Exhibit 13.1

2006 Annual Report


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|Omega Financial Corporation and SubsidiariesSelected Financial Data
The selected financial data for the last five years were derived
from audited consolidated financial statements of Omega Financial Corporation (Omega,
the Company or the Corporation), and should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations and the consolidated
financial statements and related notes thereto.
Five-Year Financial Summary
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|                                                            | 2006 |            | 2005 |   | 2004       |   | 2003 |            | 2002 |  
|----------------------------------------------------------- | ---- | ---------- | ---- | - | ---------- | - | ---- | ---------- | ---- | -
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|BALANCE SHEET INFORMATION at December 31                    |      |            |      |   |            |   |      |            |      |  
|Assets                                                      | $    | 1,815,818  |      | $ | 1,939,979  |   | $    | 2,082,571  |      | $
|Deposits                                                    |      | 1,325,763  |      |   | 1,422,530  |   |      | 1,502,082  |      |  
|Loans, net                                                  |      | 1,135,048  |      |   | 1,199,373  |   |      | 1,312,606  |      |  
|Investment securities                                       |      | 303,894    |      |   | 353,355    |   |      | 327,979    |      |  
|Short-term borrowings                                       |      | 65,712     |      |   | 90,153     |   |      | 90,259     |      |  
|Junior subordinated debentures                              |      | 56,193     |      |   | 56,692     |   |      | 57,190     |      |  
|Long-term debt (including ESOP debt)                        |      | 29,358     |      |   | 38,167     |   |      | 101,771    |      |  
|Shareholders equity                                        |      | 325,211    |      |   | 318,490    |   |      | 315,739    |      |  
|Number of shares outstandingcommon                         |      | 12,622,802 |      |   | 12,599,508 |   |      | 12,593,524 |      |  
|Number of shares outstandingpreferred                      |      |           |      |   |           |   |      |           |      |  
|                                                            |      |            |      |   |            |   |      |            |      |  
|INCOME STATEMENT INFORMATION                                |      |            |      |   |            |   |      |            |      |  
|Years Ended December 31                                     |      |            |      |   |            |   |      |            |      |  
|Total interest income                                       | $    | 94,787     |      | $ | 91,175     |   | $    | 62,371     |      | $
|Net interest income                                         |      | 61,066     |      |   | 61,670     |   |      | 45,705     |      |  
|Provision (credit) for loan losses                          |      | 3,896      |      |   | 1,202      |   |      | (300       | )    |  
|Income before income taxes and
     discontinued operations |      | 26,447     |      |   | 28,976     |   |      | 22,443     |      |  
|Income tax expense                                          |      | 5,702      |      |   | 6,213      |   |      | 5,357      |      |  
|Discontinued operations, net of tax                         |      | (314       | )    |   | 112        |   |      | (65        | )    |  
|Net income                                                  |      | 20,431     |      |   | 22,875     |   |      | 17,021     |      |  
|                                                            |      |            |      |   |           
|                                                            |      |            |      |   |            |   |      |            |      |  
|PER COMMON SHARE DATA                                       |      |            |      |   |            |   |      |            |      |  
|Basic earnings per shareContinuing operations               |      | 1.65       |      |   | 1.81       |   |      | 1.80       |      |  
|Discontinued operations                                     |      | (0.02      | )    |   | 0.01       |   |      | (0.01      | )    |  
|Net income(1)                                               |      | 1.62       |      |   | 1.82       |   |      | 1.79       |      |  
|Diluted earnings per shareContinuing operations             |      | 1.65       |      |   | 1.80       |   |      | 1.79       |      |  
|Discontinued operations                                     |      | (0.02      | )    |   | 0.01       |   |      | (0.01      | )    |  
|Net income(1)                                               |      | 1.62       |      |   | 1.81       |   |      | 1.78       |      |  
|Cash dividendscommon                                       |      | 1.24       |      |   | 1.24       |   |      | 1.20       |      |  
|Book valuecommon                                           |      | 25.76      |      |   | 25.28      |   |      | 25.07      |      |  
|Book valuetangible                                         |      | 12.61      |      |   | 11.76      |   |      | 11.28      |      |  
|                                                            |      |            |      |   |            |   |      |            |      |  
|FINANCIAL RATIOS                                            |      |            |      |   |            |   |      |            |      |  
|based on net income                                         |      |            |      |   |            |   |      |            |      |  
|Return on average tangible equity                           |      | 13.22      | %    |   | 15.33      | % |      | 11.84      | %    |  
|Return on average common equity                             |      | 6.32       |      |   | 7.13       |   |      | 8.89       |      |  
|Return on average tangible assets                           |      | 1.18       |      |   | 1.25       |   |      | 1.26       |      |  
|Return on average assets                                    |      | 1.08       |      |   | 1.15       |   |      | 1.24       |      |  
|Dividend payoutcommon                                      |      | 76.59      |      |   | 68.30      |   |      | 66.91      |      |  
|Average equity to average assets                            |      | 17.07      |      |   | 16.06      |   |      | 13.97      |      |  

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|(1) Totals may not sum due to rounding

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Omega Financial Corporation 2006 Annual Report

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|Omega Financial Corporation and SubsidiariesManagements Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
The information contained in this Annual Report contains forward-looking statements (as this 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 and other
statements which are not historical facts or as to trends or managements intentions, plans,
beliefs, expectations or opinions. 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 including without limitation, the effect of economic conditions
and related uncertainties, the effect of interest rates on the Corporation, federal and state government
regulation and competition. Certain of these risks, uncertainties and other factors are discussed
in this Annual Report or in Omegas Annual Report on Form 10-K for the year ended December 31,
2006, a copy of which may be obtained from Omega upon request and without charge (except for the
exhibits thereto). You should not place undue reliance on the Companys forward-looking statements.
Any forward-looking statement speaks only as of the date on which it is made and the Company undertakes
no obligation to update or revise any forward-looking statement.
COMPANY OVERVIEW
This discussion concerns Omega and the consolidated results of
its subsidiaries, Omega Bank, Central Pennsylvania Investment Company (CPI) and its subsidiary
Omega Insurance Agency (OIA), Central Pennsylvania Life Insurance Company (CPLI),
Mid Penn Insurance Associates, Inc. (Mid Penn) and Central Pennsylvania Leasing, Inc.
As of December 31, 2006, Omega Bank has one principal subsidiary, Bank Capital Services Corporation.
On September 15, 2006, Omega completed the sale of Omega Banks subsidiary, Sentry Trust Company.
The purpose of this discussion is to focus on information concerning Omegas financial condition
and results of operations that is not readily apparent from the consolidated financial statements.
In order to obtain a clear understanding of this discussion, the reader should refer to the consolidated
financial statements, the notes thereto and other financial information presented in this Annual Report.
Nature of Operations
Omega is a financial holding company that provides financial services primarily in central and northeastern Pennsylvania. Consisting of one bank and four active non-bank
subsidiaries, Omega provides retail and commercial banking services through 64 offices in Bedford,
Blair, Cameron, Centre, Clinton, Huntingdon, Juniata, Luzerne, Lycoming, Mifflin, Snyder, Union,
and Northumberland counties.
Omega Bank offers a full range of consumer and commercial services.
Consumer services include Internet and telephone banking, an automated teller machine network, personal
checking accounts, interest-earning checking accounts, savings accounts, health savings accounts,
insured money market accounts, debit cards, investment certificates, fixed and variable rate certificates
of deposit, club accounts, secured and unsecured installment loans, construction and mortgage loans,
safe deposit facilities, credit lines with overdraft checking protection, Home Equity VISA card,
IRA accounts and student loans. Commercial banking services include commercial lending,small and high-volume business checking accounts, on-line account man­agement services, ACH origination,
payroll direct deposit, commercial cash management services and repurchase agreements. Omega Bank
also provides a variety of trust and asset management services. Through Omegas sub­sidiaries
OIA and Mid Penn insurance agencies, a full complement of auto, home and business insurance as well
as term life insurance is avail­able. Omega offers annuities, mutual funds, stock and bond brok­erage
services, long-term care insurance and sophisticated life products through an arrangement with a
broker-dealer and insurance brokers. Manage­ment believes the Corporation has a relatively stable
deposit base with no major seasonal depositor or group of depositors. Most of the Corporations
commercial customers are small and mid-sized businesses in central and northeastern Pennsylvania.
Economic and Industry-Wide Factors Relevant to Omega
As a financial services organization, Omegas core business is heavily influenced by the movement of interest rates. Lending and investing is done daily, using
funding from deposits and borrowings, resulting in net interest income, the most significant portion
of operating results. The Corporation continually projects the effects of changes in interest rates
through asset/liability management, product pricing and review and analysis of competition.
General economic conditions are relevant to Omegas business. In addition, economic factors impact the customers need for financing, thus affecting loan
growth. Additionally, changes in the economy can directly impact the credit strength of existing
and potential borrowers.
Focus of Management
Management is committed to achieving long-term stability and measures
its success by five key elements.
Customer RelationshipsOmega strives to maximize customer
satisfaction. We are sensitive to the broad array of financial alternatives available to our customers
from both local and global competition. We are committed to fostering a complete customer relationship
and plan to continue to provide for the financial needs in future generations as in the past.
Shareholder SatisfactionOmega believes our investors are
entitled to a fair return on their investment through both stock value appreciation and dividend
returns. We intend to continue to protect their investment through long-term stability of our balance
sheet and earnings.
Balance Sheet StabilityBy maintaining a disciplined approach,
we have built a solid balance sheet. In spite of intense competition, we maintain stringent credit
standards. We believe we consistently pay fair market rates on all deposits, minimizing funding and
balance sheet volatility. We also believe we have invested wisely, in compliance with self-imposed
standards, minimizing the risk of asset impairment.
Operating ResultsManagement of Omega is profitability focused.
Through close monitoring of expenses, identification of opportunities to increase fee income and
sound balance sheet management, we strive to deliver to shareholders a fair return on their investment.
Commitment to the CommunityWe are active corporate citizens
of the communities we serve. Although the world of banking is ever-changing and in some cases does
not even require a physical building, we believe that our community banking philosophy is still valid.
Despite technological advances, banking is still a personal business. We believe that our customers
shop for services and value a relationship with an institution involved in the same
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|community, with the same interests in its prosperity. We have a foundation and a history in each of
the communities we serve. Our employees live there; we encourage and support community involvement.
Omegas Opportunities
We seek to continually enhance our customer delivery system, both through technology and physical facilities. We have short-term and long-term plans to revitalize
many existing branch locations through remodeling for efficiencies or relocation for improved access
and customer convenience. In 2006, we sold three of our branch offices that were located outside
of our customer market, to increase our focus on the remaining branches within our defined markets.
We continually examine opportunities to upgrade technology both to cater to our customers needs
and to increase operational efficiency. In 2006, Omega introduced Remote Deposit Service, which allows
business customers to electronically deposit checks, providing for the clearing of checks much more
efficiently than with traditional paper checks.
Omegas Challenges
CompetitionWe continue to experience more, and very intense competition in the marketplace. Increased competition and the resulting pricing pressures have challenged
Omegas growth opportunities in our primary market areas. Our competition is not limited to
local community institutions or strictly to financial institutions. Our primary market area includes
several very prosperous communities, an attractive target for competitors. To meet this challenge,
we stay in close contact with our customers, mon­itoring their satisfaction with our services
through professionally conducted surveys, personal visits and networking in the communities that
we serve. We strive to meet our customers expectations and deliver consistent high-quality service.
Regulated CompanyOmega is subject to banking regulation as well as regulation by the Securities and Exchange Commission (SEC), and as such, must comply with
several laws, including, but not limited to, the USA Patriot Act, Sarbanes-Oxley Act of 2002 and
the Bank Secrecy Act. Man­agement follows strong corporate governance practices, including a
Disclosure Committee for Financial Reporting and a Code of Ethics for all directors, officers and
employees.
Omega has incurred direct and indirect costs associated with compliance with the SECs filing and reporting requirements imposed on public companies by the Sarbanes-Oxley
Act, as well as adherence to new and existing banking regulations. It is unlikely that regulatory
demands will be reduced, and management expects that more resources will be dedicated to meet future
compliance standards.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Corporations consolidated financial statements are prepared based upon the application of U.S. generally accepted accounting principles, the most significant
of which are described in Note 1Summary of Significant Accounting Policies. Certain of these
policies require numerous estimates and assumptions, and are based upon information available as
of the date of the financial statements. As such, over time these estimates and assumptions may prove
inaccurate or vary from actual results and may significantly affect the Corporations reported
results and financial position for the period or in future periods. The accounting policy for establishing
the allowance for loan losses has a greater reliance on the use of estimates, and as such has a greater
possibility of producing results that could be different than originally reported. Changes in underlying
factors, assumptions or estimates in the allowance for loan losses could have a material impact on
the Corporations future financial condition and results of operations.
Page 13 of this Annual Report to Shareholders provides managements analysis of the Companys allowance for loan losses and related pro­vision for loan losses
expense. The allowance for loan losses is maintained at a level believed adequate by management to
absorb probable inherent losses in the loan portfolio. Managements determination of the adequacy
of the allowance for loan losses is based upon an evaluation of individual credits in the loan portfolio,
historical loan loss experience, current economic conditions, and other relevant factors. This determination
is inherently subjective, as it requires material estimates including the amounts and timing of future
cash flows expected to be received on impaired loans that may be susceptible to significant change.
The allowance for loan losses related to loans considered to be impaired is generally evaluated based
on the discounted cash flows using the impaired loans initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans.
Omegas accounting policy for the determination of goodwill and other intangibles also places significant reliance on the use of estimates. Goodwill represents
the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible
assets represent purchased assets that also lack physical substance but that can be separately distinguished
from goodwill because of contractual or other legal rights, or because the asset is capable of being
sold or exchanged either on its own or in combination with a related contract, asset or liability.
It is Omegas policy that goodwill be tested for impairment on at least an annual basis. Managements
current analysis indicates that a 19.3% decline in market capitalization would warrant further analysis
of the carrying value of goodwill, which could result in an adjustment to its value. Intangible assets
with finite lives include core deposits and customer relationship. Intangible assets are subject
to impairment testing whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Core deposit and customer relationship intangibles are amortized over a period
of time that represents their expected life using a method of amortization that reflects the pattern
of economic benefit. Management estimates that consecutive annual declines of more than 9% of the
acquired customer base subsequent to December 31, 2006 could result in an impairment of the core
deposit intangible and affect Omegas operating results in future years.
Certain amounts in the 2005 financial statements have been reclassified to segregate balances and results associated with discontinued operations and to conform to the
2006 presentation. The reclassification had no impact on net income.
SUMMARYTHE YEAR IN REVIEW
Net income for 2006 was $20.4 million, a 10.7% decrease from 2005 net income of $22.9 million. The following significant factors impacted Omegas financial performance
and results of operations during 2006:
Provision for Loan LossesDuring 2006, two large commercial relationships required significant reserve allocations totaling $4.8 million in the Allowance for
Loan Losses. The circumstances surrounding these two loans were the major cause of the overall increase
in the provision for loan losses from $1.2 million in 2005 to $3.9 million in 2006. Both of these
borrowers are involved in corporate bankruptcy proceedings. Prior to year-end, we sold our entire
interest in one of these loans. We continue to monitor the cash flows and collateral supporting the
other loan and are awaiting the final rulings of the bankruptcy court regarding this borrower.
Net Interest MarginOur net interest margin declined by $0.6 million in 2006 compared to 2005, due primarily to increasing rates on deposits. Additionally, the
one large commercial relationship referred to in the preceding section was not accruing interest
during a significant portion of 2006, resulting in lost interest earnings of approximately $1.0 million.
Other IncomeIdentification and delivery of new product offerings resulted in increased other income of $1.0 million in comparison to 2005. The introduction of two
new checking account products, coupled with
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    Omega Financial Corporation 2006 Annual Report

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|increased service charge levels in other fees, contributed significantly to the increase in service
charges on deposit accounts. Additional loan fee income was generated primarily through fees related
to business loans and the origination of Pennsylvania Housing Finance Agency loans. The investment
portfolio was also restructured during late 2006, resulting in the sale of all the tax-free municipal
securities in the available for sale category, $21.0 million of securities. This sale resulted in
a $0.4 million loss in the fourth quarter.
Other ExpenseClose monitoring of expenses resulted in a 0.4%
increase in other expenses in 2006 in comparison to 2005. Salaries and benefits expense remained
constant from 2005 to 2006, reflective of some personnel reductions as well as consolidation of some
positions.
Sale of Sentry Trust/Branch LocationsThe sale of Sentry Trust was finalized during 2006, resulting in an overall loss of $0.8 million, net of tax. The Corporation
also sold three of its branch locations during the year, resulting in a gain of $1.5 million, net
of tax. While the sales of Sentry Trust and the branches resulted in a reduction of assets and deposits,
these sales were part of managements plan to focus the Corporation on its core products in
its established markets.
DividendsThe Corporation also continued its tradition of
paying dividends to shareholders during 2006, maintaining the dividend at $1.24 per com­mon share.
The Corporation has consistently paid quarterly cash dividends since its inception in 1986. Effective
February 1, 2007, Omega was added to the NASDAQ Dividend Achievers Index. This index, which consists
of 99 companies, provides investors seeking a long-term portfolio with an opportunity to invest in
companies with higher returns, adjusted for market risk.
Risk FactorsThe Corporation faces a variety of risks and
challenges in the future, including: changes in local economic conditions, an uncertain interest
rate environment, increased competition, and a complex regulatory environment. For a more complete
discussion of relevant risk factors, see Item 1A of Part I of the Corporations Annual Report
on Form 10-K for the fiscal year ended December 31, 2006.
RESULTS OF OPERATIONS
Financial Performance2006 vs. 2005
Omega reported net income for the year ended December 31, 2006
of $20.4 million, representing $1.62 per diluted share, compared to $22.9 million or $1.81 per diluted
share for 2005. The decline in 2006 earnings can be attributed primarily to a $3.9 million provision
for loan losses, or $0.25 per diluted share after tax. The significant provision for loan losses
in 2006 resulted from estimated losses related to two commercial loans.
Summarized below are the components of net income (in thousands
of dollars) and the contribution of each to return on average asset (ROA) for 2006 and 2005.
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|                                                                 | 2006 |           | 2005 | 
|---------------------------------------------------------------- | ---- | --------- | ---- | 
|
|
|
|Net interest income                                              | $    | 61,066    |      | 
|Loan loss provision                                              |      | (3,896    | )    | 
|Trust fees                                                       |      | 4,063     |      | 
|Deposit service fees                                             |      | 10,130    |      | 
|Other fees                                                       |      | 9,511     |      | 
|Bank-owned life insurance                                        |      | 2,413     |      | 
|Security gains                                                   |      | 389       |      | 
|Gain on debt extinguishment                                      |      |          |      | 
|Gain (loss) on sale of
        other assets                      |      | 2,380     |      | 
|
|Total non-interest income                                        |      | 28,886    |      | 
|Employee expense                                                 |      | (29,398   | )    | 
|Occupancy and equipment                                          |      | (8,889    | )    | 
|Other non-interest expense                                       |      | (20,440   | )    | 
|Amortization of intangibles                                      |      | (882      | )    | 
|
|Total non-interest expense                                       |      | (59,609   | )    | 
|Income tax expense                                               |      | (5,702    | )    | 
|
|Net income from continuing
        operations                    | $    | 20,745    |      | 
|
|Income from discontinued
        operations, net of tax          | $    | 446       |      | 
|                                                                 |      |           |      | 
|Loss on disposal of  discontinued
        operations, net of tax |      | (760      | )    | 
|
|Income (loss) from
        discontinued operations               | $    | (314      | )    | 
|
|Net income                                                       | $    | 20,431    |      | 
|
|Average assets                                                   | $    | 1,893,973 |      | 
|                                                                 |      |           |      | 

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|For the year ended December 31, 2006, Omegas net income represented an ROA of 1.08% compared to 1.15% in 2005. Omegas return on average tangible assets, which
excludes from average assets goodwill and intangibles, was 1.18% in 2006 compared to 1.25% in 2005.
Omegas management strives to attain consistently high earnings levels each year by protecting
the core earnings base with conservative growth strategies that minimize shareholder risk, while
serving a broad customer base. Omega considers ROA to be a key performance ratio, and continually
evaluates the broad categories of the income statement that impact this profitability indicator.
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|The following table shows certain key ratios for the last five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                        |  |       |   |  |       |   |  |       |   | 
|--------------------------------------- |  | ----- | - |  | ----- | - |  | ----- | - | 
|
|
|Key Ratio Schedule (in %)               |  |       |   |  |       |   |  |       |   | 
|Net interest margin                     |  | 3.95  | % |  | 3.77  | % |  | 3.71  | % | 
|Net interest margin, tax-equivalent     |  | 4.07  | % |  | 3.92  | % |  | 3.92  | % | 
|Yield on earning assets                 |  | 6.14  | % |  | 5.58  | % |  | 5.06  | % | 
|Cost of funds                           |  | 2.18  | % |  | 1.80  | % |  | 1.35  | % | 
|Non interest income to average assets   |  | 1.47  | % |  | 1.35  | % |  | 1.38  | % | 
|Non interest expenses to average assets |  | 3.20  | % |  | 3.07  | % |  | 3.22  | % | 
|Return on average assets                |  | 1.08  | % |  | 1.15  | % |  | 1.24  | % | 
|Return on average tangible assets       |  | 1.18  | % |  | 1.25  | % |  | 1.26  | % | 
|Return on average stated equity         |  | 6.32  | % |  | 7.13  | % |  | 8.89  | % | 
|Return on average tangible equity       |  | 13.22 | % |  | 15.33 | % |  | 11.84 | % | 

