP debt, net of tax impact -- 2
--------------------- ----------------------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $ 7,535 8,546 $ 0.88 $ 8,413 8,532 $ 0.99
================================== ===================================
G. 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 pro forma 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 pro forma net income reported below
(in thousands, except per share data).
Quarter ended June 30 Year To Date
2004 2003 2004 2003
-------- -------- -------- --------
Net income As reported $ 3,931 $ 4,232 $ 7,535 $ 8,454
Pro forma 3,827 4,125 7,328 8,239
Compensation expense, net of tax 104 107 207 215
Basic earnings per share As reported $ 0.46 $ 0.51 $ 0.89 $ 1.02
Pro forma 0.45 0.50 0.87 0.99
Diluted earnings per share As reported $ 0.46 $ 0.49 $ 0.88 $ 0.99
Pro forma 0.45 0.48 0.86 0.96
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.
H. 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 application of FIN 46 did not have a material
impact on its financial condition or results of operations.
I. Pending Acquisition:
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 will 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. Special meetings for shareholders will be held on
September 9, 2004 to vote on the transaction. The transaction is
anticipated to close late in the third quarter or early fourth quarter
2004.
The acquisition will be accounted for as a purchase. Purchase accounting
requires the Corporation to allocate the total purchase price of the
acquisition to the assets acquired and liabilities assumed, based on their
respective fair values at the acquisition date, with any remaining
acquisition cost being recorded as goodwill. Resulting goodwill balances
are then subject to an impairment review on at least an annual basis. The
results of Sun Bancorp's operations will be included in the Corporation's
financial statements prospectively from the date of the acquisition.
The total purchase price is estimated to be approximately $189 million,
which includes the value of the Corporation's stock to be issued, Sun
Bancorp options to be converted and certain acquisition costs. Acquisition
costs currently deferred, and included in other assets as of June 30, 2004
was $721,000. The estimated fair value of the net assets of Sun Bancorp as
of June 30, 2004 were $44 million, and accordingly, the purchase price
exceeds the estimated fair value of the net assets by approximately$145
million as of this date. The total purchase price will be allocated to the
net assets acquired as of the merger effective date, based on fair market
values at that date. The Corporation expects to record a core deposit
intangible asset and goodwill as a result of the purchase accounting.
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 Six and Three Months Ended June 30, 2004 and 2003
Operations Overview
A. Six months ended June 30, 2004 and 2003
For the first six months of 2004, income before income taxes decreased by
$1,371,000, or 12.4%, compared to the same period in 2003. Income from
credit activities decreased $1,643,000, or 7.6%. Non-interest income
decreased $859,000 or 9.7% while non-interest expense decreased
$1,131,000, or 5.8%.
The tax provision for the first six months of 2004 decreased by $452,000,
or 17.1% when compared to the first six months of 2003. The effective tax
rate for this period decreased from 23.8% in 2003 to 22.5% for the
corresponding period in 2004. Net income decreased by $919,000, or 10.9%,
in the first six months of 2004 as compared to the same period in 2003.
B. Three months ended June 30, 2004 and 2003
The second quarter's income before income taxes decreased $546,000 when
compared to the same period in 2003. Income from credit activities
decreased by $833,000, from $10,719,000 in the second quarter of 2003 to
$9,886,000 in the second quarter of 2004. Non-interest income decreased
$701,000, or 14.1% and non-interest expense decreased by $988,000, or
9.8%.
After the income tax provision (which decreased by $245,000, or 17.0%
compared to the same period in 2003) was deducted from earnings, net
income was $301,000, or 7.1%, lower than the second quarter of 2003. The
effective tax rate for the second quarter of 2004 was 23.3%, as compared
to the second quarter of 2003 of 25.4%.
Following are selected key ratios for the period:
Three Months Ended Six Months Ended
June 30 June 30
---------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Return on average assets (annualized) ..... 1.38% 1.47% 1.33% 1.48%
Return on average equity (annualized) ..... 9.19 10.18 8.84 10.22
Dividend payout ratio (common) ............ 64.40 55.53 67.38 55.64
Average equity to average assets .......... 15.00 14.47 15.05 14.48
Net Interest Income
A. Six months ended June 30, 2004 and 2003
The net interest margin, at 3.84% for the first six months of 2004, was 30
basis points lower than the first six months of 2003, with a $13,238,000
or 1.3% decrease in average earning assets in the first six months of 2004
as compared to the first six months of 2003. Yield on earning assets in
the first six months of 2004 decreased by 55 basis points when compared to
2003's first six months, while cost of funding decreased by 25 basis
points; these changes in rates resulted in a decrease in net interest
income of $1,954,000. Changes in volumes, net of differences caused by
number of days in the period, resulted in a $61,000 increase in net
interest income. 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 half of 2004, average tax-free
assets owned were $2,493,000 less than in the first half of 2003, with
average rates of 45 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 decreased balances and decreased rates on tax-free
assets in the first half of 2004, the net interest margin on a fully
tax-equivalent basis was 4.06% compared to 4.39% in the first half of
2003.