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|The key factors that defined the 2006 results are as follows:
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| | $3.9 million provision for loan loss related to two large commercial borrowers; 
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| | Increase in net interest margin despite a challenging interest rate environment;
|  |                                                                                 
| | Declining earning assets;                                                       
|  |                                                                                 
| | The sale of Sentry Trust Company and three branch locations; and                
|  |                                                                                 
| | Ongoing expense control.                                                        

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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             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|Provision for Loan Losses
Omegas provision for loan losses is determined as a result of changes in the required level of the allowance for loan loss reserve. In 2006, Omega provided
a provision for loan losses of $3.9 million as compared to $1.2 million in 2005. During 2006, two
large commercial borrowers entered into corporate bankruptcy proceedings. One of these lending relationships,
a $1.5 million facility to a water bottling company, resulted in Omega Bank ultimately selling its
entire interest in this facility in the fourth quarter of 2006 after the company entered the bankruptcy
process. The second borrower, a food distribution company with a $16.8 million facility, is still
working through the bankruptcy re-organization process. The majority of the 2006 provisions reflect
managements assessment of these two large commercial borrowers. During 2006, management has
continued to update its evaluation of the credit and the related estimates of losses. Evaluations
of this credit continue. The ongoing analysis may cause this estimate to change in the future and
actual losses resulting from this credit may differ materially from this initial estimate.
In 2006, the provision for loan losses exceeded net charge-offs
by $2.0 million, while in 2005 the net charge-offs exceeded the provision by $0.2 million. Credit
quality is a high priority for Omega as evidenced by its low ratios of net charge-offs to average
loans outstanding. Net charge-offs in 2006 and 2005 were .16% and .11% of average loans outstanding,
respectively. Non-performing loans as a percentage of the allowance for loan losses were 134.5% at
year-end 2006 and 59.3% at the end of 2005. The allowance for loan losses as a percentage of net
loans was 1.51% and 1.27% at December 31, 2006 and 2005, respectively.
Net Interest Income and Margin
Net interest income is the amount by which interest income on earning assets exceeds interest expense on interest bearing liabilities. Net interest income is the most
significant component of income from continuing oper­ations, comprising approximately 68% of
total income from continuing operations for 2006. Net interest margin is the percentage of net return
on average earning assets and provides a measure of comparability of a financial institutions
performance. Because some interest earning assets are tax-exempt and generate tax-exempt income,
an adjustment is made for analytical purposes to place all interest income on a fully tax-equivalent basis.
Both net interest income and net interest margin are impacted by changes in interest rates, relationships between various rates and the composition of the average
balance sheet. Additionally, product pricing, product mix and customer preferences dictate the composition
of the balance sheet and the resulting net interest income. Table 1 (located on pages 6 & 7)
shows average asset and liability balances, average interest rates and interest income and expense
for the period 2004 to 2006. In addition, it shows the changes attributable to the volume and rate
components of net interest income.
Net interest income for 2006 was $61.1 million, a decrease of $0.6 million or .97% compared to net interest income of $61.7 million for 2005. Net interest income in
2006 includes the effects of $1.0 million in lost interest of a large commercial customer. The 2006
decrease in net interest income was the result of an increase of $2.7 million due to interest rate
effects and adecrease of $3.3 million due to volume and changes in the composition of our interest-earning assets. The net interest margin was 3.95% in 2006 and 3.77% in 2005. On a fully tax-equivalent basis, the
net interest margin increased 15 basis points to 4.07% from 3.92% in 2005. The increase in our net
interest margin was due principally to improvements in yields on our interest-earning assets, as
discussed below.
Total average loans were $1.2 billion in 2006 with an average weighted yield of 6.83% that produced $81.1 million in interest income. This represented a $75.4 million,
or 6.0%, decrease in average loan balances from 2005. Some of this volume decrease can be attributed
to continued competitive pressures in pricing and credit standards. However, continued runoff from
a portfolio of auto loans acquired in connection with the acquisition of Sun Bancorp, Inc. (Sun)
in 2004 contributed $22.5 million of this average decrease, while the sale of a pool of manufactured
housing loans in 2005 and three branch locations in 2006 accounted for $3.8 million of the average
decrease. In addition, as a tool for controlling interest rate risk, the Corporation increased its
efforts in 2006 to sell new mortgage loans in the secondary market instead of adding them to the
loan portfolio. The average yield on loans increased 58 basis points to 6.83% from 6.25% in 2005,
which resulted in an increase of $7.0 million in interest income, while volume changes decreased
interest income $4.8 million when compared to 2005. The combination of the rate, volume and mix effects
resulted in an increase of $2.2 million, or 2.8%, in total loan interest. The 58 basis point increase
in loan yields in 2006 is largely attributable to the higher interest rate environment in 2006 compared to 2005.
Investment securities averaged $332.1 million, a decrease of $1.2 million, or .35% from the average investment securities in 2005. The average weighted yield on investments
increased to 3.77% from 3.37% in 2005. This increase, along with a change in investment mix, resulted
in an additional $1.3 million in investment income in 2006 as compared to 2005. Interest bearing
deposits and federal funds sold, as a group on average, decreased 34.5%, or $13.5 million due to
reduced liquidity needs in 2006. The lower level of interest bearing deposits and federal funds sold
resulted in a decrease in interest income of $0.4 million, however this decrease was offset by an
increase of $.06 million due to the yield on these assets improving to 4.55% in 2006 from 2.65% in 2005.
Total interest earning assets averaged $1.5 billion at a yield
of 6.14% and produced total interest income of $94.8 million for 2006. The yield on earning assets
increased by 56 basis points to 6.14% in 2006 from 5.58% in 2005. Changes in interest rates resulted
in an increase of $8.6 million, or 9.4%, in interest income while volume and mix changes decreased
it $4.9 million or 5.4%.
Total interest bearing liabilities averaged $1.3 billion at a cost
of $33.7 million carrying a composite rate of 2.55%. This represented a decrease in interest bearing
liabilities of 7.7%, or $109.6 million compared to 2005. The composite rate was 2.06% in 2005. Interest
expense increased $5.9 million due to the higher interest rate environment in 2006. This increase
was offset by a decrease of $1.7 million due to volume and mix of interest bearing liabilities. These
changes resulted in a total increase of $4.2 million, or 14.3%, in interest expense.
Non-interest bearing funding sources, including equity, averaged $572.6 million in 2006, compared to $566.5 million in 2005, for an increase of $6.1 million, or 1.1%.
The rate to fund interest bearing assets increased by 49 basis points to 2.55% in 2006 from 2.06%
in 2005. The increase in funding cost was the result of increased interest rates as well as competitive
pressures for deposits. Partially offsetting this increased cost was the fact that a higher percentage
of the earning assets are being funded by non-interest bearing funding sources in 2006 than in 2005.
For 2006, this ratio was 37.1%; in 2005 it was 34.7%.

|                                                    
|----------------------------------------------------
|5
    Omega Financial Corporation 2006 Annual Report

|
|



|Table 1Average Balance Sheets and Net Interest Income Analysis(In thousands)
|----------------------------------------------------------------------------
|                                                                            

|                                                                                                            | Years Ended December 31, |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|----------------------------------------------------------------------------------------------------------- | ------------------------ | - | --------- | - | - | ------ |  |  | ---- | - | - | --------- | - | - | ------ |  |  | ---- | - | - | --------- | -
|
|
|
|
|                                                                                                            |                          |  
|ASSETS                                                                                                      |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|Interest earning 
  assets:                                                                                 |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|Taxable loans(2)                                                                                            |                          | $ | 1,128,048 |   | $ | 78,472 |  |  | 6.96 | % | $ | 1,202,607 |   | $ | 76,204 |  |  | 6.34 | % | $ | 876,317   |  
|Tax-exempt loans                                                                                            |                          |   | 59,190    |   |   | 2,631  |  |  | 4.45 |   |   | 60,048    |   |   | 2,703  |  |  | 4.50 |   |   | 49,785    |  
|                                                                                                            |                          |  
|Total loans                                                                                                 |                          |   | 1,187,238 |   |   | 81,103 |  |  | 6.83 |   |   | 1,262,655 |   |   | 78,907 |  |  | 6.25 |   |   | 926,102   |  
|Taxable investment 
   securities                                                                           |                          |   | 298,486   |   |   | 11,635 |  |  | 3.90 |   |   | 266,791   |   |   | 9,314  |  |  | 3.49 |   |   | 176,061   |  
|Tax-exempt
   investment securities                                                                         |                          |   | 33,589    |   |   | 883    |  |  | 2.63 |   |   | 66,449    |   |   | 1,917  |  |  | 2.88 |   |   | 85,567    |  
|                                                                                                            |                          |  
|Total investment
    securities                                                                             |                          |   | 332,075   |   |   | 12,518 |  |  | 3.77 |   |   | 333,240   |   |   | 11,231 |  |  | 3.37 |   |   | 261,628   |  
|Interest bearing
  deposits                                                                                 |                          |   | 12,956    |   |   | 510    |  |  | 3.94 |   |   | 21,637    |   |   | 551    |  |  | 2.55 |   |   | 22,680    |  
|Federal funds sold                                                                                          |                          |   | 12,685    |   |   | 656    |  |  | 5.17 |   |   | 17,539    |   |   | 486    |  |  | 2.77 |   |   | 20,503    |  
|                                                                                                            |                          |  
|Total interest
  earning assets                                                                             |                          |   | 1,544,954 |   |   | 94,787 |  |  | 6.14 |   |   | 1,635,071 |   |   | 91,175 |  |  | 5.58 |   |   | 1,230,913 |  
|Non-interest
  earning assets:                                                                              |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|Cash and due from
  banks                                                                                   |                          |   | 50,230    |   |   |        |  |  |      |   |   | 53,629    |   |   |        |  |  |      |   |   | 37,607    |  
|Allowance for
   loan losses                                                                                |                          |   | (15,205   | ) |   |        |  |  |      |   |   | (15,295   | ) |   |        |  |  |      |   |   | (12,507   | )
|Premises and
  equipment                                                                                    |                          |   | 36,542    |   |   |        |  |  |      |   |   | 37,447    |   |   |        |  |  |      |   |   | 20,446    |  
|Other assets(3)                                                                                             |                          |   | 277,452   |   |   |        |  |  |      |   |   | 286,608   |   |   |        |  |  |      |   |   | 94,768    |  
|                                                                                                            |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|Total assets                                                                                                |                          | $ | 1,893,973 |   |   |        |  |  |      |   | $ | 1,997,460 |   |   |        |  |  |      |   | $ | 1,371,227 |  
|                                                                                                            |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|LIABILITIES AND SHAREHOLDERS
      EQUITY                                                                  |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|Interest bearing
 liabilities:                                                                              |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|Interest bearing 
   demand 
   deposits(4)                                                                 |                          | $ | 395,769   |   |   | 3,546  |  |  | 0.90 |   | $ | 470,292   |   |   | 3,963  |  |  | 0.84 |   | $ | 343,527   |  
|Savings deposits                                                                                            |                          |   | 195,280   |   |   | 1,072  |  |  | 0.55 |   |   | 216,923   |   |   | 1,187  |  |  | 0.55 |   |   | 159,776   |  
|Time deposits                                                                                               |                          |   | 571,094   |   |   | 21,349 |  |  | 3.74 |   |   | 566,689   |   |   | 16,541 |  |  | 2.92 |   |   | 389,206   |  
|Other, including 
  short-term
  borrowings,
  long-term
  debt, and other
  interest bearing
  liabilities |                          |   | 159,268   |   |   | 7,754  |  |  | 4.87 |   |   | 177,066   |   |   | 7,814  |  |  | 4.41 |   |   | 105,000   |  
|                                                                                                            |                          |  
|Total interest
  bearing liabilities                                                                        |                          |   | 1,321,411 |   |   | 33,721 |  |  | 2.55 |   |   | 1,430,970 |   |   | 29,505 |  |  | 2.06 |   |   | 997,509   |  
|                                                                                                            |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|Non-interest 
  bearing liabilities:                                                                        |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|Demand deposits                                                                                             |                          |   | 235,505   |   |   |        |  |  |      |   |   | 231,144   |   |   |        |  |  |      |   |   | 172,721   |  
|Other                                                                                                       |                          |   | 13,687    |   |   |        |  |  |      |   |   | 14,810    |   |   |        |  |  |      |   |   | 9,485     |  
|Shareholders equity                                                                                        |                          |   | 323,370   |   |   |        |  |  |      |   |   | 320,536   |   |   |        |  |  |      |   |   | 191,512   |  
|                                                                                                            |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|Total liabilities and  shareholders equity                                                                 |                          | $ | 1,893,973 |   |   |        |  |  |      |   | $ | 1,997,460 |   |   |        |  |  |      |   | $ | 1,371,227 |  
|                                                                                                            |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|Net interest income                                                                                         |                          |   |           |   | $ | 61,066 |  |  |      |   |   |           |   | $ | 61,670 |  |  |      |   |   |           |  
|                                                                                                            |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|Net yield on interest 
  earning assets(5)                                                                  |                          |   |           |   |   |        |  |  | 3.95 | % |   |           |   |   |        |  |  | 3.77 | % |   |           |  
|                                                                                                            |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  
|Net interest income
  and yield-tax 
  equivalent
   basis(6)                                               |                          |   |           |   | $ | 62,958 |  |  | 4.07 | % |   |           |   | $ | 64,158 |  |  | 3.92 | % |   |           |  
|                                                                                                            |                          |   |           |   |   |        |  |  |      |   |   |           |   |   |        |  |  |      |   |   |           |  

|        
|--------
|*Notes:*

|1) |  | *Average balances were calculated using a daily average.*                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                               
|2) |  | *Non-accruing loans and investments are included until they are charged off.*                                                                                                                                                                                                 
|   |  |                                                                                                                                                                                                                                                                               
|3) |  | *Includes gross unrealized loss on securities available for sale of $2,066 in 2006, and total gross unrealized gains on securities available for sale of $2,282
    in 2005 and $6,194 in 2004.*                                                                              
|   |  |                                                                                                                                                                                                                                                                               
|4) |  | *Includes NOW, money management and money market accounts.*                                                                                                                                                                                                                   
|   |  |                                                                                                                                                                                                                                                                               
|5) |  | *Net yield on interest earning assets is net interest income divided by average interest earning assets.*                                                                                                                                                                     
|   |  |                                                                                                                                                                                                                                                                               
|6) |  | *Interest on obligations of states and municipalities is not subject to federal income tax. In order to make the net yield comparable on a fully taxable basis, a
    tax equivalent adjustment is applied against the tax-exempt income utilizing a federal tax rate of 35%.*
|   |  |                                                                                                                                                                                                                                                                               
|7) |  | *The change in interest due to rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts 
    of the change in each.*                                                                                    

|  |                                              
|- | ---------------------------------------------
|6 | 7                                            
|  | Omega Financial Corporation2006 Annual Report

|
|



|Other (Non-Interest) Income
Omega remains committed to continually increasing customer satisfaction and expanding existing customer relationships by conveniently delivering popular services. This commitment
is affirmed by the continued increase in income from traditional bank services. In 2006, 2005 and
2004, 26.4%, 25.2% and 25.8% of total income from continuing operations, respectively, was derived
from service-based fee income. We believe that our advanced front line delivery systems, our interactive
web site with on-line banking, our customer information center, our broad menu of investment products
and our extensive employee training programs have all contributed to the satisfaction of our customer
base. Technology advances that allow us to be better and more quickly informed about our clients
help us be responsive to their financial needs with personalized service and well-designed products.
The following table discloses the sources of our other (non-interest) income for 2006 and 2005, and shows each source as a percentage of total non-interest income.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                                      |   | 2006   |  |  | 2005   |  
|----------------------------------------------------- | - | ------ |  |  | ------ | -
|
|
|
|OTHER INCOME:                                         |   |        |  |  |        |  
|Service fees on
        deposit accounts              | $ | 10,130 |  |  | 35.07  | %
|Service fees on loans                                 |   | 1,635  |  |  | 5.66   |  
|Earnings on bank-owned
        life insurance         |   | 2,413  |  |  | 8.35   |  
|Trust fees                                            |   | 4,063  |  |  | 14.07  |  
|Investment and insurance product sales                |   | 2,942  |  |  | 10.18  |  
|Gain on early extinguishment of debt                  |   |       |  |  |       |  
|Gain (loss) on sale of
        loans and other assets |   | 2,380  |  |  | 8.24   |  
|Net gains on investment securities                    |   | 389    |  |  | 1.35   |  
|Other                                                 |   | 4,934  |  |  | 17.08  |  
|                                                      |   |       
|TOTAL OTHER INCOME                                    | $ | 28,886 |  |  | 100.00 | %
|                                                      |   |       

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Service-based fee income (fees on deposits, loans, trust services, investment and insurance products and other services) continues to be our primary source of other
income and increased to $23.7 million, or a 4.9% increase of $1.1 million when compared to $22.6
million for 2005. This increase was due primarily to the introduction of new fee-based products as
well as increases in service charge levels. Additionally, fees from debit card and point of sale
transactions generated by our business customers also increased during 2006. Trust fees continue
as a major source of non-interest income, as a result of continued development efforts by the Banks
Wealth Management team. Trust fee income was directly affected by various factors, such as performance
of the bond and equity markets, and by the amount of assets under management. The average market
value of assets, including managed and non-managed accounts, in the trust department during 2006,
2005 and 2004 was $656.0 million, $644.0 million and $578.0 million, respectively. Sentry Trust is
excluded from this discussion, as it was a discontinued operation in 2006, 2005 and 2004.
The investment in bank-owned life insurance (BOLI) continues to
generate non-interest income each year as the cash surrender value increases. BOLI earnings were
$2.4 million in 2006, as compared to $2.3 million in 2005.
In 2006, net gains from the sale of investment securities decreased by $1.9 million, or 83.3%, to $0.4 million as compared to 2005. Management considers multiple factors
when selling investment securities; therefore, income from this activity can fluctuate dramatically
from year to year. Omega generally sells only equity securities that have appreciated in value since
their purchase. Primarily, equity securities are considered for sale when market appreciation has
occurred, when there is no longer a business reason to hold the stock or if securities gains are
desired to supplement earnings. In 2006, approximately $0.4 million in losses were incurred as a
result of the liquidation of $22.0 million in tax-free municipal bonds. These sales were part of
managements ongoing strategy to improve the Corporations tax position.
Similarly, other gains or losses can be realized in a given year based upon unique circumstances. In 2006, gains of $2.3 million before tax were recognized from the
sale of three branch locations. These branches were acquired in the 2004 merger with Sun Bancorp
and did not complement Omegas long-term strategy. Management is committed to controlling interest
rate risk and occasionally will sell longer-term fixed-rate assets to reposition the balance sheet
when the rate risk analysis warrants it. During the first quarter of 2005, Omega paid down $55.0
million of Federal Home Loan Bank debt that was acquired in the Sun merger. This resulted in a gain
of $1.0 million due to favorable rate movements after the merger was closed. Net losses of $0.4 million
on other assets sold were also realized in 2005.
Other (Non-Interest) Expense
In order to optimize earnings, Omegas management strives
to effectively monitor and control its operating expenses. Total other (non-interest) expenses from
continuing operations were $59.6 million for 2006 as compared to $59.4 million for 2005, representing
a minor increase of $0.2 million, or 0.4%. As a percentage of average assets, other (non-interest)
expense from continuing operations was 3.15% for 2006 as compared to 2.97% in 2005.
The following table illustrates the composition of our other (non-interest) expenses for the past two years, and displays each category as a percentage of total non-interest
expense:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                        | 2006 |        | 2005 | 
|--------------------------------------- | ---- | ------ | ---- | 
|
|
|
|OTHER EXPENSE:                          |      |        |      | 
|Salaries and employee
         benefits | $    | 29,398 |      | 
|Net occupancy expense                   |      | 4,318  |      | 
|Equipment expense                       |      | 4,571  |      | 
|Data processing service                 |      | 2,642  |      | 
|Pennsylvania shares tax                 |      | 2,765  |      | 
|Amortization of intangible assets       |      | 882    |      | 
|Other                                   |      | 15,033 |      | 
|                                        |      |       
|TOTAL OTHER EXPENSE                     | $    | 59,609 |      | 
|                                        |      |       

| 
|-
|8

|
|



|Salaries and employee benefits are the most significant component of non-interest expense, and was unchanged at $29.4 million for 2006 and 2005. Salaries and benefits
remained constant for the two-year period due to some minor workforce reductions, consolidation of
some open positions, and reduced management bonuses. Occupancy and equipment increased by $0.5 million,
or 5.8%, reflecting increased depreciation related to investments in technological upgrades. Data
processing costs were $2.6 million for the year representing a $0.1 million or 4.8% increase. Pennsylvania
shares tax also increased $1.0 million to $2.8 million representing a 55.3% increase, due to the
inclusion of an additional year of goodwill in the assessment base of the shares tax calculation.
The goodwill relates to the Sun acquisition in 2004. Other expenses amounted to $15.0 million for
a decrease of $1.4 million or 8.7% from the prior year. Managements emphasis on cost controls
during 2006 included an internal initiative to thoroughly challenge all of its expenses, taking advantage
of any opportunity to reduce costs without impairing the Corporations ability to effectively
provide service to its customers. This cost control initiative included taking advantage of contract
renewals to re-negotiate pricing, and to identify any remaining areas for cost reduction related to the Sun merger.
Income Taxes
Our effective tax rate for 2006 was 23.9%, a combination of a 21.1% effective rate on income from continuing operations and a 35.2% effective rate on income of discontinued
operations. In 2005, the effective tax rate was 21.3%, resulting from a 21.4% rate on income from
continuing operations and a 38.1% tax benefit on income from discontinued operations. There are several
factors that have caused our effective tax rate to be less than the statutory rate. We have a significant
amount of tax-exempt income. Average tax-exempt investments and loans as a percentage of average
assets were 4.9%, 6.3% and 9.9% in 2006, 2005 and 2004, respectively. Tax-exempt income as a percentage
of income before tax and discontinued operations was 13.3%, 15.9% and 21.0% in 2006, 2005 and 2004,
respectively. Investments in low-income housing partnerships generate income tax credits, which are
used to offset our income tax liability. Lastly, the investments in bank-owned life insurance (see
discussion in non-interest income section) also generate tax-exempt income. See Note 15 of Notes
to Consolidated Financial Statements for further information on income taxes.
Financial Performance2005 vs. 2004
Omega reported net income for the year ended December 31, 2005
of $22.9 million, representing $1.81 per diluted share, compared to $17 million, or $1.78 per diluted
share for 2004. The increase in net income reflects the successful integration of Sun, which merged
into Omega in the fourth quarter of 2004 as well as the ability of Omega to maintain a net interest
margin of 3.92%, on a tax-equivalent basis, in both 2005 and 2004, despite a challenging interest
rate environment.
For the year ended December 31, 2005, Omegas net income represented a return on average assets (ROA) of 1.15% compared to 1.24% in 2004. Omegas return on average
tangible assets, which excludes from average assets the goodwill and intangibles resulting from the
Sun acquisition, was 1.25% in 2005 compared to 1.26% in 2004. Omega managementstrives to attain consistently high earnings levels each year by protecting the core earnings base
with conservative growth strategies that minimize shareholder risk, while serving a broad customer
base. This approach has helped achieve consistent performance. Omega considers ROA to be a key performance
ratio, and constantly scrutinizes the broad categories of the income statement that impact this profitability
indicator.
Summarized below are the components of net income (in thousands
of dollars), and the contribution of each to ROA for 2005 and 2004.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                                                | 2005 |           | 2004 | 
|--------------------------------------------------------------- | ---- | --------- | ---- | 
|
|
|
|Net interest income                                             | $    | 61,670    |      | 
|Loan loss (provision) credit                                    |      | (1,202    | )    | 
|Trust fees                                                      |      | 4,140     |      | 
|Deposit service fees                                            |      | 9,344     |      | 
|Other fees                                                      |      | 9,112     |      | 
|BOLI                                                            |      | 2,299     |      | 
|Security gains                                                  |      | 2,327     |      | 
|Gain on debt extinguishment                                     |      | 1,043     |      | 
|Gains (loss) on sale of other assets                            |      | (376      | )    | 
|                                                                |      |          
|Total non-interest income                                       |      | 27,889    |      | 
|Employee expense                                                |      | (29,382   | )    | 
|Occupancy and equipment                                         |      | (8,403    | )    | 
|Other non-interest expense                                      |      | (20,771   | )    | 
|Amortization of intangibles                                     |      | (825      | )    | 
|                                                                |      |          
|Total non-interest expense                                      |      | (59,381   | )    | 
|Income tax expense                                              |      | (6,213    | )    | 
|                                                                |      |          
|Net income from continuing operations                           | $    | 22,763    |      | 
|                                                                |      |          
|Income from discontinued operations, net of tax                 | $    | 112       |      | 
|Loss on disposal of
        discontinued operations, net of tax |      |          |      | 
|                                                                |      |          
|Income (Loss) from discontinued operations                      | $    | 112       |      | 
|                                                                |      |          
|Net Income                                                      | $    | 22,875    |      | 
|                                                                |      |          
|Average assets                                                  | $    | 1,997,460 |      | 

|                                                                                                                                                                                                                                                                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Sun merger had a material impact on Omegas 2004 results.
In order to properly analyze 2005 earnings compared to 2004, management has identified the effects
on 2004 earnings caused by the addition of Sun on October 1, 2004. The following table sets forth
the approximate effect of Suns former operations and the gains realized from the restructuring
of Suns balance sheet.

|                                                      
|------------------------------------------------------
|9
      Omega Financial Corporation 2006 Annual Report

|
|



|Omega Financial Corporation Income Statement Analysis(in thousands)
|-------------------------------------------------------------------
|                                                                   

|                                                                     |  | Omega 2005
      Consolidated
      Income Statement |        | Estimated
      Contribution to
      2004 Results
      from Pre-Merger
      Omega Operations |   | Estimated
      Contribution to 
      2004
      Results
      from Former
      Sun
      Operations |   | Omega 2004 
      Consolidated 
      Income Statement |       | 2005 
      Compared 
      to 2004 |  
|-------------------------------------------------------------------- |  | ---------------------------------------------------- | ------ | ----------------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------ | - | ------------------------------------------------------ | ----- | ----------------------------------- | -
|                                                                     |  |                                                      |       
|Total interest income                                                |  | $                                                    | 91,175 |                                                                                                 | $ | 52,415                                                                                                 |   | $                                                      | 9,956 |                                     | $
|Total interest expense                                               |  |                                                      | 29,505 |                                                                                                 |   | 12,238                                                                                                 |   |                                                        | 4,429 |                                     |  
|                                                                     |  |                                                      |       
|Net interest income                                                  |  |                                                      | 61,670 |                                                                                                 |   | 40,177                                                                                                 |   |                                                        | 5,527 |                                     |  
|Provision (credit) for loan 
  losses                                |  |                                                      | 1,202  |                                                                                                 |   | (300                                                                                                   | ) |                                                        |      |                                     |  
|Service fee and other operating 
  income                            |  |                                                      | 26,874 |                                                                                                 |   | 15,840                                                                                                 |   |                                                        | 3,134 |                                     |  
|Net gains on sales of assets and early 
      extinguishment of debt |  |                                                      | 2,994  |                                                                                                 |   | 331                                                                                                    |   |                                                        | 1,100 |                                     |  
|                                                                     |  |                                                      |       
|Total non-interest income                                            |  |                                                      | 29,868 |                                                                                                 |   | 16,171                                                                                                 |   |                                                        | 4,234 |                                     |  
|Salaries and employee benefits                                       |  |                                                      | 30,555 |                                                                                                 |   | 19,654                                                                                                 |   |                                                        | 3,234 |                                     |  
|Other operating expense                                              |  |                                                      | 30,724 |                                                                                                 |   | 17,899                                                                                                 |   |                                                        | 3,279 |                                     |  
|                                                                     |  |                                                      |       
|Total non-interest expense                                           |  |                                                      | 61,279 |                                                                                                 |   | 37,553                                                                                                 |   |                                                        | 6,513 |                                     |  
|                                                                     |  |                                                      |       
|Income before tax                                                    |  |                                                      | 29,057 |                                                                                                 |   | 19,095                                                                                                 |   |                                                        | 3,248 |                                     |  
|Provision for federal income 
      tax                              |  |                                                      | 6,182  |                                                                                                 |   | 4,549                                                                                                  |   |                                                        | 773   |                                     |  
|                                                                     |  |                                                      |       
|Net income                                                           |  | $                                                    | 22,875 |                                                                                                 | $ | 14,546                                                                                                 |   | $                                                      | 2,475 |                                     | $
|                                                                     |  |                                                      |       

|                                                                  
|------------------------------------------------------------------
|The key factors defined in 2005 operating results were as follows:
|                                                                  

| | Successful integration of Sun, resulting in cost savings that exceeded expectations;
|- | ------------------------------------------------------------------------------------
|  |                                                                                     
| | Maintaining net interest margin despite a challenging interest rate environment;    
|  |                                                                                     
| | One-time gains due to balance sheet restructuring;                                  
|  |                                                                                     
| | Ongoing expense control; and                                                        
|  |                                                                                     
| | Declining earning assets in 2005.                                                   

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Total average loans were $1.3 billion in 2005 at an average weighted yield of 6.25% that produced $78.9 million of interest income. This represented a $336.5 million
or 36.3% increase in average loan volumes from 2004. This volume increase can be primarily attributed
to the Sun acquisition. As 2005 was a challenging year for loan growth due to the continued evaluation
of the Sun loan portfolio as well as continued competitive pressures in pricing and credit standards.
The yield increased 48 basis points to 6.25% from 5.77% in 2004, which resulted in an increase of
$4.8 million, in interest income, while mix and volume changes increased interest income $20.8 million
when compared to 2004. The combination of the rate, volume and mix effects resulted in an increase
of $25.6 million, or 47.8% in total interest earnings from loans. The 48 basis point increase in
loan yields in 2005 was largely attributable to the higher interest rate environment in 2005 compared to 2004.
Investment securities averaged $333.5 million, an increase of $71.9 million, or 27.5% from the average investment securities in 2004. This increase was due to assets
acquired in the Sun acquisition as well as a shift in the mix of earning assets from loans to investments
in 2005. The average weighted yield increased to 3.37% from 3.22% in 2004. Interest bearing deposits
and federal funds sold, as a group on average, decreased 9.3%, or $4.0 million.
Total interest earning assets averaged $1.6 billion at a yield
of 5.58% and produced total interest income of $91.2 million for 2005. The increase in average earning
assets of $404.4 million in 2005 over 2004 was primarilythe result of the Sun acquisition. The yield on earning assets increased by 51 basis points to 5.58% in 2005. Changes in interest rates resulted in an increase of $5.5 million, or 8.9%, in interest
income while volume and mix changes increased interest income by $23.3 million or 37.5%.
Total interest bearing liabilities averaged $1.4 billion at a cost of $29.5 million carrying a composite rate of 2.06%. This represented an increase in interest bearing
liabilities of 43.5%, or $433.5 million compared to 2004.
The composite rate was 1.67% in 2004. Interest expense increased $4.0 million due to higher rates and increased $8.9 million due to volume and mix changes. These
changes resulted in a total increase of $12.9 mil­lion, or 77.3%, in interest expense. Once again,
the Sun acquisition was the key factor in the growth of interest bearing liabilities, with increases
in deposits as well as other borrowings. In addition, in order to help fund the Sun acquisition,
Omega issued $36.0 million in trust-preferred securities in September 2004.
Non-interest bearing funding sources, including equity, averaged $566.7 million in 2005, compared to $373.7 million in 2004, for an increase of $193 million, or 51.6%.
This increase was the result of demand deposits acquired and the increased equity from the stock
issued to consummate the Sun merger. The rate to fund interest bearing assets increased by 45 basis
points to 1.80% in 2005 from 1.35% in 2004. The increase in funding cost was the result of higher
interest rates as well as the increased amount of long-term debt. Partially offsetting this increased
cost was the fact that a higher percentage of the earning assets were being funded by non-interest
bearing funding sources in 2005 than in 2004. For 2005, this ratio was 34.7%; in 2004 it was 30.4%.
Net interest income was $61.7 million for 2005, an increase of
$16.0 million, or 34.9%, from 2004. The increase in net interest income was the result of an increase
of $1.5 million due to interest rate effects and an increase of $14.5 million due to volume and mix
changes. The net interest margin was 3.77% in 2005 and 3.71% in 2004. On a fully tax-equivalent basis,
the net interest margin remained at 3.92% in 2004 and 2005.

|  
|--
|10

|
|



|Provision for Loan Losses
Omegas provision for loan losses was determined as a result of changes in the required level of the allowance for loan loss reserve. In 2005, Omega provided
a provision for loan losses of $1.2 million as compared to crediting the provision for $0.3 million
in 2004. The majority of the 2005 provision reflected managements assessment of one large commercial
borrower who was experiencing cash flow problems. In 2005, net charge-offs exceeded the provision
for loan losses by $0.2 million, while in 2004 the net charge-offs exceeded the provision by $3.8
million. Credit quality is a high priority for Omega as evidenced by its low ratios of net charge-offs
to average loans outstanding and non-performing loans to the loan loss allowance. Net charge-offs
in 2005 and 2004 were .11% and .38% of average loans outstanding, respectively. Non-performing loans
as a ratio to the allowance for loan losses were 59.3% at year-end 2005 and 51.8% at the end of 2004.
The allowance for loan losses as a percentage to net loans was 1.27% and 1.18% at December 31, 2005
and 2004, respectively.
Non-Interest Income
Service-based fee income (fees on deposits, loans, trust services, investment and insurance products and other services) grew to $24.6 million, for a 41.3% or $7.2
million increase when compared to $17.4 million for 2004. The majority of this increase related to
accounts acquired in the Sun acqui­sition as well as growth in trust fees.
Bank-owned life insurance (BOLI) continued to generate non-interest income each year as the cash surrender value increased. BOLI earnings were $2.3 million in 2005,
as compared to $1.6 million in 2004.
As a percentage of average assets, non-interest income (excluding securities gains gain on debt extinguishment and other gains from the sale of assets) was 1.35% for
2005, as compared to 1.38% in 2004.
In 2005, net gains from investment securities increased by $1.4
million, or 141.6%, to $2.3, which included gains of $0.4 million related to the sale of $47.3 million
of investments acquired from Sun. Management considers multiple factors when selling investment securities;
therefore, income from this activity can fluctuate dramatically from year to year.
Likewise, other gains or losses can be realized in a given year
based upon unique circumstances. Management is committed to controlling rate risk and occasionally
will sell longer-term fixed-rate assets to reposition the balance sheet when the rate risk analysis
warrants it. During the first quarter 2005, Omega paid down $55.0 million of Federal Home Loan Bank
borrowings that were acquired in the Sun merger. This resulted in a gain of $1.0 million due to favorable
rate movements after the merger was completed. Net losses of $0.4 million on other assets sold were
realized in 2005.
Non-Interest Expense
Total non-interest expenses were $61.3 million for 2005 as compared to $44.1 million for 2004, representing an increase of $17.2 million, or 39.1%. Management estimates
that the Sun acquisition contributed most of this increase. While it is difficult to compare full
year results because of the merger, Omegas cost savings plan resulted in a $7.8 million, or
11.39% reduction in non-interest expenses in 2005 compared to pro forma combined non-interest expenses
for 2004. As a percentage of average assets, non-interest expense was 3.07% for 2005 as compared
to 3.22% in 2004.
Salaries and employee benefits increased by 33.5%, or $7.7 million in 2005 as compared to 2004, primarily due to the Sun merger. Occupancy and equipment increased by
$2.4 million, or 40.4%, driven primarily by the addition of Suns 23 branches. Data processing
costs were $2.5 million for the year representing a $0.7 million, or 37.1% increase. Shares tax also
increased $0.2 million to $1.9 million representing a 9.3% increase. These increases can primarily
be attributed to the former Suns operations, which were included in expenses during the fourth
quarter only in 2004, and the full year in 2005. Other expenses were $17.1 million for an increase
of $5.9 million, or 52.3%, once again primarily due to the additional operations acquired.
Amortization of intangible assets totaled $1.0 million in 2005
as compared to $0.4 million in 2004. Omega recorded a core deposit intangible in the amount of $7.7
million and other intangibles of $2.9 million as a result of the Sun acquisition. The core deposit
intangible is being amortized over a period of 10 years, while the other intangibles are being amortized
over various periods ranging from 1.5 years to 11 years.
Income Taxes
Income tax expense for 2005 amounted to $6.2 million compared to $5.3 million in 2004. The effective tax rate was 21.3% in 2005 versus 23.8% in 2004, due to Omegas
net operating loss carryforwards as well as additional tax credits available in 2005 versus 2004.
Average tax-exempt investments and loans as a percentage of average assets were 6.3%, 9.9% and 12.4%
in 2005, 2004 and 2003, respectively. Tax-exempt income as a percentage of income before tax was
15.9%, 21.1% and 22.6% in 2005, 2004 and 2003, respectively. See Note 15 of Notes to Consolidated
Financial Statements for further information on income taxes.
Net Income
For comparative purposes, the following table sets forth earnings (in thousands of dollars) and selected earnings ratios based on net income for the past three years.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                  | 2005 |        | 2004 |   | 2003   |  
|--------------------------------- | ---- | ------ | ---- | - | ------ | -
|                                  |      |       
|Net income                        | $    | 22,875 |      | $ | 17,021 |  
|Return on average assets          |      | 1.15   | %    |   | 1.24   | %
|Return on average tangible asset  |      | 1.25   | %    |   | 1.26   | %
|Return on average equity          |      | 7.13   | %    |   | 8.89   | %
|Return on average tangible equity |      | 15.33  | %    |   | 11.84  | %

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|FINANCIAL CONDITION
Balance Sheet Summary
On December 31, 2006, our total assets were $1.8 billion, representing a 6.4% decrease when compared to total assets of $1.9 billion at December 31, 2005. This decrease
was driven primarily by the sale of Sentry Trust Company and three of our branch locations during
2006.
Omegas average assets for 2006 were $1.9 billion, as compared to $2.0 billion for 2005. This represented a $103.5 million or 5.2% year-over-year decrease due primarily
to the sale of Sentry Trust, which closed in September 2006, the sale of three branch locations,
which was completed late in the fourth quarter of 2006, the sale of approximately $21.0 million of
our tax-exempt investments in December 2006 and no significant new loan growth throughout 2006.

|                                                       
|-------------------------------------------------------
|11
      Omega Financial Corporation 2006 Annual Report

|
|



|Table 2 below reflects an analysis of the sources and uses of funds for 2006 based on average balances.
Table 2
|---------------------------------------------------------------------------------------------------------------
|                                                                                                               

|                                   | 2006
      Average
      Balance |           | Increase (Decrease) |   | 2005
      Average
      Balance |   | Increase (Decrease) |        | 2004
      Average
      Balance |  
|---------------------------------- | -------------------------------- | --------- | ------------------- | - | -------------------------------- | - | ------------------- | ------ | -------------------------------- | -
|
|
|                                   |                                  |          
|FUNDING USES:                      |                                  |           |                     |   |                                  |   |                     |        |                                  |  
|Loans                              | $                                | 1,128,048 |                     | $ | (74,559                          | ) |                     | (6.2   | )%                               | $
|Tax-exempt loans                   |                                  | 59,190    |                     |   | (858                             | ) |                     | (1.4   | )                                |  
|Investment securities              |                                  | 298,376   |                     |   | 31,821                           |   |                     | 11.9   |                                  |  
|Tax-exempt investment securities   |                                  | 33,589    |                     |   | (32,860                          | ) |                     | (49.5  | )                                |  
|Trading securities                 |                                  | 110       |                     |   | (126                             | ) |                     | (53.4  | )                                |  
|Interest bearing deposits          |                                  | 12,956    |                     |   | (8,681                           | ) |                     | (40.1  | )                                |  
|Federal funds sold                 |                                  | 12,685    |                     |   | (4,854                           | ) |                     | (27.7  | )                                |  
|                                   |                                  |          
|Total interest earning assets      |                                  | 1,544,954 |                     |   | (90,117                          | ) |                     | (5.5   | )                                |  
|Non-interest earning assets        |                                  | 366,290   |                     |   | (9,112                           | ) |                     | (2.4   | )                                |  
|Unrealized gains on investments    |                                  | (2,066    | )                   |   | (4,348                           | ) |                     | (190.5 | )                                |  
|Less: Allowance for loan losses    |                                  | (15,205   | )                   |   | 90                               |   |                     | (0.6   | )                                |  
|                                   |                                  |          
|Total uses                         | $                                | 1,893,973 |                     | $ | (103,487                         | ) |                     | (5.2   | )%                               | $
|                                   |                                  |          
|FUNDING SOURCES:                   |                                  |           |                     |   |                                  |   |                     |        |                                  |  
|Interest bearing demand deposits   | $                                | 395,769   |                     | $ | (74,522                          | ) |                     | (15.8  | )%                               | $
|Savings deposits                   |                                  | 195,280   |                     |   | (21,644                          | ) |                     | (10.0  | )                                |  
|Time deposits                      |                                  | 571,094   |                     |   | 4,405                            |   |                     | 0.8    |                                  |  
|Repurchase agreements              |                                  | 61,501    |                     |   | 12,044                           |   |                     | 24.4   |                                  |  
|Other borrowed funds               |                                  | 99,474    |                     |   | (30,195                          | ) |                     | (23.3  | )                                |  
|                                   |                                  |          
|Total interest bearing liabilities |                                  | 1,323,118 |                     |   | (109,912                         | ) |                     | (7.7   | )                                |  
|Demand deposits                    |                                  | 235,505   |                     |   | 4,361                            |   |                     | 1.9    |                                  |  
|Other Liabilities                  |                                  | 11,980    |                     |   | (771                             | ) |                     | (6.0   | )                                |  
|Shareholders equity               |                                  | 323,370   |                     |   | 2,835                            |   |                     | 0.9    |                                  |  
|                                   |                                  |          
|Total sources                      | $                                | 1,893,973 |                     | $ | (103,487                         | ) |                     | (5.2   | )%                               | $
|                                   |                                  |          