B. Three months ended June 30, 2004 and 2003
The net interest margin, at 3.76% for the second quarter of 2004, was 34
basis points lower than the second quarter of 2003, with a $12,170,000 or
1.1% decrease in average earning assets resulting in a 9.0% decrease in
net interest income. Yield on earning assets in the second quarter of 2004
declined by 56 basis points when compared to 2003's second quarter, while
cost of funding decreased by 22 basis points.
Following are key net interest margin ratios (annualized):
Three Months Ended Six Months Ended
June 30 June 30
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Yield on average earning assets ........... 4.89% 5.45% 4.99% 5.54%
Cost to fund earning assets ............... 1.13 1.35 1.15 1.40
Net interest margin ....................... 3.76 4.10 3.84 4.14
Net interest margin - tax equivalent ...... 3.98 4.35 4.06 4.39
At June 30, 2004, Omega had $435,855,000 of earning assets scheduled to
reprice over the next twelve months as compared to $502,664,000 in
interest-sensitive liabilities, resulting in a negative gap of
$66,809,000, or 5.8% 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 June 30, 2004 was $1,456,000, or 3.8%, 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 $1,443,000, or 3.8%, over a 12-month period.
Possible Effect of Interest Rate Risk on Net Interest Income
Based on Interest Rate Shock Analysis
(in $ thousands)
June 30, 2004 December 31, 2003
- ------------------------------------ -------------------------------------
Change in Change in
Interest Change Interest Change
Rates in Net Rates in Net
(Basis Interest Percent (Basis Interest Percent
Points) Income Change Points) Income Change
- ------------------------------------ -------------------------------------
200 2,898 7.6% 200 2,936 7.5%
100 1,443 3.8% 100 1,465 3.7%
0 -- 0 --
(100) (1,456) 3.8% (100) (1,541) 3.9%
(200) (3,166) 8.3% (200) (4,045) 10.3%
Loan Loss Provision
During the first six months of 2004, no loan loss provision was recorded,
as compared to the $150,000 and $100,000 that was recorded in the second
quarter and first quarter of 2003, respectively. The change in the loan
loss provision is reflective of the change in credit quality, including
movement in non-performing loans in each quarter, as compared to 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. During the second quarter of 2004, non-performing loans
decreased by $190,000 or 5.8%, from March 31, 2004 to $3,097,000.
Other Income and Expense
A. Six months ended June 30, 2004 and 2003
Other income decreased $859,000, or 9.7%, in the first six months of 2004
as compared to the same period in 2003. Service fee income on deposit
accounts increased by $50,000, or 1.7%. Service fees on loans decreased by
$134,000, or 17.2%, 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 ("BOLI"), causing an $89,000,
or 11.6%, decline in earnings on BOLI when comparing the first six months
results of 2004 and 2003. Trust fees decreased in the first six months of
2004 by $5,000, or 0.3% when compared to the same time period in 2003.
Other non-interest income increased by a total of $116,000, due primarily
to two factors. Fee income from commissions received from investment
services and insurance sales increased by $211,000, or 74.8% in the first
six months of 2004 versus the same time period in 2003. 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 $138,000 in
premium earnings from Omega's reinsurance subsidiary. Gains on the sale of
investment securities, loans and other assets were $797,000 lower in the
first six months of 2004 than in the first six months of 2003.
As a percentage of average assets, annualized other income net of gains on
securities, loans and other assets was 1.38 % for the first six months of
2004 and 2003.
Other expenses decreased $1,131,000, or 5.8%, in the first six months of
2004 as compared to the same period in 2003. Salaries and employee
benefits decreased $271,000, or 2.7%, in the first six months of
2004 as compared to the same period in 2003. Occupancy and equipment
expense in total increased by $35,000, or 1.4%. Other non-interest
expenses decreased by $895,000 or 13.2%, compared to the same period in
2003. The bulk of this decrease was related to accelerated amortization of
$802,000 recorded on investments in limited partnership low-income housing
projects in June of 2003, due to declines in estimated residual values.