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The average balances of funding sources for 2006 decreased 5.2%, or $103.5 million to $1.9 billion when compared to $2.0 billion for 2005. Significant increases in
2005 were due primarily to the Sun acquisition in October 2004.
More detailed discussion of the year-to-year changes in Omegas interest earning assets and interest bearing liabilities are presented in the sections following,
titled Loans, Investments, Deposits and Market Risk.
Loans
Due to the uncertain economy, a slowdown in demand for mortgage
and commercial loans and intense competition in our market, 2006 was a challenging year for lending.
Omega has continuously maintained tight credit standards and diligent pricing standards, which at
times adversely affects loan growth. During 2006, we experienced net decreases in our commercial,
real estate, consumer and residential loan portfolios, offset in part by a net increase in our home
equity loans.
The following table summarizes the changes in loan balances (in
thousands) over the last three years.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                                     | 2006 |         | 2005 |   | 2004     |  
|---------------------------------------------------- | ---- | ------- | ---- | - | -------- | -
|                                                     |      |        
|New loans, net of repayments                         | $    | (29,700 | )    | $ | (81,413  | )
|Loans and leases sold                                |      | (29,588 | )    |   | (30,888  | )
|Loans charged off                                    |      | (2,548  | )    |   | (1,736   | )
|Loans transferred to other real estate owned         |      | (818    | )    |   | (176     | )
|Loans and leases acquired through acquisition of Sun |      |        |      |   |         |  
|Market value amortization                            |      | (55     | )    |   | 490      |  
|Other adjustments to carrying value                  |      | 246     |      |   | 328      |  
|                                                     |      |        
|                                                     | $    | (62,463 | )    | $ | (113,395 | )
|                                                     |      |        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Total loans outstanding at year-end 2006, net of unearned interest, decreased $62.4 million compared to year-end 2005. Several factors affected the amount of loans outstanding
during 2006, including the sale of three branch locations, which included approximately $30.9 million
in loans. Con­tinued runoff from a portfolio of auto loans, acquired from Sun in 2004, contributed
$18.3 million to the decrease in 2006. A total of $8.7 million in mortgage loans was sold as the
Corporation increased its efforts to sell new mortgage loans in the secondary market instead of adding
them to the loan portfolio. Additionally, $21.0 million in risk rated credits were paid off during
2006. New loan production in all categories was limited in 2006 due to the aggressive level of competition
in both pricing and credit standards in Omegas market areas. Average loans outstanding decreased
during 2006, by approximately $74.5 million, or 6.2%.
In December 2006, management announced the formation of Omega Financial Mortgage Solutions, LLC, a joint venture with American Home Bank. The purpose of
the joint venture is to become more competitive in the residential lending business and to increase
the origination of residential mortgage loans in Omegas market areas. Most of the new loans
generated will not be originated nor held in Omegas loan portfolio. However, these originations
are anticipated to be an additional source of fee-based income.
Omegas lending strategy stresses quality growth, diversified by product and industry. A standardized credit policy is in place throughout the Corporation, and
a special credit committee reviews all large loan requests prior to approval. Omegas commercial
and consumer lenders make credit judgments based on a customers existing debt obligations,
ability to pay and general economic trends.

|  
|--
|12

|
|



|Management monitors the activity within the loan portfolio very
carefully and strives to be competitive within its market for both commercial and residential real
estate loans. Omega intends to actively pursue growth in each of the loan categories again during
2007. Competition will continue to play a key role in pricing decisions to maintain and build new
loan volumes.
Lending activities have inherent risks associated with them, such as the potential risk of loans becoming past due, non-performing or, ultimately, uncollectible or
charged-off loans. Omega attempts to manage this risk through credit approval standards, as discussed
above, and aggressive monitoring and collection policies.
An allowance for loan losses is maintained in order to absorb probable losses on existing loans. An annual provision or credit is recorded to current earnings to maintain
the allowance at adequate levels. Charge-offs and recoveries are recorded as an adjustment to the
reserve. The allowance for loan losses at December 31, 2006 was 1.51% of total loans, net of unearned
interest, as compared to 1.27% of total loans, net of unearned interest at the end of 2005. The allowance
increased $1.9 million when compared to December 31, 2005. Net charge-offs for 2006 and 2005 were
0.16% and 0.11%, respectively of average loans. Net charge-offs were $1.9 million in 2006, an increase
of $0.5 million over the net charge-offs in 2005. The increase in net charge-offs in 2006 relates
primarily to the charge-off of loans made to a one commercial borrower that filed for bankruptcy
protection during the third quarter of 2006. The bank subsequently sold its interest in this credit
facility, resulting in a loss but also eliminating the potential for future losses from this borrower.
Change in Allowance for Loan Losses(In thousands)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                    | At December 31, |       
|----------------------------------- | --------------- | ------
|
|
|                                    |                 |       
|Provision                           | $               | 3,896 
|Allocated to assets sold in 2006    |                 | (136  
|Net charge-offs                     |                 | (1,898
|                                    |                 |       
|Change in allowance for loan losses | $               | 1,862 
|                                    |                 |       
|Allowance for loan losses           | $               | 17,344

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|At December 31, 2006, non-performing loans (consisting of non-accrual loans, accruing loans past due 90 days or more and restructured loans) as a percentage of the allowance
for loan losses were 134.5% as compared to 59.3% at December 31, 2005. Of the $23.3 million of non-performing
loans at December 31, 2006, $3.8 million are collateralized with real estate, and $19.5 million are
collateralized with other assets (e.g., receivables, inventory, etc.).
Non-performing loans were 2.0% of loans as of December 31, 2006, and 0.8% of loans as of December 31, 2005. The increase in non-performing loans in 2006 was due primarily
to one commercial borrower, who is operating under bankruptcy protection, with loans totaling $16.8
million being placed on non-accrual status. Loans in this relationship have been allocated a specific
$5.3 million loan loss reserve as of December 31, 2006. Non-accrual loans at December 31, 2005 included
loans due from one borrower amounting to $2.3 million. These loans were repaid in full during the
first quarter of 2006.
Table 3Non-performing loans
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                 | December 31, |       
|------------------------------------------------ | ------------ | ------
|
|
|                                                 |              |       
|Non-accrual                                      |              |       
|loans                                            | $            | 21,001
|Accruing loans
         past due 90 days or more |              | 2,327 
|Restructured loans                               |              |      
|                                                 |              |       
|Total non-performing loans                       | $            | 23,328
|                                                 |              |       

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued when reasonable doubt
exists as to the full, timely collection of principal or interest. When a loan is placed on non-accrual
status, all interest previously accrued but not collected is reversed against current period income.
Income on such loans is then recognized only to the extent that cash is received and where the future
collection of principal is probable. Accruals are resumed on loans only when they are brought fully
current with respect to interest and principal, and when, in the judgment of management, the loan
is estimated to be well secured and fully collectible as to both principal and interest.
Allowance for Loan Losses
The amount of allowance for loan losses is determined through a
critical quantitative analysis performed by management that includes significant assumptions and
estimates. It must be maintained at a level deemed suf­ficient to absorb probable estimated losses
within the loan portfolio, and supported by detailed documentation. Critical to this analysis is
any change in observable trends that may be occurring relative to loans, to assess potential credit
weaknesses.
Management systematically monitors the composition and quality
of the loan portfolio and the adequacy of the allowance for loan losses on a quarterly basis in order
to provide for probable losses inherent in the portfolio. Omegas methodology for maintaining
the allowance is highly structured and consists of several key elements:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| | Historical trends: Historical net charge-offs are computed as a per­centage of average loans, by loan type. This percentage is applied to the ending period balance of the loan type to determine the amount to be
    included in the allowance as part of managements estimate of inherent probable loss.                                                                                                                                                                                                                        
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Individual loan performance: Management identifies and maintains a list of high-risk loans called a watch list. These loans are
      individually assigned a risk-rating grade because the loan has not performed according to payment
      terms or the credit has deteriorated and there is reason to believe that repayment of the loan principal
      in whole or part is unlikely. The specific portion of the allowance for these loans is the total
    amount of potential unconfirmed losses for these individual loans.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | General economic environment: Current economic factors and business trends relative to specific types of loans are assessed. Omegas
      lending is concentrated within central Pennsylvania and accordingly the loan portfolio quality is
      dependent upon localized economic factors such as: unemployment rates, commercial real estate vacancy
    rates, consumer delinquency trends and residential housing appreciation rates.                                                                                         

|                                                       
|-------------------------------------------------------
|13
      Omega Financial Corporation 2006 Annual Report

|
|



| | Other relevant factors: Certain specific risks inherent in the loan port­folio are identified and examined to determine
      if additional reserve is warranted, and if so, management assigns a percentage to the loan category.
    Such factors consist of:
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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|  |                                                                                                                                                                                                                                                               

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Individual credits are selected throughout the year for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the adequacy
of the allowance. Due to the nature of commercial lending, evaluation of the adequacy of the allowance
as it relates to these loan types is often based more upon specific credit review, with consideration
given to the potential impairment of certain credits and historical charge-off percentages, adjusted
for general economic conditions and other inherent risk factors. Loans not individually evaluated
for impairment are grouped by pools with similar risk characteristics and the related historical
charge-off percentages are adjusted to reflect current inherent risk factors, such as unemployment,
overall economic conditions, concentrations of credit, loan growth, classified and impaired loan
trends, staffing adherence to lending policies and loss trends.
Conversely, due to the homogeneous nature of the real estate and installment portfolios, the portions of the allowance allocated to those portfolios are primarily
based on prior charge-off history of each portfolio, adjusted for general economic conditions and
other inherent risk factors.
Determination of the allowance for loan losses is subjective in
nature and requires management to periodically reassess the validity of its assumptions. Differences
between net charge-offs and estimated losses are assessed such that management can timely modify
its evaluation model to ensure that adequate provision has been made for risk in the total loan portfolio.
Management applied the methodology described in this report to
the acquired Sun loan portfolio, including a review of Suns historical trends. Suns loan
charge-off trends were reviewed by loan type and allocated at their respective historical levels
to determine the amount to be included in the allowance. Management also reviewed Suns high-risk
(watch list) loans and assigned a specific portion of the allowance for estimated probable losses.
Other risk factors unique to Suns loan portfolio were identified and examined with additional
reserve allocations assigned as warranted.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|The following tables show how the allowance for loan losses is allocated among the various types of outstanding loans and the percent of loans by type to total loans as of December 31 for the last five years:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                       | Allocation of the Allowance for Loan Losses (in thousands) |       
|-------------------------------------- | ---------------------------------------------------------- | ------
|
|
|
|Commercial, financial and agricultural | $                                                          | 7,109 
|Real estatecommercial                 |                                                            | 7,326 
|Real estateconstruction               |                                                            | 322   
|Real estatemortgage                   |                                                            | 980   
|Home equity                            |                                                            | 723   
|Personal                               |                                                            | 800   
|Lease financing                        |                                                            | 84    
|                                       |                                                            |       
|Total Allowance for Loan Losses        | $                                                          | 17,344
|                                       |                                                            |       
|                                       |                                                            |       

|                                       | Percentage of Loans by Loan Type (in %s) |      
|-------------------------------------- | ---------------------------------------- | -----
|
|
|
|Commercial, financial and agricultural |                                          | 21.8 
|Real estatecommercial                 |                                          | 37.5 
|Real estateconstruction               |                                          | 1.9  
|Real estatemortgage                   |                                          | 18.9 
|Home equity                            |                                          | 14.3 
|Personal                               |                                          | 4.0  
|Lease financing                        |                                          | 1.6  
|                                       |                                          |      
|Total Allowance for Loan Losses        |                                          | 100.0
|                                       |                                          |      

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|At December 31, 2006, $5.3 million of the loan loss reserve was
specifically allocated to one large commercial borrower who is currently in non-accrual status but
has been experiencing cash flow problems and is operating under protection of the U.S. bankruptcy
laws. During the fourth quarter of 2006, a $2.8 million principal payment was received from this
borrower. Omega has estimated and provided for probable losses on this remaining $16.8 million credit,
however, evaluations of the credit continue. The ongoing analysis may cause this estimate to change
in the future and actual losses resulting from this credit may differ materially from this initial
estimate.
Omega has 18 credit relationships with exposure individually greater than $10.0 million. The total outstanding loan exposure to these 18 commercial customers at December
31, 2006 was $172.0 million. These loans are all secured with real estate, accounts receivable,
inventory or marketable collateral. Two of the facilities required an allocation of the allowance
for loan losses at year-end, including the previously mentioned $16.8 million credit as well as
a $0.3 million allocation for a $15.8 million credit.
Investments
Total investments are defined as all interest earning assets except loans, and include investment securities available for sale (at market value), investment securities
held to maturity, trading securities, federal funds sold, interest bearing deposits and other interest-earning
assets. Investments totaled $317.6 million on December 31, 2006, representing a decrease of $46.7
million from year-end 2005. The decline in the balance of investments in

|  
|--
|14

|
|



|2006 was due to the sale of approximately $27.0 million of municipal securities during the fourth quarter,
along with other sales of other municipal securities during the year, as well as repayments of mortgage
backed securities. The decrease in the portfolio can be attributed to funding needs associated with
the balance sheet restructuring from the Sun merger. In 2005, investments totaling $46.8 million
were sold to fund the early extinguishment of FHLB debt. In addition, interest bearing deposits and
federal funds sold were at higher than usual levels at the end of 2004 in anticipation of some of
the loss of deposits acquired from Sun.
The following table summarizes how the ending balances (in thousands)
changed as of December 31 for each of the last three years.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                                  | 2006 |          | 2005 |   | 2004     |  
|------------------------------------------------- | ---- | -------- | ---- | - | -------- | -
|                                                  |      |         
|Purchases of investment securities                | $    | 95,053   |      | $ | 147,487  |  
|Sales and maturities of investment securities     |      | (146,134 | )    |   | (113,278 | )
|Investments acquired through acquisition of Sun   |      |         |      |   |         |  
|Adjustment in market value of AFS securities      |      | 2,367    |      |   | (7,310   | )
|Amortization/Accretion                            |      | (747     | )    |   | (1,523   | )
|Trading account, net change                       |      | (420     | )    |   | 468      |  
|Federal funds sold, net change                    |      |         |      |   | (36,350  | )
|Interest bearing deposits acquired                |      |         |      |   |         |  
|Interest bearing deposits with others, net change |      | 3,165    |      |   | (22,214  | )
|                                                  |      |         
|Net change in investments                         | $    | (46,716  | )    | $ | (32,720  | )
|                                                  |      |         

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|On average, investments decreased by $14.7 million, or 3.9%, during 2006, after increasing by $69.8 million, or 22.9%, during 2005. The 2006 decrease was primarily due
to the sale of a significant portion of the municipal securities in the portfolio. The increase in
2005s average balance was primarily the result of a shift in the mix of earning assets from
loans to investments.
The investment area is managed according to internally established guidelines and quality standards. Omega segregates its investment securities portfolio into two classifications:
those held to maturity and those available for sale. Omega classifies all marketable investment securities
as available for sale, and currently holds no securities in the held to maturity classification.
At December 31, 2006, the market value of the entire securities portfolio exceeded its amortized
cost by $0.5 million as compared to December 31, 2005 when amortized cost was greater than market
value by $1.9 million. The weighted-average maturity of the investment portfolio was 1 year and 5
months as of December 31, 2006 as compared to 1 year and 7 months at the end of 2005. The weighted-average
maturity has remained short in order to achieve a desired level of liquidity. Table 5 (located on
page 20) shows the remaining maturity or earliest possible re-pricing of investment securities.
Non-Interest Earning Assets
Non-interest earning assets on average decreased $13.4 million,
or 3.7%, in 2006 and increased $231.3 million, or 61.6%, in 2005. During 2006, the sale of Sentry
and three branch offices significantly impacted the decrease in non-interest earning assets. In 2005,
the completion of the valuation of the core deposit intangible acquired in the Sun transaction resulted
in a decrease of $6.5 million in intangible assets and a corresponding increase in goodwill and deferred
tax assets. The opening of two new branch locations also contributed to the increase in premises
and equipment in 2005.
The following table summarizes how ending balances, including balances of discontinued operations, changed annually in each of the last three years (in thousands).
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                       | 2006 |         | 2005 |   | 2004   |  
|-------------------------------------- | ---- | ------- | ---- | - | ------ | -
|                                       |      |        
|Cash and due from banks                | $    | 31      |      | $ | 8,317  |  
|Premises and equipment, net            |      | (7,530  | )    |   | 2,882  |  
|Other real estate owned                |      | (444    | )    |   | (2,126 | )
|Bank-owned life insurance              |      | 1,197   |      |   | 2,299  |  
|Investment in limited partnerships     |      | (849    | )    |   | (1,993 | )
|Intangible assets                      |      | (2,532  | )    |   | (7,468 | )
|Goodwill                               |      | (1,617  | )    |   | 4,045  |  
|Other receivables and prepaid expenses |      | (18,721 | )    |   | (2,595 | )
|                                       |      |        
|Net change in non-earning assets       | $    | (30,465 | )    | $ | 3,361  |  
|                                       |      |        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Deposits
For the year 2006, total deposits decreased $96.8 million. The
primary reasons for this decrease were the sale of three branch locations in 2006, and the fact that
management did not pursue an aggressive pricing strategy for deposits due to limited loan demand,
resulting in some deposit run-off. Deposits included in the branch sales totaled $33.1 million. Excluding
the effect of the branch sales, deposit decreases were primarily in the interest bearing demand deposit
and savings categories, both of which were the result of aggressive competitor pricing strategies.
In 2005, total deposits from the Sun region decreased $80.3 million, with interest bearing demand
decreasing $57.1 million, and savings and time deposits decreasing $22.5 million. A significant portion
of the decrease in interest bearing demand deposits can be attributed to a change in pricing on premium
priced public funds acquired from Sun. In addition, as loan volume slowed in 2005, Omegas balance
sheet management strategy provided for a less aggressive approach to pricing deposits and therefore
experienced limited growth in 2005.
The following table summarizes how the ending balances changed
annually in each of the last three years (in thousands).
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                    | 2006 |         | 2005 |   | 2004    |  
|----------------------------------- | ---- | ------- | ---- | - | ------- | -
|                                    |      |        
|Increase (decrease) in:             |      |         |      |   |         |  
|Demand deposits                     | $    | (4,348  | )    | $ | 8,275   |  
|Interest bearing demand deposits    |      | (46,887 | )    |   | (59,701 | )
|Savings deposits                    |      | (27,407 | )    |   | (13,296 | )
|Time deposits, $100,000 and greater |      | (1,857  | )    |   | (8,133  | )
|Time deposits, other                |      | (16,268 | )    |   | (6,697  | )
|                                    |      |        
|Net increase (decrease) in deposits | $    | (96,767 | )    | $ | (79,552 | )
|                                    |      |        

|                                                                                                
|------------------------------------------------------------------------------------------------
|The following table summarizes deposits sold as part of the branch sales in 2006 (in thousands).
|                                                                                                

|Demand deposits                     | $ | 3,334  | 
|----------------------------------- | - | ------ | 
|Interest bearing demand deposits    |   | 3,919  | 
|Savings deposits                    |   | 3,274  | 
|Time deposits, $100,000 and greater |   | 3,076  | 
|Time deposits, other                |   | 19,482 | 
|                                    |   |       
|Total deposits sold                 | $ | 33,085 | 
|                                    |   |       

|                                                                                                                                                                                                                                                                                                                                                                                
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Average deposits decreased $87.4 million, or 5.9%, to $1.4 billion in 2006 as compared to an increase in 2005 of $420.0 million, or 39.4%, to $1.5 billion. The 2006
decrease was due primarily to the sale of three branches that occurred in 2006 and some deposit run-off.
In 2005, on an average basis, the acquisition of Sun accounted for $420.0 million of new deposits.

|                                                       
|-------------------------------------------------------
|15
      Omega Financial Corporation 2006 Annual Report

|
|



|Management analyzes the core deposit intangible asset recorded
related to the Sun acquisition on a quarterly basis. No impairment of the core deposit intangible
asset exists as estimated runoff in the acquired deposit accounts exceeded the actual experience
noted above.
In the past several years, the banking industry in general has
expe­rienced limited deposit growth because of competition in the marketplace provided by mutual
funds and other investment options that directly compete with traditional banking products. In keeping
with our desire to provide our customers a full array of financial services within our own
walls, we supplemented the services traditionally offered by our Trust Department, by staffing
our community offices with financial services consultants and representatives that are licensed and
trained to sell variable and fixed rate annuities, mutual funds, stock brokerage services, long term
care insurance and other life products. Although the sale of these products can reduce the Banks
deposit levels, we have been rewarded with satisfied customers and significant increases in non-interest
fee income.
Many of our customers still require the comfort of insured deposits and local familiarity that our bank continues to offer, and this is the primary consideration for
the majority of our depositors. During the low interest rate environment of the past few years, many
customers chose to shift their funds to more liquid transaction accounts from time deposits. However,
in 2006, as interest rates on deposits began to increase, customers have become more rate focused
and are now more willing to shift some funds back to time deposits. As a result, competitive pricing
pressures on deposit pricing have increased in 2006, and are expected to continue in 2007.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|The following table shows the comparison of average core deposits and average time deposits as a percentage of total deposits for each of the last three years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Table 4Changes in Deposits($ in thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                    | 2006 |           | Increase (Decrease) |   | 2005    |   | Increase (Decrease) |       | 2004 |  
|----------------------------------- | ---- | --------- | ------------------- | - | ------- | - | ------------------- | ----- | ---- | -
|
|
|                                    |      |          
|Interest bearing demand deposits    | $    | 395,769   |                     | $ | (74,523 | ) |                     | (15.8 | )%   | $
|Savings deposits                    |      | 195,280   |                     |   | (21,643 | ) |                     | (10.0 | )    |  
|Demand deposits                     |      | 235,505   |                     |   | 4,361   |   |                     | 1.9   |      |  
|                                    |      |          
|Total core (transaction) accounts   |      | 826,554   |                     |   | (91,805 | ) |                     | (10.0 | )    |  
|Time deposits, $100,000 and greater |      | 97,358    |                     |   | 556     |   |                     | 0.6   |      |  
|Time deposits, other                |      | 473,736   |                     |   | 3,849   |   |                     | 0.8   |      |  
|                                    |      |          
|Total time deposits                 |      | 571,094   |                     |   | 4,405   |   |                     | 0.8   |      |  
|                                    |      |          
|Total deposits                      | $    | 1,397,648 |                     | $ | (87,400 | ) |                     | (5.9  | )%   | $
|                                    |      |          

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Other Interest Bearing Liabilities
Omegas average balances for other interest bearing liabilities, including repurchase agreements and other borrowed funds, decreased $18.2 million in 2006 compared
to 2005. This decrease was attributed to the higher level of borrowings in the first quarter of 2005.
In February 2005, Omega paid off $55.0 million in Federal Home Loan Bank debt. This payment was the
final early extinguishment of debt acquired from the acquisition of Sun. Gains of $1.0 million were
recognized as a result of the early extinguishment of this debt. In addition, average repurchase
agreements increased $12.0 million in 2006 as compared to 2005, as commercial customers continue
to search for better alternatives for investing excess funds.
Shareholders Equity
During 2006, total shareholders equity increased by $6.7
million. The following table summarizes how the components of equity changed annually in each of
the last three years (in thousands).
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                                    | 2006 |         | 2005 |   | 2004    |  
|--------------------------------------------------- | ---- | ------- | ---- | - | ------- | -
|
|Net income                                          | $    | 20,431  |      | $ | 22,875  |  
|Dividends                                           |      | (15,639 | )    |   | (15,651 | )
|Stock options exercised                             |      | 4,040   |      |   | 1,904   |  
|Repurchase of stock                                 |      | (4,194  | )    |   | (1,984  | )
|Net change in unrealized security gains, net of tax |      | 1,539   |      |   | (4,752  | )
|Acquisition of Sun Bancorp                          |      |        |      |   |        |  
|Other                                               |      | 544     |      |   | 359     |  
|
|Change in shareholders equity                      | $    | 6,721   |      | $ | 2,751   |  
|

|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|*** | *Equity recorded from the acquisition of Sun was the fair value of assets acquired of $187.7 million less cash paid of $43.8 million.*
|    |                                                                                                                                       

|Shareholders equity continued to be an important funding
source during 2006, providing an average balance of $323.4 million, as compared to the $320.5 million
provided in 2005. Dividend payout ratios on the common stock were 76.59% for 2006, 68.30% for 2005
and 66.91% for 2004. Shareholders equity has been increased as a result of the exercise of
employee stock options and employee stock purchase plan options and continued profitability. Other
comprehensive income arising from unrealized gains (net of tax) on securities available for sale
decreased average equity by $1.3 million in 2006, increased it by $1.5 million in 2005 and increased
it by $3.9 million in 2004. At December 31, 2006, Omega held 200,669 shares of stock in treasury
at a cost of $6.2 million versus 70,815 shares of stock in treasury at a cost of $2.0 million at
December 31, 2005. The increase in treasury stock is the result of the Omega stock repurchase program
in effect during 2006 (see Note 16 of Notes to Consolidated Financial Statements for further information).
Omega maintained its return to shareholders by paying dividends
of $1.24 per common share for 2006 and 2005. Per share common dividends were $1.20 in 2004.
Omegas book value per share at December 31, 2006 was $25.76 and on a tangible book basis it was $12.61. The tangible book value excludes goodwill and intangible
assets that resulted from the Sun merger in 2004. At December 31, 2005, book value per share was
$25.28 and tangible book basis was $11.76.
Federal banking regulators have established capital adequacy requirements for banks based on risk factors. All banks and bank holding companies are required to have a minimum
of 4% of risk adjusted assets in Tier I capital and 8% of risk adjusted assets in Total capital (Tier
I and Tier II capital). As of December 31, 2006 and 2005, Omegas Tier I capital ratio was
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|  
|--
|16

|
|



|17.6% and 15.7%, respectively, and its Total capital ratio was 18.9% and 17.0%, respectively. Additionally, banking organizations must maintain a minimum Tier I capital to total average asset (leverage) ratio
of 3%. This 3% leverage ratio is a minimum for the top-rated banking organizations without any supervisory,
financial or operational weaknesses or deficiencies. Other banking organizations are required to
maintain leverage capital ratios 100 to 200 basis points above the minimum depending on their financial
condition. At December 31, 2006 and 2005, Omegas leverage ratio was 12.3% and 11.1%, respectively,
against a required leverage ratio of 4% (see Note 24 of Notes to the Consolidated Financial Statements).
Omegas equity to assets ratio for 2006, 2005 and 2004 was
17.91%, 16.42% and 15.16%, respectively.
MARKET RISK
Market risk is the risk of loss arising from changes in the fair value of financial instruments due to changes in interest rates, currency exchange rates, commodity
prices or equity prices. The Corporations market risk is composed primarily of interest rate
risk. The process by which financial institutions manage their interest rate risk is called asset/liability
management. This process has become very important in an industry undergoing an ever-changing interest
rate environment. The goals of Omegas asset/liability management are increasing net interest
income without taking undue interest rate risk or material loss of net market value of its equity,
while maintaining adequate liquidity. Net interest income is increased by widening the interest spread
and increasing earning assets. Liquidity is measured by the ability to meet both depositors
and credit customers requirements.
Net Interest Income and Interest Rate Risk
Omega believes that it has managed interest rate risk while achieving optimal levels of net interest income. Interest rate risk is the risk to net interest income or capital
arising from movements of interest rates. There are several components of interest rate risk: re-pricing
risk, basis risk and customer option risk. The two methodologies used by the Corporation to aid in
the management of interest rate risk are gap analysis and economic simulation. Gap analysis is a
tool used by the Corporation primarily to measure re-pricing risk while economic simulation is used
to measure and manage re-pricing risk, basis risk and customer option risk.
Both gap analysis and economic simulations are performed in a static environment. In reality, Omegas balance sheet is dynamic and in constant change as are interest
rates. Management applies the same techniques using projected future volumes and various interest
rate scenarios to analyze potential hedging decisions or decisions that involve the acquisition or
investment of funds.
Economic simulation involves management simulating possible economic conditions and interest rate scenarios in order to quantify the impact on net interest income. The
effect that changing interest rates have on Omegas net interest income is simulated by moving
interest rates up and down at 100 basis point increments. These simulations are known as rate shocks.
As the table below indicates, based on rate shock simulations,
the Corporation is exposed to projected loss of income if interest rates fall. For example, net interest
income at risk for a 100 basis point decrease in rates as of December 31, 2006 was $1.0 million,
or 1.60%, of net interest income, compared to $1.8 million, or 2.73%, of net interest income at risk
as of December 31, 2005. Omegas rate risk policies provide for maximum limits on net interest
income that can be at risk for 100 through 300 basis point changes in interest rates.
Effect of Interest Rate Risk on Net Interest Income($ in thousands)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|Change in
      Interest Rates
      (Basis Points) |  | Change
      Due to
      Re-Pricing Risk |   | Change
      Due to
      Basis Risk |   | Change
      Due to
      Customer
      Options |   | Total
      Change Due
      to Interest
      Rate Risk |  
|--------------------------------------------------- |  | ----------------------------------------- | - | ------------------------------------ | - | ------------------------------------------------ | - | -------------------------------------------------------- | -
|                                                    | 
|300                                                 |  |                                           | $ | 584                                  |   |                                                  | $ | 2,512                                                    |  
|200                                                 |  |                                           |   | 372                                  |   |                                                  |   | 1,707                                                    |  
|100                                                 |  |                                           |   | 169                                  |   |                                                  |   | 860                                                      |  
|0                                                   |  |                                           |   | 0                                    |   |                                                  |   | 0                                                        |  
|100                                                |  |                                           |   | (156                                 | ) |                                                  |   | (861                                                     | )
|200                                                |  |                                           |   | (395                                 | ) |                                                  |   | (1,722                                                   | )
|300                                                |  |                                           |   | (625                                 | ) |                                                  |   | (2,583                                                   | )

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Omegas interest rate risk position is directly related to
the preference of our customers for fixed rate loans and shorter-term deposits. If customer preferences
change, the same effects could be obtained by changing investment, lending, funding or pricing strategies;
however, these strategies could reduce liquidity or require maintaining additional capital.
In addition to determining the impact on net interest income from various interest rate changes, the same analysis is applied to determine the change that interest
rate movements would have on Omegas economic value of equity (EVE). The EVE provides an indicator
of economic value and is computed by discounting all contractual future cash flows at current market
rates. The effect that changing interest rates have on Omegas EVE is simulated by moving interest
rates up and down at 100 basis point increments. This provides management with information necessary
to analyze long-term interest rate risk. Management can limit long-term interest rate risk, but it
is generally at the expense of short-term earnings, which can cause more volatility in the short
term. At December 31, 2006, Omegas EVE was within the guidelines established by management
and the Board of Directors. The table below summarizes the results of rate shocks showing the effect
that interest rate risk has on economic value of equity as of December 31, 2006.
Effect of Interest Rate Risk on Economic Value of Equity($ in thousands)
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|Change in
      Interest Rates
      (Basis Points) |  | Change
      Due to
      Re-Pricing Risk |   | Change
      Due to
      Basis Risk |   | Change
      Due to
      Customer
      Options |   | Total
      Change Due
      to Interest
      Rate Risk |  
|--------------------------------------------------- |  | ----------------------------------------- | - | ------------------------------------ | - | ------------------------------------------------ | - | -------------------------------------------------------- | -
|                                                    | 
|300                                                 |  |                                           | $ | (30,015                              | ) |                                                  | $ | 30,600                                                   |  
|200                                                 |  |                                           |   | (20,692                              | ) |                                                  |   | 21,147                                                   |  
|100                                                 |  |                                           |   | (11,624                              | ) |                                                  |   | 11,860                                                   |  
|0                                                   |  |                                           |   | 0                                    |   |                                                  |   | 0                                                        |  
|100                                                |  |                                           |   | 11,398                               |   |                                                  |   | (11,780                                                  | )
|200                                                |  |                                           |   | 23,704                               |   |                                                  |   | (24,419                                                  | )
|300                                                |  |                                           |   | 36,957                               |   |                                                  |   | (37,959                                                  | )

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Re-Pricing Risk
Re-pricing risk arises from differences between the timing of rate changes and the timing of cash flows that occur in the pricing and maturity of assets and liabilities.
The static gap analysis is one of the tools used to measure and manage re-pricing risk. By managing
gap, fluctuations in net interest income can be minimized, thereby achieving consistent growth in
net interest income during periods of changing interest rates. Table 5 (located on page 20) shows
the period and cumulative static gaps for various time intervals as of December 31, 2006. The data
in this table is based upon the earliest possible re-pricing date or maturity whichever comes first.
Core deposit accounts, defined as interest bearing demand deposits and certain savings accounts are
considered to have re-pricing implications of various

|                                                       
|-------------------------------------------------------
|17
      Omega Financial Corporation 2006 Annual Report

|
|



|intervals between one month and five years. The gap analysis is used as an indicator of what may happen
to net interest income if interest rates rise or fall. On a cumulative basis, over the next 12 months,
Omega is in a negative gap position of $82.4 million at December 31, 2006, indicating more interest-bearing
liabilities than earning assets will re-price during that period. As a result of the low interest
rate environment of the past several years, the level of our gap and interest rate risk positions
has been affected by both the extension of our loan portfolio, which reflects our customers
preference for fixed rates, and the shortening of our deposit base as customers continue to prefer
transaction accounts or shorter-term certificates. As we continue to transition into a period of
higher interest rates, it is expected that our gap and interest rate risk position will be most affected
by the likely lengthening of our customer deposit base as customers may be more willing to move funds
from transaction accounts and short-term certificates into higher-paying, longer-term certificates of deposit.
As of December 31, 2006, should interest rates rise by 100 basis points immediately and Omegas balances do not grow and the mix does not change, the re-pricing
risk analysis indicates that net interest income would increase over the next twelve months by $0.2
million. If interest rates would decline by 100 basis points immediately, the re-pricing risk analysis
indicates that net interest income would decrease by $0.2 million over the next twelve months.
Omegas management cannot predict the direction of interest rates nor will the product mix remain unchanged, yet management uses this information to help formulate
strategies to minimize any unfavorable effect on net interest income as a result of interest rate
changes.
Basis Risk
Basis risk is another source of interest rate risk and arises from the difference in movements of interest rates earned on assets and the interest rates paid on liabilities
with otherwise similar repricing characteristics. The Corporation analyzed the effects of basis risk
on both net interest income and EVE. This was done through interest rate shocks, which isolated the
movements of the prime rate and treasury rates. The following shows the results of these rate shocks.
Effect of Basis Risk on Net Interest Income($ in thousands)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|Change in
      Interest Rates
      (Basis Points) |  | Change Due to
      Prime Basis Risk |   | Change Due to
      Treasury Basis Risk |   | Change Due to
      Total Basis Risk |  
|--------------------------------------------------- |  | ------------------------------------ | - | --------------------------------------- | - | ------------------------------------ | -
|
|300                                                 |  |                                      | $ | 8,540                                   |   |                                      | $
|200                                                 |  |                                      |   | 5,694                                   |   |                                      |  
|100                                                 |  |                                      |   | 2,847                                   |   |                                      |  
|0                                                   |  |                                      |   | 0                                       |   |                                      |  
|100                                                |  |                                      |   | (2,847                                  | ) |                                      |  
|200                                                |  |                                      |   | (5,693                                  | ) |                                      |  
|300                                                |  |                                      |   | (8,540                                  | ) |                                      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The table above indicates the results of changes in the prime rate or treasury rates, keeping all other interest rates unchanged. If the prime rate would increase by
100 basis points, and all other rates remained unchanged, this analysis indicates that the Corporations
net interest income would increase by $2.8 million and economic value of equity would decrease by
$4.8 million. The Corporations prime basis risk has stabilized over the last several years
as a result of customer preference for fixed rate loans and the fact that the Corporation has increasingly
indexed variable rate loans to rates other than the prime rate. If all points on the treasury curve
would increase 100 basis points and all other rates remained unchanged, this analysis indicates that
the Corporations net interest income would decrease $2.0 million and economic value of equity
would increase $16.7 million. This change can be attributed to the fact that most deposit rates are
indexed to the treasury curve; therefore, an increase in treasury rates would increase interest expense
more than interest income.
Effect of Basis Risk on Economic Value of Equity($ in thousands)
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|Change in
      Interest Rates
      (Basis Points) |  | Change Due to
      Prime Basis Risk |   | Change Due to
      Treasury Basis Risk |   | Change Due to
      Total Basis Risk |  
|--------------------------------------------------- |  | ------------------------------------ | - | --------------------------------------- | - | ------------------------------------ | -
|
|300                                                 |  |                                      | $ | (13,874                                 | ) |                                      | $
|200                                                 |  |                                      |   | (9,442                                  | ) |                                      |  
|100                                                 |  |                                      |   | (4,821                                  | ) |                                      |  
|0                                                   |  |                                      |   | 0                                       |   |                                      |  
|100                                                |  |                                      |   | 5,037                                   |   |                                      |  
|200                                                |  |                                      |   | 10,307                                  |   |                                      |  
|300                                                |  |                                      |   | 15,826                                  |   |                                      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Customer Option Risk
Customer option risk arises when a customer has the right to alter the level and timing of cash flows of an asset or liability. Prepayment options on loans and early
withdrawal of deposits are two of the most common types of customer options. In a rising rate environment,
the Corporations interest rate risk is increased as customers transfer deposits from products
with lower interest rates to accounts or other products that offer higher interest rates. In a declining
rate environment, the Corporations interest rate risk is increased when a customer prepays
or refinances their loan in order to take advantage of the lower rate environment. Prepayment levels
are dependent on several factors including the current interest rate environment, the interest rate
on the loan as well as other contractual provisions of the loan. The Corporation analyzed the effects
of customer options on net interest income and EVE by using interest rate shocks that included the
effect of estimated prepayments on our mortgage portfolio. Mortgage prepayment levels were determined
by using estimated prepayments of mortgage-backed securities with similar maturity and rate characteristics
as the Corporations mortgage portfolio. This analysis indicated that customer options resulting
from a 100 basis point decrease in interest rates would cause net interest income to decrease $.006
million and economic value of equity to decrease $3.2 million.
Liquidity and Capital Resources
Liquidity represents the Corporations ability to efficiently meet commitments to fund loans, purchase securities and repay deposits or other liabilities.
There is no standardized formula for measuring liquidity. Therefore in order to assess the adequacy of the Corporations liquidity position, Omega has adopted a
liquidity measurement that answers the following three questions:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|1. | How much cash is on hand or could be raised over the next 30 days without any
    principal loss on the assets?                                                                                   
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                   
|2. | If adverse publicity was released about the industry or the Corporation, what
      is the ability of Omega to meet depositor needs? This would be the run on the bank or worst-case
    scenario.
|   |                                                                                                                                                                                                   
|3. | What are the funding requirements through the next 90 days?                                                                                                                                       

|                                                                                                                                                                                                                                                                                                                                           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|When measuring liquidity, total liquid assets must be determined.
      This includes cash on hand, federal funds sold, market value of U.S. Treasury and Agency securities
      not pledged, loans that could be sold within 30 days, cash from investment or loan maturities within
    30 days and any other readily marketable assets.

|  
|--
|18

|
|



|Total short-term liabilities must also be determined to measure
liquidity. Total short-term liabilities include federal funds purchased, repurchase agreements, certificates
of deposit over $100,000 scheduled to mature within 30 days, and an estimated amount of retail deposit
withdrawals.
The short-term liabilities are deducted from the liquid assets
to determine a surplus or deficit and a percentage of total assets is determined. At December 31,
2006, total liquid assets were $251.1 million while short-term liabilities were $113.8 million. This
left a surplus of liquid assets of $137.3 million, or 7.6%, of total assets.
Management believes that a surplus of not less than 5% is adequate. The Corporation actively manages liquidity at this level and has developed reasonable liquidity contingency
plans, including ensuring available alter­native funding sources to maintain adequate liquidity
under a variety of business conditions.
The investment portfolio, due to its relatively short average life, has the ability to provide additional liquidity if necessary. When developing investment strategies,
the Corporation considers runoff of assets and expected future funding needs.
If required, due to unforeseen circumstances, Omega has the ability to increase its liquidity through the sale of assets, primarily financial instruments. As disclosed
in Note 20 of Notes to the Consolidated Financial Statements, Omegas total financial assets
at December 31, 2006 have a fair value in proximity to their aggregate book value; therefore, some
of these instruments could be sold if needed for liquidity purposes and their sale would not significantly
affect current earnings or capital.
In addition, liquidity can also be provided from off-balance sheet sources. At December 31, 2006, Omega had unsecured federal funds lines totaling $73.5 million. At
December 31, 2006, Omega had $3.4 million outstanding against these federal funds lines. Another
source of liquidity is the Federal Reserve Discount Window. Omega is able to borrow up to 85% of
the amount of mortgage collateral pledged and 100% of the market value of investment securities pledged.
As of December 31, 2006 the Discount Window provided $18.9 million in additional borrowing capacity.
The Corporation does not consider either of these to be a source of long-term liquidity; rather they
are used to cover short-term fluctuations in liquidity.
The Corporation is also a member of the Federal Home Loan Bank
of Pittsburgh (FHLB), which provides overnight or term funding to the bank with a borrowing limit
of $67.0 million. This borrowing limit could be increased to a maximum amount of $565.7 million with
the purchase of additional FHLB stock. These borrowings are secured by investment securities and
first mortgage residential real estate loans. At December 31, 2006, Omega had $34.2 million outstanding
in term loans. (See Note 11 of Notes to the Consolidated Financial Statements.)
The Corporations primary source of long-term liquidity is
a large core deposit base and a strong capital position. Another measure of liquidity is the average
loan to deposit ratio. This ratio was 85.61% at December 31, 2006 and 84.31% at December 31, 2005.
Managements target range for this ratio is 70% to 85%. Management believes that Omega has a
relatively stable deposit base with no major seasonal depositor or group of depositors. However,
management recognizes that a significant risk to liquidity is the level and mix of deposits. Due
to the uncertain rate environment over the past year, customers have shifted funds from longer-term
deposits and other alternative investments, into liquid core accounts and short-term certificates.
Continued increases in interest rates, improved economic activity and confidence in the stock market,
may result in depositors shifting funds back to longer-term deposits or other alternative investments.
This could require the Corporation to replace those funds with higher cost borrowings in the future.
Off-Balance Sheet Arrangements, Contractual Obligations and Commitments
Off-Balance Sheet ArrangementsThe Corporation has numerous off-balance sheet loan obligations that exist in order to meet the financing needs of its customers.
These include commitments to extend credit, unused lines of credit as well as standby letters of
credit. (See Note 21 of Notes to the Consolidated Financial Statements.) Because many commitments
are expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation does not expect that these commitments will have
an adverse effect on its liquidity position.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Contractual ObligationsPresented below are the significant contractual obligations of the Corporation as of December 31, 2006, in thousands of dollars. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                                            |  |    | Payments Due by Period |  
|----------------------------------------------------------- |  | -- | ---------------------- | -
|
|
|                                                            |  |   
|Certificates of deposits(a)                                 |  | 10 |                        | $
|Other deposits(b)                                           |  |    |                        |  
|Other interest-bearing liabilities                          |  |    |                        |  
|Federal funds borrowed and securityrepurchase agreements(a) |  | 11 |                        |  
|Borrowed funds(a)                                           |  | 11 |                        |  
|Junior subordinated debentures(a)                           |  | 12 |                        |  
|Long-term debt(a)                                           |  | 11 |                        |  
|Operating lease obligations                                 |  | 13 |                        |  
|Supplemental executive retirement plan                      |  | 19 |                        |  
|Purchase obligations third-party data processor contract    |  | 23 |                        |  
|
|Total                                                       |  |    |                        | $
|