The remaining $93,000 in decreased expenses is the result of cost saving
initiatives by management.
As a percentage of average assets, annualized expenses for the
year-to-date through June 30, 2004 were 3.22% and were 3.40% for the same
period in 2003.
B. Three months ended June 30, 2004 and 2003
Other income decreased $701,000, or 14.1%, in the second quarter of 2004
as compared to the same period in 2003. Service fee income on deposit
accounts increased by $115,000, or 7.9%. Service fees on loans decreased
by $13,000, or 3.4% due to reduced activity in loan rate modifications and
refinancings. The lower rate environment has also caused a reduction in
the rate earned on BOLI, causing a $57,000 decline in earnings on BOLI
when comparing the second quarter results of 2004 and 2003. Trust fees
decreased in the second quarter of 2004 by $28,000, or 3.1% when compared
to the same time period in 2003. Other non-interest income increased by a
total of $51,000, due primarily to two factors. Fee income from
commissions received from investment services and insurance sales
increased by $106,000, or 61% in the second quarter of 2004. This increase
in other non-interest income was offset by a reduction of $70,000 in
premium earnings from Omega's reinsurance subsidiary. Gains on the sale of
investment securities, loans and other assets were $769,000 lower in the
second quarter of 2004 than in the second quarter of 2003.
As a percentage of average assets, annualized other income net of gains on
securities, loans and other assets was 1.43 % for the second quarter of
2004 as compared to 1.40 % for the same period in 2003.
Other expenses decreased $988,000, or 9.8%, in the second quarter of 2004
as compared to the same period in 2003. Salaries and employee benefits
decreased $287,000, or 5.6%, in 2004 as compared to the same period in
2003. Occupancy and equipment expense in total increased by $51,000, or
4.1%. Other non-interest expenses decreased by $752,000 or 20.3%, compared
to the same period in 2003. In June of 2003, there was accelerated
amortization of $802,000 recorded on investments in limited partnership
low-income housing projects, due to declines in estimated residual values.
This was partially offset by increases in costs associated with complying
with SEC rules as prescribed by the Sarbanes-Oxley Act of 2002.
As a percentage of average assets, annualized expenses for the quarter
ended June 30, 2004 were 3.17% and were 3.49% for the same period in 2003.
Federal Income Tax
The effective tax rate for the six months ended June 30, 2004 was 22.5%,
compared to the same period in 2003 when the effective tax rate was 23.8%.
For the second quarter of 2004, the effective tax rate was 23.3% compared
to 25.4% in the second quarter of 2003. These decreases in effective tax
rates from 2003 to 2004 are the effect of 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 June 30, 2004
and December 31, 2003 (in thousands).
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------
June 30, 2004
U.S. Treasury securities and
obligations of other U.S. Govern-
ment agencies and corporations $ 116,732 $ 101 ($ 1,639) $ 115,194
Obligations of state and
political subdivisions 88,006 1,107 (403) 88,710
Corporate securities 2,749 12 (36) 2,725
Mortgage backed securities 19,509 18 (165) 19,362
Equity securities 11,913 5,076 (4) 16,985
------------------------------------------------------
Total $ 238,909 $ 6,314 ($ 2,247) $ 242,976
======================================================
Securities Classified as Available for Sale
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------
December 31, 2003
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 June 30,
2004 and December 31, 2003 were 21.1% and 21.1%, respectively. Amortized
cost of securities maturing or repricing in one year or less comprised
25.6% of the total amortized cost of investment securities of $238,909,000
as of June 30, 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 June 30, 2004.
3. Loans
Net loans in the first six months of 2004 decreased by $13,972,000, or
1.8% from the balance at December 31, 2003, bringing the total to
$763,603,000 at June 30, 2004. From December 31, 2003 to June 30, 2004,
consumer mortgage and home equity loan outstanding balances decreased by
$10,939,000. Other consumer loan balances declined by $3,538,000 during
the same time period. Commercial loans increased by $162,000 from December
31, 2003 to June 30, 2004.
Changes in the allowance for loan losses for the six months ended June 30,
2004 and 2003 were as follows (in thousands):
2004 2003
-------- --------
Balance at January 1 ............................... $ 10,569 $ 11,052
Charge-offs ........................................ (409) (396)
Recoveries ......................................... 66 74
-------- --------
Net charge-offs ................................ (343) (322)
Provision for loan losses .......................... -- 250
-------- --------
Balance at June 30 ................................. $ 10,226 $ 10,980
======== ========
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, 2004 and 2003 represented 1.32% and 1.40%, 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, 2004 as compared to December 31, 2003.