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*(a)* | *Includes interest on both fixed and variable rate obligations. The interest
      associated  with variable rate  obligations is based upon interest rates in
      effect at December 31, 2006. The contractual amounts to be paid on variable
      rate  obligations are affected by changes in market interest rates.  Future
      changes in market  interest rates could  materially  affect the contractual
      amounts to be paid.*
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|*(b)* | *Excludes interest.*                                                                                                                                                                                                                                                                                                                                                                                                                           

|19
      Omega Financial Corporation 2006 Annual Report
|-------------------------------------------------------

|
|



|Table 5Maturity Distribution as of December 31, 2006(In thousands)Remaining Maturity/Earliest Possible Re-Pricing
|-----------------------------------------------------------------------------------------------------------------
|                                                                                                                 

|                                                                                                                                            | Three 
      Months 
    or Less |   | Over 
      Three Months 
      But Within 
    Six Months |   | Over 
      Six Months 
      But Within 
    One Year |         | Over 
      One Year 
      But Within 
    Five Years |   | Over 
    Five Years |   | Total |        
|------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | - | ---------------------------------------------------------- | - | ------------------------------------------------------ | ------- | ------------------------------------------------------ | - | -------------------- | - | ----- | -------
|                                                                                                                                            |                                  |   |                                                           
|Interest Earning Assets                                                                                                                     |                                  |   |                                                            |   |                                                        |         |                                                        |   |                      |   |       |        
|Interest-bearing deposits                                                                                                                   |                                  | $ | 11,973                                                     |   | $                                                      | 100     |                                                        | $ |                     |   | $     |       
|Investment securities:                                                                                                                      |                                  |   |                                                            |   |                                                        |         |                                                        |   |                      |   |       |        
|U.S. Treasury securities and 
               obligations
      of other U.S. 
         Government agencies and 
               corporations |                                  |   | 52,083                                                     |   |                                                        | 25,688  |                                                        |   | 35,025               |   |       | 74,184 
|Obligations of state and political 
           subdivisions                                                                                 |                                  |   |                                                           |   |                                                        | 496     |                                                        |   | 2,295                |   |       | 1,705  
|Corporate and other securities                                                                                                              |                                  |   | 192                                                        |   |                                                        | 800     |                                                        |   | 840                  |   |       | 1,208  
|Mortgage-backed securities                                                                                                                  |                                  |   | 4,817                                                      |   |                                                        | 4,874   |                                                        |   | 9,924                |   |       | 69,744 
|Stocks                                                                                                                                      |                                  |   |                                                           |   |                                                        |        |                                                        |   |                     |   |       |       
|Investment in unconsolidated 
            subsidiary                                                                                        |                                  |   |                                                           |   |                                                        |        |                                                        |   |                     |   |       |       
|Trading account assets                                                                                                                      |                                  |   | 48                                                         |   |                                                        |        |                                                        |   |                     |   |       |       
|Loans:                                                                                                                                      |                                  |   |                                                            |   |                                                        |         |                                                        |   |                      |   |       |        
|Commercial, financial and agricultural                                                                                                      |                                  |   | 145,341                                                    |   |                                                        | 8,153   |                                                        |   | 21,241               |   |       | 60,499 
|Real estatecommercial                                                                                                                      |                                  |   | 124,677                                                    |   |                                                        | 24,606  |                                                        |   | 51,346               |   |       | 211,507
|Real estateconstruction                                                                                                                    |                                  |   | 18,416                                                     |   |                                                        | 604     |                                                        |   | 663                  |   |       | 1,693  
|Real estatemortgage                                                                                                                        |                                  |   | 2,890                                                      |   |                                                        | 9,730   |                                                        |   | 17,316               |   |       | 104,854
|Home equity                                                                                                                                 |                                  |   | 40,481                                                     |   |                                                        | 3,917   |                                                        |   | 7,588                |   |       | 54,015 
|Personal (net of unearned discount                                                                                                          |                                  |   | 14,777                                                     |   |                                                        | 3,900   |                                                        |   | 7,027                |   |       | 19,286 
|Lease financing (net of unearned 
            interest)                                                                                     |                                  |   | 417                                                        |   |                                                        | 371     |                                                        |   | 777                  |   |       | 17,793 
|                                                                                                                                            |                                  |   |                                                           
|Total Interest Earning Assets                                                                                                               |                                  |   | 416,112                                                    |   |                                                        | 83,239  |                                                        |   | 154,042              |   |       | 616,488
|                                                                                                                                            |                                  |   |                                                           
|Interest Bearing Liabilities                                                                                                                |                                  |   |                                                            |   |                                                        |         |                                                        |   |                      |   |       |        
|Demand deposits                                                                                                                             |                                  |   | 164,157                                                    |   |                                                        |        |                                                        |   |                     |   |       | 208,846
|Savings deposits                                                                                                                            |                                  |   | 69,931                                                     |   |                                                        |        |                                                        |   | 36,616               |   |       | 69,931 
|Certificates of deposit over $100,000                                                                                                       |                                  |   | 27,100                                                     |   |                                                        | 14,887  |                                                        |   | 27,420               |   |       | 23,538 
|Time deposits                                                                                                                               |                                  |   | 102,514                                                    |   |                                                        | 81,311  |                                                        |   | 143,331              |   |       | 122,831
|Short-term borrowings                                                                                                                       |                                  |   | 65,712                                                     |   |                                                        |        |                                                        |   |                     |   |       |       
|Junior subordinated debt                                                                                                                    |                                  |   | 125                                                        |   |                                                        | 125     |                                                        |   | 249                  |   |       | 38,683 
|Long-term debt                                                                                                                              |                                  |   | 352                                                        |   |                                                        | 358     |                                                        |   | 733                  |   |       | 26,347 
|Other interest bearing liabilities                                                                                                          |                                  |   | 858                                                        |   |                                                        |        |                                                        |   |                     |   |       |       
|                                                                                                                                            |                                  |   |                                                           
|Total Interest Bearing Liabilities                                                                                                          |                                  |   | 430,749                                                    |   |                                                        | 96,681  |                                                        |   | 208,349              |   |       | 490,176
|                                                                                                                                            |                                  |   |                                                           
|Gap                                                                                                                                         |                                  | $ | (14,637                                                    | ) | $                                                      | (13,442 | )                                                      | $ | (54,307              | ) | $     | 126,312
|                                                                                                                                            |                                  |   |                                                           
|Cumulative Gap                                                                                                                              |                                  | $ | (14,637                                                    | ) | $                                                      | (28,079 | )                                                      | $ | (82,386              | ) | $     | 43,926 
|                                                                                                                                            |                                  |   |                                                            |   |                                                        |        
|Cumulative sensitivity ratio                                                                                                                |                                  |   | 0.97                                                       |   |                                                        | 0.95    |                                                        |   | 0.89                 |   |       | 1.04   
|Commercial, financial and agricultural 
   loans maturing after one year with:                                                              |                                  |   |                                                            |   |                                                        |         |                                                        |   |                      |   |       |        
|Fixed interest rates                                                                                                                        |                                  |   |                                                            |   |                                                        |         |                                                        |   |                      |   | $     | 24,091 
|Variable interest rates                                                                                                                     |                                  |   |                                                            |   |                                                        |         |                                                        |   |                      |   |       | 36,408 
|                                                                                                                                            |                                  |   |                                                            |   |                                                        |         |                                                        |   |                      |   |       |        
|Total                                                                                                                                       |                                  |   |                                                            |   |                                                        |         |                                                        |   |                      |   | $     | 60,499 
|                                                                                                                                            |                                  |   |                                                            |   |                                                        |         |                                                        |   |                      |   |       |        

|  
|--
|20

|
|



|Report of Independent Registered Public Accounting Firm
Report on Consolidated Financial Statements
The Shareholders and Board of DirectorsOmega Financial Corporation
We have audited the accompanying consolidated balance sheets of
Omega Financial Corporation and subsidiaries (Omega) as of December 31, 2006 and 2005, and the related consolidated
statements of income, changes in shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2006. These financial statements are the responsibility of
Omegas man­agement. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Omega Financial Corporation
and subsidiaries at December 31, 2006 and 2005, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
in 2006 Omega changed its method for the recognition of stock-based compensation expense in accordance
with Financial Accounting Standards Board Statement 123(R), Share Based Payment.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Omega Financial Corporations
internal control over financial reporting as of December 31, 2006, based on criteria established
in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 9, 2007, expressed an unqualified opinion thereon.


Pittsburgh, PennsylvaniaMarch 9, 2007
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     
|-----------------------------------------------------
|21
    Omega Financial Corporation 2006 Annual Report

|
|



|Reports of Independent Registered Public Accounting FirmReport on Effectiveness of Internal Control Over Financial Reporting
The Board of Directors and Shareholders of Omega Financial Corporation
We have audited managements assessment, included in the accom­panying
Report of Management on Internal Control Over Financial Reporting that Omega Financial Corporation
maintained effective internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Omega Financial Corporations
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Because managements assessment and our audit were conducted to also
meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement
Act (FDICIA), managements assessment and our audit of Omega Financial Corporations internal
control over financial reporting included controls over the preparation of financial statements in
accordance with the instructions for the preparation of Consolidated Financial State­ments for
Bank Holding Companies (Form FRY-9C). A companys internal control over financial reporting
includes those policies and proceduresthat (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the companys assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Omega Financial
Corporation maintained effective internal control over financial reporting as of December 31, 2006
is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Omega
Financial Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance sheets of Omega Financial
Corporation as of December 31, 2006 and 2005, and the related consolidated statements of income,
shareholders equity, and cash flows for each of the three years in the period ended December
31, 2006 of Omega Financial Corporation and our report dated March 9, 2007 expressed an unqualified
opinion thereon.


Pittsburgh, Pennsylvania
    March 9, 2007
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|22
|--



|Omega Financial Corporation and Subsidiaries
Report of Management on Internal Control Over Financial Reporting
Omega Financial Corporations (Omega) management is responsible
for establishing and maintaining adequate internal control over financial reporting that is designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally accepted accounting
principles. The system of internal control over financial reporting as it relates to the financial
statements is evaluated for effectiveness by management and tested for reliability. Actions are taken
to correct potential deficiencies as they are identified. Any system of internal control, no matter
how well designed, has inherent limitations, including the possibility that a control can be circumvented
or overridden and misstatements due to error or fraud may occur and not be detected. Also, because
of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an
effective system of internal control will provide only reasonable assurance with respect to financial
statement preparation.
Management assessed the effectiveness of Omegas internal
control over financial reporting as of December 31, 2006, in relation to criteria for effective internal
control over financial reporting as described in Internal ControlIntegrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment,management concluded that, as of December 31, 2006, Omegas system of internal control over financial
reporting was effective to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.
Ernst & Young LLP, an independent registered public accounting
firm, audited the consolidated financial statements included in this annual report and issued an
attestation report on managements assessment of Omegas internal control over financial
reporting.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                        |  |                             
|----------------------- |  | ----------------------------
|                       
|Donita R. Koval         |  | Daniel L. Warfel            
|President and           |  | Executive Vice President and
|Chief Executive Officer |  | Chief Financial Officer     
|                        |  |                             

|                           
|---------------------------
|State College, Pennsylvania
|March 9, 2007              

|                                                     
|-----------------------------------------------------
|23
    Omega Financial Corporation 2006 Annual Report

|
|



|Omega Financial Corporation and Subsidiaries                
|------------------------------------------------------------
|                                                            
|Consolidated Balance Sheets(In thousands, except share data)
|                                                            

|                                                                 | December 31, |  
|---------------------------------------------------------------- | ------------ | -
|
|
|
|ASSETS                                                           |              |  
|Cash and due from banks                                          |              | $
|Interest bearing deposits with other banks                       |              |  
|Trading securities                                               |              |  
|Investment securities available for sale                         |              |  
|Other investments                                                |              |  
|Investment in unconsolidated subsidiary                          |              |  
|Loans held for sale                                              |              |  
|Total portfolio loans                                            |              |  
|Less: Allowance for loan losses                                  |              |  
|
|Net portfolio loans                                              |              |  
|Premises and equipment, net                                      |              |  
|Other real estate owned                                          |              |  
|Bank-owned life insurance                                        |              |  
|Investment in limited partnerships                               |              |  
|Core deposit intangibles                                         |              |  
|Other intangibles                                                |              |  
|Goodwill                                                         |              |  
|Assets of discontinued operations                                |              |  
|Other assets                                                     |              |  
|
|TOTAL ASSETS                                                     |              | $
|
|LIABILITIES AND SHAREHOLDERS EQUITY                             |              |  
|Deposits:                                                        |              |  
|Non-interest bearing                                             |              | $
|Interest bearing                                                 |              |  
|
|Total deposits                                                   |              |  
|Short-term borrowings                                            |              |  
|ESOP debt                                                        |              |  
|Junior subordinated debentures                                   |              |  
|Long-term debt                                                   |              |  
|Other interest bearing liabilities                               |              |  
|Liabilities of discontinued operations                           |              |  
|Other liabilities                                                |              |  
|
|TOTAL LIABILITIES                                                |              |  
|Shareholders Equity                                             |              |  
|Preferred stock, par value $5.00 per share:                      |              |  
|Authorized5,000,000 shares, none issued                         |              |  
|Common stock, par value $5.00 per share:                         |              |  
|Authorized25,000,000 shares;                                    |              |  
|Issued                                                          |              |  
|12,823,471 shares at December 31, 2006;                          |              |  
|12,670,323 shares at December 31, 2005                           |              |  
|Outstanding                                                     |              |  
|12,622,802 shares at December 31, 2006;                          |              |  
|12,599,508 shares at December 31, 2005                           |              |  
|Capital surplus                                                  |              |  
|Retained earnings                                                |              |  
|Accumulated other comprehensive income                           |              |  
|Unearned compensation related to ESOP debt                       |              |  
|Cost of common stock in treasury:                                |              |  
|200,669 shares at December 31, 2006;                             |              |  
|70,815 shares at December 31, 2005;                              |              |  
|
|TOTAL SHAREHOLDERS EQUITY                                       |              |  
|
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                       |              | $
|
|The accompanying notes are an integral part of these statements.

|  
|--
|24

|
|



|Omega Financial Corporation and Subsidiaries                      
|------------------------------------------------------------------
|                                                                  
|Consolidated Statements of Income(In thousands, except share data)
|                                                                  

|                                                                  | Twelve Months Ended
      December 31, |  
|----------------------------------------------------------------- | -------------------------------------- | -
|
|
|                                                                  |                                        |  
|INTEREST INCOME:                                                  |                                        |  
|Interest and fees on loans                                        |                                        | $
|Interest and dividends on investment securities                   |                                        |  
|Other interest income                                             |                                        |  
|                                                                  |                                        |  
|TOTAL INTEREST INCOME                                             |                                        |  
|INTEREST EXPENSE:                                                 |                                        |  
|Interest on deposits                                              |                                        |  
|Interest on short-term borrowings                                 |                                        |  
|Interest on long-term debt and other interest bearing liabilities |                                        |  
|                                                                  |                                        |  
|TOTAL INTEREST EXPENSE                                            |                                        |  
|                                                                  |                                        |  
|NET INTEREST INCOME                                               |                                        |  
|Provision for loan losses                                         |                                        |  
|                                                                  |                                        |  
|INCOME FROM CREDIT ACTIVITIES                                     |                                        |  
|OTHER INCOME:                                                     |                                        |  
|Service fees on deposit accounts                                  |                                        |  
|Service fees on loans                                             |                                        |  
|Earnings on bank-owned life insurance                             |                                        |  
|Trust fees                                                        |                                        |  
|Investment and insurance product sales                            |                                        |  
|Gain on the early extinguishment of debt                          |                                        |  
|Gain (loss) on sale of loans and other assets                     |                                        |  
|Net gains on the sale of investment securities                    |                                        |  
|Other                                                             |                                        |  
|                                                                  |                                        |  
|TOTAL OTHER INCOME                                                |                                        |  
|OTHER EXPENSE:                                                    |                                        |  
|Salaries and employee benefits                                    |                                        |  
|Net occupancy expense                                             |                                        |  
|Equipment expense                                                 |                                        |  
|Data processing service                                           |                                        |  
|Pennsylvania shares tax                                           |                                        |  
|Amortization of intangible assets                                 |                                        |  
|Other                                                             |                                        |  
|                                                                  |                                        |  
|TOTAL OTHER EXPENSE                                               |                                        |  
|                                                                  |                                        |  
|Income before income taxes and discontinued operations            |                                        |  
|Income tax expense                                                |                                        |  
|                                                                  |                                        |  
|Income from continuing operations                                 |                                        |  
|DISCONTINUED OPERATIONS:                                          |                                        |  
|Income from discontinued operations, net of tax                   |                                        |  
|Loss on disposal of discontinued operations, net of tax           |                                        |  
|                                                                  |                                        |  
|Income (loss) from discontinued operations                        |                                        |  
|                                                                  |                                        |  
|NET INCOME                                                        |                                        | $
|                                                                  |                                        |  
|Net income per common share                                       |                                        |  
|Basic                                                             |                                        | $
|Diluted                                                           |                                        | $
|Net income per common share from continuing operations            |                                        |  
|Basic                                                             |                                        | $
|Diluted                                                           |                                        | $
|Net income (loss) per common share from discontinued operations   |                                        |  
|Basic                                                             |                                        | $
|Diluted                                                           |                                        | $
|Weighted-average shares and equivalents                           |                                        |  
|Basic                                                             |                                        |  
|Diluted                                                           |                                        |  
|                                                                  |                                        |  
|                                                                  |                                        |  

|                                                                
|----------------------------------------------------------------
|The accompanying notes are an integral part of these statements.
|                                                                
|25Omega Financial Corporation 2006 Annual Report                

|
|



|Omega Financial Corporation and Subsidiaries                                    
|--------------------------------------------------------------------------------
|                                                                                
|Consolidated Statements of Shareholders Equity(In thousands, except share data)
|                                                                                

|                                                                      |  | Periods Ended December 31, 2004, 2005, 2006 |       
|--------------------------------------------------------------------- |  | ------------------------------------------- | ------
|
|
|
|Balance at December 31, 2003                                          |  | $                                           | 50,242
|Comprehensive income:                                                 |  |                                             |       
|Net income                                                            |  |                                             |       
|Change in unrealized securities gains, net                            |  |                                             |       
|Total comprehensive income                                            |  |                                             |       
|Common dividends declared$1.20 per share                             |  |                                             |       
|Amortization of unearned compensation                                 |  |                                             |       
|Tax benefit from employee stock options                               |  |                                             |       
|Tax benefit from dividends paid to ESOP on
  unallocated common stock |  |                                             |       
|Issuance of 2,457,571 shares for acquisition of
  Sun Bancorp, Inc.   |  |                                             | 12,288
|Value of options assumed in Sun acquisition                           |  |                                             |       
|Purchase of treasury stock73,212 shares                              |  |                                             |       
|Exercised employee stock options87,585 
  shares                     |  |                                             | 438   
|
|Balance at December 31, 2004                                          |  |                                             | 62,968
|Comprehensive income:                                                 |  |                                             |       
|Net income                                                            |  |                                             |       
|Change in unrealized securities gains, net                            |  |                                             |       
|Total comprehensive income                                            |  |                                             |       
|Common dividends declared$1.24 per share                             |  |                                             |       
|Amortization of unearned compensation                                 |  |                                             |       
|Tax benefit from employee stock options                               |  |                                             |       
|Tax benefit from dividends paid to ESOP on
  unallocated common stock |  |                                             |       
|Purchase of treasury stock67,069 shares                              |  |                                             |       
|Employer stock held in Rabbi Trusts3,746 
  shares                   |  |                                             |       
|Exercised employee stock options53,554 
  shares                     |  |                                             | 400   
|
|Balance at December 31, 2005                                          |  |                                             | 63,368
|Comprehensive income:                                                 |  |                                             |       
|Net income                                                            |  |                                             |       
|Change in unrealized securities gains, net                            |  |                                             |       
|Total comprehensive income                                            |  |                                             |       
|Common dividends declared$1.24 per share                             |  |                                             |       
|Amortization of unearned compensation                                 |  |                                             |       
|Tax benefit from employee stock options                               |  |                                             |       
|Tax benefit from dividends paid to ESOP on
  unallocated common stock |  |                                             |       
|Purchase of treasury stock133,600 shares                             |  |                                             |       
|Exercised employee stock options153,148 
  shares                    |  |                                             | 765   
|
|Balance at December 31, 2006                                          |  | $                                           | 64,133
|
|The accompanying notes are an integral part of these statements.     

|  
|--
|26

|
|



|Omega Financial Corporation and Subsidiaries       
|---------------------------------------------------
|                                                   
|Consolidated Statements of Cash Flows(In thousands)
|                                                   

|                                                                                    | Years Ended December 31, |        
|----------------------------------------------------------------------------------- | ------------------------ | -------
|
|
|
|Cash flows from operating activities:                                               |                          |        
|Net income                                                                          | $                        | 20,431 
|Adjustments to reconcile net income to net cash provided by
  operating activities: |                          |        
|Depreciation and amortization                                                       |                          | 5,919  
|Provision for loan losses and off-balance sheet reserve                             |                          | 3,854  
|Gain on sale of investment securities                                               |                          | (394   
|Gain on early extinguishment of debt                                                |                          |       
|Non-monetary gift                                                                   |                          | 16     
|Gain on sale of fixed assets and other property owned                               |                          | (3,745 
|Loss on sale of loans and leases                                                    |                          | (16    
|Provision for deferred income tax                                                   |                          | 495    
|Increase in cash surrender value of bank-owned life insurance                       |                          | (2,414 
|(Increase) decrease in interest receivable and other assets                         |                          | 196    
|Increase (decrease) in interest payable                                             |                          | 185    
|Increase in taxes payable                                                           |                          | 332    
|Amortization of deferred net loan (fees) costs                                      |                          | 396    
|Deferral of net loan fees                                                           |                          | (642   
|Decrease in accounts payable and accrued expenses                                   |                          | (694   
|
|Total adjustments                                                                   |                          | 3,488  
|
|Net cash provided by operating activities                                           |                          | 23,919 
|Cash flows from investing activities:                                               |                          |        
|Investment securities available for sale:                                           |                          |        
|Proceeds from sales                                                                 |                          | 33,514 
|Proceeds from maturities                                                            |                          | 113,005
|Cash used for purchases                                                             |                          | (95,053
|Investment in unconsolidated subsidiary                                             |                          |       
|Net cash paid for acquisition of Sun Bancorp, Inc.                                  |                          |       
|Proceeds from sale of trading securities                                            |                          | 435    
|(Increase) decrease in interest bearing deposits with other banks                   |                          | (3,165 
|Decrease in loans and leases                                                        |                          | 30,359 
|Gross proceeds from sale of loans and leases                                        |                          | 29,595 
|Return of capital (investment) in limited partnership                               |                          | (79    
|Capital expenditures                                                                |                          | (2,318 
|Sale of fixed assets and other property owned                                       |                          | 7,605  
|Sale of liabilities                                                                 |                          | (205   
|Sale of Sentry Trust, net                                                           |                          | 4,875  
|Payout from bank-owned life insurance                                               |                          | 1,217  
|(Increase) decrease in federal funds sold                                           |                          |       
|
|Net cash provided by investing activities                                           |                          | 119,785
|                                                                                    |                          |        

|The accompanying notes are an integral part of these statements. | (continued on next page)
|---------------------------------------------------------------- | ------------------------
|                                                                
|27Omega Financial Corporation 2006 Annual Report                

|
|



|Omega Financial Corporation and Subsidiaries       
|---------------------------------------------------
|                                                   
|Consolidated Statements of Cash Flows(In thousands)
|                                                   

|                                                                     | Years Ended December 31, |         
|-------------------------------------------------------------------- | ------------------------ | --------
|
|
|
|Cash flows from financing activities:                                |                          |         
|Net decrease in demand deposits, checking with interest and savings  | $                        | (68,108 
|Net change in time deposits                                          |                          | 4,434   
|Deposits and other liabilities sold                                  |                          | (31,407 
|(Decrease) increase in short-term borrowings, net                    |                          | (33,041 
|Issuance of junior subordinated debt                                 |                          |        
|Issuance of long-term debt                                           |                          | 1,500   
|Principal payment on long-term debt                                  |                          | (1,355  
|Net change in other interest bearing liabilities                     |                          | 97      
|Payment of fee to terminate swap arrangement                         |                          |        
|Dividends paid                                                       |                          | (15,639 
|Issuance of common stock                                             |                          | 4,040   
|Acquisition of treasury stock                                        |                          | (4,194  
|
|Net cash used in financing activities                                |                          | (143,673
|
|Net increase in cash and cash equivalents                            | $                        | 31      
|
|Cash and cash equivalents at beginning of period                     | $                        | 56,194  
|Cash and cash equivalents at end of period                           |                          | 56,225  
|                                                                    
|Net increase in cash and cash equivalents                            | $                        | 31      
|
|Interest paid                                                        | $                        | 33,546  
|Income taxes paid                                                    |                          | 5,720   
|Supplemental schedule of noncash investing and financing activities: |                          |         
|Business acquisition:                                                |                          |         
|Fair value of tangible assets acquired (noncash)                     |                          |        
|Goodwill and identifiable intangible assets acquired                 |                          |        
|Liabilities assumed                                                  |                          |        
|Stock options                                                        |                          |        
|Common stock issued                                                  |                          |        
|Other noncash activity:                                              |                          |         
|Transfers of loans to other real estate owned                        | $                        | 818     
|Transfers of bank property to other real estate owned                |                          |        
|The accompanying notes are an integral part of these statements.     |                          |         

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|--
|28

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|Omega Financial Corporation and Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Notes to Consolidated Financial StatementsYears Ended December 31, 2006, 2005 and 2004
NATURE OF OPERATIONS
Omega Financial Corporation is a financial holding company that
provides financial services primarily in central and northeastern Pennsylvania. Consisting of banking
and non-bank subsidiaries, Omega Financial Cor­po­ra­tion provides retail and commercial
banking and other financial services through 64 offices in Bedford, Blair, Cameron, Centre, Clinton,
Huntingdon, Juniata, Luzerne, Lycoming, Mifflin, Northumberland, Snyder, and Union counties. Each
of Omegas entities are a part of the same reporting segment, whose operating results are regularly
reviewed and managed by a centralized executive management group. The bank provides a full range
of banking services including on-line banking, an automatic teller machine network, checking accounts,
NOW accounts, savings accounts, health savings accounts, money market accounts, investment certificates,
fixed rate certificates of deposit, club accounts, secured and unsecured commercial and consumer
loans, construction and mortgage loans, safe deposit facilities, credit loans with overdraft checking
protection and student loans. The bank subsidiary also provides a variety of trust services and lease
servicing. Omega has contracted with a broker-dealer to allow the offering of annuities, mutual funds,
stock and bond brokerage services, long-term care insurance and sophisticated life products to its
local market. Additionally, in 2004, a full service insurance agency was added to the financial group
owned by Omega. Most of Omega Financial Corporations commercial customers are small and mid-sized
businesses located in central and northeastern Pennsylvania.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Omega Financial Corporation and its
wholly owned subsidiaries conform to accounting principles generally accepted in the United States
and to general financial services industry practices. A summary of the more significant accounting
policies applied in the preparation of the accompanying consolidated financial statements follows.
Principles of Consolidation
Accounting Research Bulletin 51 (ARB 51), Consolidated Financial
Statements, requires a companys consolidated financial statements to include subsidiaries
in which the company has a controlling financial interest. This requirement usually has been applied
to subsidiaries in which a company has a majority voting interest. Investments in companies in which
the Corporation controls operating and financing decisions (principally defined as owning a voting
or economic interest greater than 50%) are consolidated. Investments in companies in which the Corporation
has significant influence over operating and financing decisions (principally defined as owning a
voting or economic interest of 20% to 50%) and limited partnership investments are generally accounted
for by the equity method of accounting. Entities whose equity holders do not have voting rights or
whose equity is insufficient to support its activities are consolidated if the Corporation is deemed
to absorb a majority of the risk of loss or returns.
The voting interest approach defined in ARB 51 is not applicable
in identifying controlling financial interests in entities that are not controllable through voting
interests or in which the equity investors do not bear the residual economic risks. In such instances,
Financial Accounting Standards Board Interpretation 46 (FIN 46), Consolidation of Variable Interest
Entities (VIE), provides guidance on when a company should include in its financialstatements the assets, liabilities and activities of another entity. In general, a VIE is a corporation,
partnership, trust, or any other legal structure used for business purposes that either does not
have equity investors with voting rights or has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires a VIE to be consolidated by a
company if that company is subject to a majority of the risk of loss from the VIEs activities
or entitles it to receive a majority of the entitys residual returns or both. A company that
consolidates a VIE is called the primary beneficiary of that entity. Omega is not deemed to be the
primary beneficiary of any VIEs as of December 31, 2006 or December 31, 2005.
The consolidated financial statements include the accounts of Omega
Financial Corporation and its wholly owned subsidiaries (hereafter collectively referred to as Omega
or the Corporation): Omega Bank (Omega Bank), Central Pennsylvania Investment
Co., Central Pennsylvania Life Insurance Co., Central Pennsylvania Leasing, Inc., Mid Penn Insurance
Associates (Mid Penn), Beacon Life Insurance Co. and Central Pennsylvania Real Estate,
Inc. Omega Banks wholly owned subsidiaries include Bank Capital Services Corporation, SUBI
Services, LLC, Sun Investment Services, Inc. and Omega Financial Company LLC. All significant intercompany
transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates, assumptions and judgments
that affect the amounts reported in the consolidated financial statements and accompanying notes.
Actual results could differ materially from those estimates.
Business Combinations
Business combinations are accounted for under the purchase method
of accounting. Under the purchase method, assets and liabilities of the business acquired are recorded
at their estimated fair values as of the date of the acquisition with any excess of the cost of the
acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill.
Results of operations of the acquired business are included in the income statement from the date
of acquisition. Refer to Note 3 for further discussion.
Cash and Cash Equivalents
Cash equivalents consist of non-interest bearing deposits with other banks.
Investment Securities
Securities classified as available for sale, which include marketable
investment securities, are stated at market value with the unrealized gains and losses, net of tax,
reported as a component of comprehensive income until realized. Investment securities for which management
has the positive intent and ability to hold the security to maturity are classified as held to maturity
and are stated at cost, adjusted for amortization of premium and accretion of discount on a level-yield
basis. Interest and dividends on investment securities available for sale and held to maturity are
recognized as income when earned. Gains or losses on the disposition of securities are based on the
net proceeds and the adjusted carrying amount of the securities sold, determined on a specific identification
basis (see Note 5).

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|29Omega Financial Corporation 2006 Annual Report

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|Omegas policy requires quarterly reviews of impaired securities.
This review includes analyzing the length of time and the extent to which the market value has been
less than cost; the financial condition and near-term prospects of the issuer, including any specific
events which may influence the operations of the issuer and the intent and ability of the Corporation
to hold its investment for a period of time sufficient to allow for any anticipated recovery in market
value.
Securities classified as trading consist of assets held in Rabbi
Trusts, including U.S. treasury notes, mutual funds and cash equivalents and are stated at market
value. Realized gains and losses and unrealized changes in fair value are reported in earnings.
Other investments include Federal Reserve Bank and Federal Home Loan Bank stock.
Loans
Loans are stated at the principal amounts outstanding, net of unearned
income. Interest income on all loans, other than non-accrual loans, is accrued over the term of the
loans based on the amount of principal outstanding.
Loans on which the accrual of interest has been discontinued are
designated as non-accrual loans. Accrual of interest on loans is discontinued when reasonable doubt
exists as to the full, timely collection of principal or interest. When a loan is placed on non-accrual
status, all interest previously accrued but not collected is reversed against current period income.
Income on such loans is then recognized only to the extent that cash is received and where the future
collection of principal is probable. Accruals are resumed on loans only when they are brought fully
current with respect to interest and principal, and when, in the judgment of management, the loan
is estimated to be well secured and fully collectible as to both principal and interest. It is Omegas
policy to continue to accrue interest on loans over 90 days past due as long as they are (1) well
secured and (2) there is an effective means of collection.
Loans are considered for charge-off when:
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|1. | Principal or interest has been in default for 120 days or more and for which no payment has been received during the previous four months;
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|2. | All collateral securing the loan has been liquidated and a deficiency balance remains;                                                    
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|3. | A bankruptcy notice is received for an unsecured loan; or                                                                                 
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|4. | The loan is deemed to be uncollectible for any other reason.                                                                              

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|Loans charged off are recorded against the allowance for loan losses.
      Management routinely evaluates all of its commercial loan accounts for impairment status. Management defines an impaired loan as a com­mercial loan over $0.1 million and classified as doubtful or substandard, in non-accrual status, or a loan classified as a troubled debt restructuring. Impairment is recognized to the extent that the fair value of the collateral of the impaired loan is less than the loan balance. The difference between the collaterals fair value and the loan balance is factored into the loan loss reserve specific allocations when determining the adequacy of the allowance for loan losses.
      Loans, other than commercial loans, are placed in homogenous groups and historical loss factors are applied to determine the amount of impairment. The homogenous groups are consumer installment loans and residential mortgages.
      The Corporations intent is to hold loans in the portfolio until maturity. At the time the Corporations intent is no longer to hold loans to maturity based on asset/liability management practices, the Corporation transfers loans from portfolio to held for sale at the lower of cost or market value on an aggregate basis. Any write-down recorded upon transfer is charged against the allowance for loan losses. Any write-downs recorded after the initial transfers are recorded as a charge to Other Non-Interest Expense. Gains or losses recognized upon sale are recorded as Other Non-Interest Income/Expense.
      Loan Origination Fees and Costs
      Loan origination fees and related direct origination costs for a given loan are offset and the net amount is deferred and amortized over the life of the loan on a level-yield basis as an adjustment to interest income.
      Allowance for Loan Losses
      For financial reporting purposes, the provision for loan losses charged to current operating income is based on managements estimates, and actual losses may vary from estimates. These estimates are reviewed and adjusted at least quarterly and are reported in earnings in the periods in which they become known. In determining the adequacy of the allowance for loan losses, management makes specific allocations to watch list loans and pools of non-watch list loans for various credit risk factors, including the composition and growth of the loan portfolio, overall portfolio quality, levels of delinquent loans, specific problem loans, prior loan loss experience and current economic conditions that may affect a borrowers ability to pay. The loan loss provision for
federal income tax purposes is based on current income tax regulations, which allow for deductions equal to net charge-offs.
      Other Real Estate Owned
      Assets acquired in settlement of mortgage loan indebtedness are recorded as other real estate owned (OREO) and are included in other assets at the lower of fair value minus estimated costs to sell or the carrying amount of the loan. Costs to maintain the assets and subsequent gains and losses attributable to their disposal are included in other income and other expenses as realized. No depreciation or amortization expense is recognized. OREO also includes bank premises held for sale, which are transferred at the lower of carrying value or estimated fair value less anticipated selling costs. Subsequent changes in value are reported as noninterest expense on the income statement. Gains or losses not previously recognized resulting from the sale of OREO is recognized in noninterest income on the date of sale. At December 31, 2006 and 2005,
the carrying value of OREO and held for investment was $0.5 million and $1.0 million, respectively.
      Investments in Limited Partnerships
      Omega is a limited partner in eight partnerships at December 31, 2006 that provide low income elderly housing in Omegas geographic market area. The carrying value of Omegas investments in limited partnerships was $4.7 million at December 31, 2006 and $5.4 million at December 31, 2005. It is Omegas policy to amortize the investment in each partnership over the life of the 10-year tax credits generated by the investment, using a method that approximates the effective yield method. Amortization of limited partnership investments totaled $0.8 million in 2006 and $0.9 million in 2005.
    30

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|Omega is also a partner in a partnership at December 31, 2006 and
2005 that provides office space in areas designated as empowerment zones by the Commonwealth of Pennsylvania.
The partnership provided Pennsylvania Shares Tax credits to the investor. Carrying value of Omegas
investment in the partnership was $1.1 million at December 31, 2006 and $1.2 million at December
31, 2005. It is Omegas policy to amortize the investment in these types of partnerships to
50% of the initial investment over a 10-year period, based upon the expected residual value of the
investment. Amortization of the partnership investment totaled $0.06 million in each of 2006 and 2005.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquisition over
the fair value of the net assets acquired. Other intangible assets represent purchased assets that
also lack physical substance but can be separately distinguished from goodwill because of contractual
or other legal rights or because the asset is capable of being sold or exchanged either on its own
or in com­bination with a related contract, asset or liability. It is Omegas policy that
Goodwill be tested at least annually for impairment at the reporting segment level. Goodwill impairment
is measured by comparing the implied fair value of goodwill to its carrying value.
Intangible assets with finite lives include core deposits and customer
relationships. Intangible assets are subject to impairment testing whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Core deposit and customer
relationship intangibles are amortized over a period of time that represents their expected life
using a method of amortization that reflects the pattern of economic benefit. Impairment of intangible
assets is measured as the difference between present value of future cash flows and its carrying value.
Premises and Equipment and Depreciation
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using both the straight-line and declining-balance methods, over the
estimated useful lives of the assets (see Note 9).
Trust Revenues
Trust revenues are recorded on the accrual basis.
Revenues from the Sales of Investment Products
Revenues from sales of investment products are recorded on the
accrual basis. Although customers have the right to cancel and receive a full refund during a time
period after the investment is made, reversals of revenue related to these cancellations are recorded
in the period when they occur. The amount of revenues related to cancellations is deemed to be immaterial.
Bank-Owned Life Insurance
The cash surrender value of bank-owned life insurance is carried
as an asset and changes in cash surrender value are recorded as non-interest income (see Note 8).
Income Taxes
Omega and its subsidiaries, except for Central Pennsylvania Life
Insurance Company, file a consolidated federal income tax return. The provision for income taxes
is based upon the results of operations, adjusted principally for tax-exempt income. Certain items
of income or expense are reported in different periods for financial reporting and tax return purposes.
The tax effects of these temporary differences are recognized currently in the deferred income tax
provision or benefit.
Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities using the applicable
enacted marginal tax rate. Deferred income tax expenses or benefits are based on the changes in the
deferred tax asset or liability from period to period.
Stock-Based Compensation
In December 2004, the Financial Accounting Standard Board (FASB)
issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payments (SFAS
123R), an amendment to SFAS 123, Account­ing for Stock-Based Compensation. SFAS 123R establishes
accounting requirements for share-based compensation to employees and carries forward prior guidance
on accounting for awards to non-employees. The provisions of this statement became effective January
1, 2006 for all equity awards granted after the effective date and for vesting or modifications of
previously issued awards. SFAS 123R requires an entity to recognize compensation expense based on
an estimate of the number of awards expected to vest, exclusive of awards expected to be forfeited.
The Corporation adopted SFAS 123R on January 1, 2006, on a modified prospective basis. At December
31, 2005, all awards previously granted by Omega were fully vested and no additional grants were
awarded; therefore, there is no related expense recognized in 2006. Future expense will depend on
the type, amount, timing and vesting provisions of the share-based compensation granted.
Previous to January 1, 2006, Omega accounted 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 had adopted the disclosure
provisions of FASB No. 148, Accounting for Stock-Based Compensation. The following pro
forma information for the years ended December 31, 2005 and 2004, 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 were 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 as disclosed in Note 19. Compensation expense,
net of related tax, amounted to $0.2 million and $0.9 million in 2005 and 2004, respectively and
is included in the pro forma net income reported below (in thousands, except per share data):
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                           | 2005 |        | 2004 |  
|-------------------------- | ---- | ------ | ---- | -
|                           |      |       
|Net income                 |      |        |      |  
|As reported                | $    | 22,875 |      | $
|Pro forma                  |      | 22,687 |      |  
|Basic earnings per share   |      |        |      |  
|As reported                | $    | 1.82   |      | $
|Pro forma                  |      | 1.80   |      |  
|Diluted earnings per share |      |        |      |  
|As reported                | $    | 1.81   |      | $
|Pro forma                  |      | 1.79   |      |  

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|31Omega Financial Corporation 2006 Annual Report

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|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 the Companys
employee stock options.
Omega has six stock-based compensation plans, which provide for
the granting of qualified and non-qualified stock options to both employees and directors. The plans
include the Employee Stock Purchase Plan (ESPP), the Stock Option Plan (1986) (the 1986
Plan), the 1996 Employee Stock Option Plan (the 1996 Plan), the 2006 Equity Incentive
Plan (the 2006 Plan), the Non-Employee Director Stock Option Plan (1994) (the 1994
Plan) and the 2004 Stock Option Plan for Non-Employee Directors (the 2004 Plan).
No options have been issued under any of these plans in 2006 and
all options previously issued were vested prior to January 1, 2006. Therefore, no compensation expense
was recognized in 2006.
The ESPP provides for options to purchase common stock of Omega
to all employees of Omega and its subsidiaries who meet certain service requirements. ESPP options
outstanding at December 31, 2006 have a current weighted-average exercise price of $31.85 and a weighted-average
remaining contractual life of 2.24 years. There were 107,284 options outstanding as of December 31,
2006 and all of these options are exercisable.
The 1986 Plan, the 1996 Plan and the 2006 Plan (collectively, the
SOPs or the Plans) provide options to purchase common stock of Omega to officers
and key employees. Awards under the 2006 Plan can also be granted to Omegas directors. The
2006 Plan also authorizes awards of stock, restricted stock, restricted stock units and other equity
awards. No additional grants will be made under the 1986 and 1996 Plans because future grants will
be made only under the 2006 Plan. As of December 31, 2006, the aggregate number of shares that may
be issued under the Plans are 1,841,738 shares. The SOPs options outstanding at December 31,
2006 have a weighted-average exercise price of $32.94 and a weighted-average remaining contractual
life of 4.53 years. As of December 31, 2006, there are 455,887 options outstanding under these plans
and all are exercisable.
The 1994 Plan and the 2004 Plan (collectively, the Director
Plans) provide options to purchase common stock of Omega to the Corporations directors.
No additional awards will be granted under the Director Plans as future options to directors will
be granted under the 2006 Plan. Director Plan options outstanding at December 31, 2006 have a weighted-average
exercise price of $32.31. As of December 31, 2006, 23,264 of these options were outstanding and exercisable.
Advertising Costs
Advertising costs are generally expensed as incurred.
Reclassification
Certain amounts in the 2005 financial statements have been reclassified