Non-performing Loans
(In thousands)
June 30, December 31,
2004 2003
---------- -----------
Non-accrual loans ................................ $ 2,443 $ 2,588
Accruing loans past due 90 days or more .......... 430 607
Restructured loans ............................... 224 223
---------- ----------
Total non-performing loans ....................... $ 3,097 $ 3,418
========== ==========
Non-performing loans as percent of allowance ..... 30.3% 32.3%
The decrease of $321,000 in non-performing loans from December 31, 2003 to
June 30, 2004 was due to the reductions in loans delinquent by 90 days or
more and non-accrual loans.
4. Deposits and Other Sources of Funds
Deposits provide the primary source of funding for loans and investment
securities. As of June 30, 2004, total deposits increased by $9,078,000 as
compared to December 31, 2003. As of June 30, 2004, interest bearing
deposits increased by $7,124,000, or 1.0% and non-interest bearing
accounts increased by $1,954,000 or 1.3%, 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 June 30, 2004, Omega had short-term borrowings
(maturities within one year) in the amount of $27,989,000 and long-term
debt in the amount of $21,005,000. 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 $5,869,000, with
long-term debt decreasing by $595,000 and short-term borrowings decreasing
by $5,274,000.
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, 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 of Directors 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 by the
Board of Directors. As of June 30, 2004, 70,000 shares have been
repurchased in conjunction with this program, at an average cost of $35.25
per share.
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 of 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 June 30, 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 June 30, 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 by the Board of
Directors. As of June 30, 2004, 70,000 shares have been repurchased in
conjunction with this program.
- -------------------------------------------------------------------------------------------------------------
(d) Maximum Number
(or Approximate
(c) Total Number of Dollar Value) of
Shares (or Units) Shares (or Units)
(a) Total Number of (b) Average Price Purchased as Part of that May Yet Be
Shares (or Units) Paid per Share (or Publicly Announced Purchased Under the
Period Purchased Unit) Plans or Programs Plans or Programs
- -------------------------------------------------------------------------------------------------------------
April 1, 2004 to
April 30, 2004 -- -- -- 848,395
- -------------------------------------------------------------------------------------------------------------
May 1, 2004 to
May 31, 2004 70,000 $ 35.25 70,000 778,395
- -------------------------------------------------------------------------------------------------------------
June 1, 2004 to
June 30, 2004 -- -- -- 778,395
- -------------------------------------------------------------------------------------------------------------
Total 70,000 $ 35.25 70,000 778,395
- -------------------------------------------------------------------------------------------------------------
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 26, 2004. At
the Annual Meeting, the shareholders elected a class of directors for a
term of three years, as described below.
- -----------------------------------------------------------------
Name For Withhold Authority
- -----------------------------------------------------------------
Robert N. Oliver 5,590,332 214,757
- -----------------------------------------------------------------
Stanton R. Sheetz 5,728,962 76,126
- -----------------------------------------------------------------
Robert A. Szeyller 5,593,912 211,177
- -----------------------------------------------------------------
The terms of the following directors continued after the annual meeting:
Raymond A. Agostinelli, David B. Lee, Philip E. Gingerich, D. Stephen
Martz and James W. Powers, Sr.
The shareholders approved a proposal to adopt the 2004 Stock Option Plan
for Non-Employee Directors, with 3,389,809 shares voted for approval,
695,556 voting against the proposal, 57,455 shares abstained and 1,662,268
shares were broker non-votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
The Company filed a Form 8-K, (Items 5, 7 and 9) on April 21, 2004
regarding a press release announcing a definitive agreement with Sun Bancorp,
Inc. relating to a merger transaction.
The Company filed a Form 8-K (Items 7, 9 and 12) on April 26, 2004
regarding its financial earnings press release.
Exhibits:
Exhibit
Number Description
2.1 Agreement and Plan of Merger between Omega Financial
Corporation and Sun Bancorp, Inc. dated as of April 20, 2004
(Incorporated by reference to Exhibit 2.1 of the Omega
Financial Corporation Form 8-K, filed on April 21, 2004).
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)
August 9, 2004 By: /s/ David B. Lee
- ----------------------------- -------------------------------------
Date David B. Lee
Chairman and
Chief Executive Officer
August 9, 2004 /s/ Daniel L. Warfel
- ----------------------------- -------------------------------------
Date Daniel L. Warfel
Executive Vice President and
Chief Financial Officer