to segregate balances and results associated with discontinued operations and to conform to the
2006
presentation. The reclassification had no impact on net income.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the FASB issued SFAS No. 156, Accounting for
Servicing of Financial Assets (SFAS 156), an amendment of FASB State­ment No.
140. SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time
it undertakes an obligation to service a financial asset by entering into a servicing contract in
specific situations. Additionally, the servicing asset or liability shall be initially measured at
fair value; however, an entity may elect the amortization method or fair value
method for subsequent balance sheet reporting periods. SFAS 156 is effective as of an entitys
first fiscal year beginning after September 15, 2006. Early adoption is permitted as of the beginning
of an entitys fiscal year, provided the entity has not yet issued financial statements, including
interim financial statements, for any period of that fiscal year. The Corporation does not expect
the adoption of this statement to have a material impact on our consolidated financial condition,
results of operations or cash flows.
In June 2006, the Emerging Issues Task Force (EITF)
released Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects
of Endorsement Split-Dollar Life Insurance Arrangements (EITF 06-4). This EITF
consensus opinion was ratified by the FASB on September 20, 2006. EITF 06-4 requires employers who
have entered into a split-dollar life insurance arrangement with an employee that extends to post-retirement
periods, to recognize a liability and related compensation costs in accordance with SFAS No. 106,
Accounting for Post Retirement Benefit Obligations or Accounting Principles Board Opinion
No. 12, Omnibus Opinion. The effective date of EITF No. 06-4 is for fiscal years beginning
after December 15, 2007, and the opinion may be adopted through either a cumulative effect adjustment
to retained earnings at the beginning of the year of adoption, or through retrospective application
to prior periods. The Corporation does not expect the adoption of this statement to have a material
impact on our consolidated financial condition, results of operations or cash flows.
In May 2006, the EITF released Issue No. 06-5, Accounting
for Purchases of Life InsuranceDetermining the Amount That Could Be Realized in Accordance
with FASB Technical Bulletin No. 85-4, Account­ing for Purchases of Life Insurance
(EITF 06-05). This EITF consensus opinion was ratified by the FASB on September 20, 2006.
EITF 06-05 provides clarifying guidance on determining the amount that could be realized from a life
insurance contract, which is the measurement amount for the asset in accordance with Technical Bulletin
85-4. The effective date of EITF 06-05 is for fiscal years beginning after December 15, 2006, and
should be applied as either a change in accounting principle through a cumulative effect adjustment
to retained earnings or a change in accounting principle through retrospective application to all
prior periods. The Corporation does not expect the adoption of this statement to have a material
impact on our consolidated financial condition, results of operations or cash flows.
In July 2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes
by prescribing the minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. In addition, FIN 48 provides guidance on de-recognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 also requires expanded disclosures, including a roll forward of unrecognized tax
benefits as well as specific detail related to tax uncertainties for which it is reasonably possible
the amount of unrecognized tax benefit will significantly change within 12 months. FIN 48
32
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|is effective for fiscal years beginning after December 15, 2006. Management has determined that the
impact of adopting this new accounting standard on the Corporations consolidated financial
statements will not be material.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements (SFAS No. 157 or the State­ment). The
Statement was issued to define fair value, establish a framework for measuring fair value in generally
accepted accounting principles (GAAP), and to expand fair value disclosure requirements. Prior to
issuance of this Statement, different definitions of fair value existed within GAAP and there was
limited guidance available on applying existing fair value definitions. The statement does not require
any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007, and interim periods within those fiscal years. The Corporation does not expect the adoption
of this statement to have a material impact on our consolidated financial condition, results of operations
or cash flows.
In September 2006, FASB also issued Statement of Financial Account­ing
Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans (SFAS No. 158 or the Statement). The Statement requires employers to recognize the over
or under funded status of their single-employer pension and postretirement benefit plans as either
an asset or liability in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income. The Statement also requires
most employers to measure the funded status of a plan as of the date of its year-end statement of
financial position. The funded status of a benefit plan shall be measured as the difference between
plan assets at fair value and the benefit obligation, which shall be measured as follows: for a pension
plan, the benefit obligation is the projected benefit obligation (PBO); for any other postretirement
benefit plan, the benefit obligation is the accumulated postretirement benefit obligation. Additionally,
the Statement also requires the measurement of the benefit plans assets and obligations to
be measured as of the date of the employers year-end statement of financial position.
The effective date of SFAS No. 158, for the funded status-reporting
requirement, is for fiscal years ending on or after December 15, 2006 (for publicly traded companies
or companies close to becoming publicly traded) with retrospective application prohibited. However,
the measurement date provision is effective for fiscal years ending after December 15, 2008 and retrospective
application is also prohibited, but early adoption is permitted and encouraged. With the exception
of the Supplemental Executive Retirement Plan (SERP), the Corporation does not provide
any pension or other postretirement benefits to its employees. The present value of the supplemental
retirement benefits to be paid under the SERP program are currently being accrued over the estimated
remaining service period of the officers designated to receive these benefits in accordance with
APB 12. Therefore, the new standard will not have any effect on the Corporations consolidated
financial statements.
3. ACQUISITION
On October 1, 2004, Omega completed its acquisition of Sun Bancorp,
Inc. (Sun), a bank holding company operating 23 retail bank branch offices in central
and northeastern Pennsylvania. The acquisition allowed the Corporation to expand its product offerings
over a larger geographic area. In the merger, Sun shareholders received either 0.664 shares of Omega
common stock for each share of Sun common stock or $23.25 in cash for each share held, depending
on shareholder elections and subject to the allocation provisionsof the merger agreement. Under the terms of the merger agreement, 20% of the outstanding Sun common
stock was exchanged for cash and 80% of the outstanding Sun common stock was exchanged for Omega
common stock. In connection with the merger, Omega paid to the former shareholders of Sun, in the
aggregate, approximately $35.9 million and issued to the former shareholders of Sun, in the aggregate,
approximately 4,117,000 shares of Omegas common stock (excluding approximately 258,000 shares
of Omega common stock to be issued upon exercise of options that, pursuant to the merger agreement,
were substituted for options that were exercisable for shares of Suns common stock prior to
the merger). The total cost of the transaction was $187.7 million. The common shares issued were
valued at $34.52 per share, representing an average of closing market prices of Omega common stock
for the period commencing two trading days before, and ending two trading days after, April 20, 2004,
the date of the merger agreement.
The assets and liabilities of the acquired entity were recorded
on the balance sheet at their estimated fair values as of October 1, 2004, and their results of operations
have been included in the consolidated statement of income since that date. The purchase price allocation
resulted in recording $161.0 million in goodwill.
The following unaudited pro forma consolidated financial information
presents the combined results of operations of Omega and Sun as if the acquisition had occurred as
of January 1, 2004.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                                       | For the Year Ended
    December 31, 2004          |       
|------------------------------------------------------ | ------------------------------------------------- | ------
|                                                       |                                                   |       
|                                                       | (in thousands,
      except
      per share data) |       
|                                                      
|Net interest income                                    | $                                                 | 69,138
|Provision for loan losses                              |                                                   | 2,299 
|                                                       |                                                   |       
|Net interest income after
   provision for loan losses |                                                   | 66,839
|Non-interest income                                    |                                                   | 31,042
|Non-interest expense                                   |                                                   | 67,852
|                                                       |                                                   |       
|Income before income taxes                             |                                                   | 30,029
|Income tax expense                                     |                                                   | 6,341 
|                                                       |                                                   |       
|Net income                                             | $                                                 | 23,688
|                                                       |                                                   |       
|Net income per common share:                           |                                                   |       
|Basic                                                  | $                                                 | 1.89  
|Diluted                                                |                                                   | 1.88  
|Weighted-average shares and equivalents:               |                                                   |       
|Basic                                                  |                                                   | 12,576
|Diluted                                                |                                                   | 12,662

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The pro forma results include amortization of fair value adjustments
on loans, deposits and debt, amortization of newly created intangibles and post-merger acquisition
related charges. The pro forma number of weighted-average common shares outstanding includes adjustments
for shares issued for the acquisition and the impact of additional dilutive securities does not assume
any incremental share repurchases. The pro forma results presented do not reflect all cost savings
or revenue enhancements anticipated from the acquisition and are not necessarily indicative of what
actually would have occurred if the acquisitions had been completed as of the beginning of each period
presented, nor are they necessarily indicative of future results.
4. RESTRICTIONS ON CASH AND DUE FROM BANKS
Omegas banking subsidiary is required to maintain cash reserve
balances with the Federal Reserve Bank. The total required reserve balances were $12.3 million and
$11.2 million as of December 31, 2006 and 2005, respectively.

|                                                    
|----------------------------------------------------
|33
    Omega Financial Corporation2006 Annual Report

|
|



|5. INVESTMENT SECURITIES (In Thousands)
|---------------------------------------
|                                       

|Securities Classified as Available for Sale       | **December 31, 2006**    |        
|------------------------------------------------- | ------------------------ | -------
|                                                  |                          |        
|**Type and maturity**                             | **Amortized
      Cost** |        
|                                                  |                         
|U.S. Treasury securities and obligations of other |                          |        
|U.S. Government agencies and corporations         |                          |        
|In one year or less                               | $                        | 107,442
|After one year through five years                 |                          | 80,763 
|After five years through ten years                |                          |       
|After ten years                                   |                          |       
|Obligations of state and political subdivisions   |                          |        
|In one year or less                               |                          | 2,800  
|After one year through five years                 |                          | 1,740  
|After five years through ten years                |                          |       
|After ten years                                   |                          |       
|Corporate and other securities                    |                          |        
|In one year or less                               |                          | 1,592  
|After one year through five years                 |                          | 1,473  
|After five years through ten years                |                          |       
|After ten years                                   |                          | 192    
|Mortgage-backed securities                        |                          |        
|In one year or less                               |                          | 172    
|After one year through five years                 |                          | 73,649 
|After five years through ten years                |                          | 6,745  
|After ten years                                   |                          | 9,811  
|Common stock                                      |                          | 4,947  
|Investment in unconsolidated subsidiary           |                          |        
|                                                  |                          |        
|Total                                             | $                        | 291,326
|                                                  |                          |        
|                                                  |                          |        

|                                                  |                          |        
|------------------------------------------------- | ------------------------ | -------
|Securities Classified as Available for Sale       | **December 31, 2005**    |        
|                                                  |                          |        
|**Type and maturity**                             | **Amortized
      Cost** |        
|                                                  |                         
|U.S. Treasury securities and obligations of other |                          |        
|U.S. Government agencies and corporations         |                          |        
|In one year or less                               | $                        | 74,885 
|After one year through five years                 |                          | 138,681
|After five years through ten years                |                          |       
|After ten years                                   |                          |       
|Obligations of state and political subdivisions   |                          |        
|In one year or less                               |                          | 32,889 
|After one year through five years                 |                          | 23,351 
|After five years through ten years                |                          | 50     
|After ten years                                   |                          |       
|Corporate and other securities                    |                          |        
|In one year or less                               |                          | 1,002  
|After one year through five years                 |                          | 2,126  
|After five years through ten years                |                          | 100    
|After ten years                                   |                          | 192    
|Mortgage-backed securities                        |                          |        
|In one year or less                               |                          | 7      
|After one year through five years                 |                          | 53,175 
|After five years through ten years                |                          | 2,794  
|After ten years                                   |                          | 14,016 
|Common stock                                      |                          | 5,917  
|                                                  |                          |        
|Total                                             | $                        | 349,185
|                                                  |                          |        

|  
|--
|34

|
|



|Securities classified as Available for Sale       | **December 31, 2004**    |        
|------------------------------------------------- | ------------------------ | -------
|                                                  |                          |        
|**Type and maturity**                             | **Amortized
      Cost** |        
|                                                  |                         
|U.S. Treasury securities and obligations of other |                          |        
|U.S. Government agencies and corporations         |                          |        
|In one year or less                               | $                        | 7,072  
|After one year through five years                 |                          | 127,151
|After five years through ten years                |                          |       
|After ten years                                   |                          |       
|Obligations of state and political subdivisions   |                          |        
|In one year or less                               |                          | 31,449 
|After one year through five years                 |                          | 43,614 
|After five years through ten years                |                          | 200    
|After ten years                                   |                          | 5,365  
|Corporate and other securities                    |                          |        
|In one year or less                               |                          | 1,048  
|After one year through five years                 |                          | 2,100  
|After five years through ten years                |                          | 200    
|After ten years                                   |                          | 687    
|Mortgage-backed securities                        |                          |        
|In one year or less                               |                          | 131    
|After one year through five years                 |                          | 19,591 
|After five years through ten years                |                          | 17,905 
|After ten years                                   |                          | 49,363 
|Common stock                                      |                          | 7,320  
|                                                  |                          |        
|Total                                             | $                        | 313,196
|                                                  |                          |        
|*N/M = Not meaningful*                            |                          |        
|                                                  |                          |        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Income on certain obligations of state and political subdivisions
is exempt from federal income tax. Total investment portfolio yields computed on a tax equivalent
basis (using a 35% tax rate) were 4.20%, 3.71%, and 3.52% as of December 31, 2006, 2005, and 2004,
respectively. Total weighted-average yield does not include the common stock holdings.
Certain obligations of the U.S. Government and state and political
subdivisions are pledged to secure public monies as required by law and for other purposes. The carrying
value of the pledged assets amounted to $181.0 million, $235.2 million, and $229.3 million at December
31, 2006, 2005, and 2004, respectively.
In addition to cash received from the scheduled maturities of securities,
some investments securities are sold at current market values during the course of normal operations.
The following is a summary of proceeds received from all investment securities transactions, and
the resulting realized gains and losses (in thousands):
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                                   | **2006** |         | **2005** |   | **2004** | 
|-------------------------------------------------- | -------- | ------- | -------- | - | -------- | 
|                                                   |          |        
|Gross proceeds from
       securities transactions | $        | 146,519 |          | $ | 115,361  | 
|Realized gains                                     |          | 816     |          |   | 2,371    | 
|Realized losses                                    |          | 427     |          |   | 44       | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Unrealized losses recognized in 2006 were the result of managements
restructuring of tax-free investments. In order to improve the Corporations tax position, $21.0
million in tax-free municipal bonds were sold, resulting in a loss of $0.4 million.
Unrealized losses recognized in 2005 were the result of managements
continued restructuring of the fixed income investment portfolio acquired from Sun. As part of this
restructuring, investment securities with a total amortized cost of $48.6 million were liquidated
in 2005, providing gains of $0.4 million and losses of $0.04 million. The average remaining maturity
of the securities sold was 12.5 years, which exceeds the two to five-year maturity period that Omega
considers acceptable for its current interest rate risk position.

|                                                        
|--------------------------------------------------------
|35
        Omega Financial Corporation2006 Annual Report

|
|



|                                                                                                                                                                                                                                                                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 securities have been in a continuous unrealized loss position, at December 31,
2006 and 2005 (in thousands):
|                                                                                                                                                                                                                                                                                                      

|                                                                                                    | **December 31, 2006**   |       
|--------------------------------------------------------------------------------------------------- | ----------------------- | ------
|                                                                                                    |                         |       
|                                                                                                    | **Less Than 12 Months** |       
|                                                                                                    |                         |       
|                                                                                                    | **Fair 
      Value**   |       
|                                                                                                    |                         |       
|U.S. Treasury securities and obligations of other 
       U.S. Government agencies and corporations | $                       | 25,512
|Obligations of state and political subdivisions                                                     |                         | 1,178 
|Corporate and other securities                                                                      |                         | 102   
|Mortgage-backed securities                                                                          |                         | 17,283
|                                                                                                    |                         |       
|Debt securities                                                                                     |                         | 44,075
|Common stock                                                                                        |                         | 144   
|                                                                                                    |                         |       
|Total temporarily impaired securities                                                               | $                       | 44,219
|                                                                                                    |                         |       

|                                                                                                    |                         |        
|--------------------------------------------------------------------------------------------------- | ----------------------- | -------
|                                                                                                    | **December 31, 2005**   |        
|                                                                                                    |                         |        
|                                                                                                    | **Less Than 12 Months** |        
|                                                                                                    |                         |        
|                                                                                                    | **Fair 
    Value**     |        
|                                                                                                    |                         |        
|U.S. Treasury securities and obligations of other 
       U.S. Government agencies and corporations | $                       | 88,226 
|Obligations of state and political subdivisions                                                     |                         | 13,923 
|Corporate and other securities                                                                      |                         | 969    
|Mortgage-backed securities                                                                          |                         | 47,865 
|                                                                                                    |                         |        
|Debt securities                                                                                     |                         | 150,983
|Common stock                                                                                        |                         | 147    
|                                                                                                    |                         |        
|Total temporarily impaired securities                                                               | $                       | 151,130
|                                                                                                    |                         |        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The unrealized losses noted above are considered to be temporary
impairments as all 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. Investments with unrealized losses for less than 12 months, includes 8 investments in
U.S. Government agency debt securities, 3 investments in obligations of state and municipal subdivisions,
4 investments in corporate securities, 7 investments in mortgage-backed securities and 3 equity issues.
These securities have maturity or prerefund dates ranging from April 2007 to March 2012. The unrealized
loss position for each security ranges from .02% to 2.27% of the securities amortized cost
as of December 31, 2006. Investments with unrealized losses for 12 months or longer include 61 investments
in U.S. Government agency debt securities, 4 investments in obligations of state and municipal subdivisions,
10 investments in corporate securities and 35 investments in mortgage-backed securities. These securities
have maturity or prerefund dates ranging from January 2007 to May 2027. The unrealized loss position
for each security ranges from .01% to 4.07% of the securities amortized cost as of December 31, 2006.
6. PORTFOLIO LOANS AND LOANS AVAILABLE FOR SALE
Loans outstanding (including loans available for sale) at the end
of each year consisted of the following (in thousands):
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                       | **December 31,** |          
|-------------------------------------- | ---------------- | ---------
|                                       |                  |          
|                                       | **2006**         |          
|                                       |                  |          
|Commercial, financial and agricultural | $                | 250,906  
|Real estatecommercial                 |                  | 432,062  
|Real estateconstruction               |                  | 21,562   
|Real estatemortgage                   |                  | 218,104  
|Home equity                            |                  | 164,800  
|Personal                               |                  | 45,602   
|Lease financing                        |                  | 23,143   
|Unearned interest                      |                  | (3,787   
|                                       |                  |          
|Total                                  | $                | 1,152,392
|                                       |                  |          
|Non-accrual loans                      | $                | 21,001   
|                                       |                  |          

|  
|--
|36

|
|



|Interest income not recorded on non-accrual loans in 2006, 2005,
and 2004 was $1.5 million, $0.4 million, and $0.3 million, respectively.
The aggregate amount of demand deposits that have been reclassified
as loan balances at December 31, 2006 and 2005 are $5.0 million and $1.8 million, respectively. Included
in the amounts above are $2.1 million and $2.3 million in net deferred loan fees as of December 31,
2006 and 2005, respectively
Omega has a diversified loan portfolio, however, at December 31,
2006, there was one industry where concentration of credit equaled 10% or more of total outstanding
loans. Outstanding loans in the real estate rental industry totaled $152.3 million, or 13.2% of total
outstanding loans. Omegas business activities are geographically concentrated throughout central
and northeastern Pennsylvania. A substantial portion of its debtors ability to honor their
obligations is dependent upon the economy in central and northeastern Pennsylvania.
Pledged Loans
As of December 31, 2006 there were no borrowings outstanding at
the Federal Reserve. However, 14 family mortgage loans are pledged as collateral for any Federal
Reserve Discount Window borrowings. The balance of the loans pledged for this purpose at December
31, 2006 was $4.5 million with a collateral value of $3.9 million.
Omega must maintain sufficient qualifying collateral with the Federal
Home Loan Bank (FHLB), in order to secure all loan and credit products. Therefore, a Master Collateral
Agreement has been entered into which pledges all mortgage related assets as collateral for future
borrowings. Mortgage related assets could include loans or investments. As of December 31, 2006,
the amount of loans included in qualifying collateral was $316.2 million, for a collateral value
of $260.5 million.
7. ALLOWANCE FOR LOAN LOSSES
Omega maintains an allowance for loan losses and for lending-related
commitments to provide for the risk of loss inherent in the process of extending credit.
A summary of the transactions in the allowance for loan losses
for the last five years (in thousands) is shown below. At December 31, 2006, $5.3 million of the
loan loss reserve was specifically allocated to one large commercial borrower who is working through
the bankruptcy re-organization process. Omega has estimated and provided for probable losses related
to this $16.8 million credit, however, evaluations of the credit continue. The ongoing analysis may
cause this estimate to change in the future and actual losses resulting from this credit may differ
materially from this initial estimate.
Omega has 18 credit relationships with exposure individually greater

than $10.0 million. The total outstanding loan exposure to these 18 commercial customers at December

31, 2006 was $172.0 million. These loans are all secured with real estate, accounts receivable,
inventory
or marketable collateral. Two of the facilities required an allocation of the allowance
for loan
losses at year-end, including the previously mentioned $16.8 million credit as well as
a $0.3 million
allocation for a $15.8 million credit.
The activity for 2004 reflects the allowance recorded by Sun and
transferred to Omega for loans acquired in the acquisition. Subsequent to the acquisition, Omega
sold $67.0 million of lease financing loans acquired from Sun and reclassified a portfolio of mobile
home loans also acquired from Sun totaling $22.5 million to loans held for sale, and reflected a
charge-off against the allowance for loan losses of $1.5 million, which is included in personal and
lease financing loans below. In addition, during the fourth quarter 2004, Omega took a charge-off
of $1.0 million (consisting of $0.7 million of a commercial real estate charge-off and $0.3 million
of commercial business charge-off for a commercial loan which was subject to a bankruptcy liquidation):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|A summary of the transactions in the allowance for loan losses for the last five years follows (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                                                       | **Years Ended December 31,** |       
|---------------------------------------------------------------------- | ---------------------------- | ------
|                                                                       |                              |       
|                                                                       | **2006**                     |       
|                                                                       |                              |       
|Balance of allowancebeginning of period                               | $                            | 15,482
|Loans charged off:                                                     |                              |       
|Commercial, financial and agricultural                                 |                              | 160   
|Real estatecommercial                                                 |                              | 547   
|Real estatemortgage                                                   |                              | 1,443 
|Personal and lease financing loans                                     |                              | 398   
|                                                                       |                              |       
|Total charge-offs                                                      |                              | 2,548 
|Recoveries of loans previously charged off:                            |                              |       
|Commercial, financial and agricultural                                 |                              | 77    
|Real estatecommercial                                                 |                              | 20    
|Real estatemortgage                                                   |                              | 303   
|Personal and lease financing loans                                     |                              | 250   
|                                                                       |                              |       
|Total recoveries                                                       |                              | 650   
|                                                                       |                              |       
|Net charge-offs                                                        |                              | 1,898 
|Provision (credit) for loan losses                                     |                              | 3,896 
|Allowance acquired through bank purchase                               |                              |      
|Reclassification of off balance sheet liability                        |                              |      
|Allocation to assets sold                                              |                              | 136   
|                                                                       |                              |       
|Balance of allowanceend of period                                     | $                            | 17,344
|                                                                       |                              |       
|Ratio of net charge-offs during period to average    loans outstanding |                              | 0.16  
|                                                                       |                              |       

|                                                
|------------------------------------------------
|37Omega Financial Corporation 2006 Annual Report

|
|



|Omega has certain loans in its portfolio that are considered to
be impaired in accordance with SFAS No. 114 as amended by SFAS No. 118. It is the policy of the Corporation
to recognize income on impaired loans on a cash basis, only to the extent that it exceeds principal
balance recovery. Following is a summary of impaired loan data as of the date of each balance sheet
presented.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                              

|                                                                    | **2006** |            | **2005** |   | **2004**  | 
|------------------------------------------------------------------- | -------- | ---------- | -------- | - | --------- | 
|                                                                    |          |           
|Impaired loans:                                                     |          |            |          |   |           | 
|Recorded investment at period end                                   | $        | 20,272,000 |          | $ | 5,676,000 | 
|Impaired loan balance for which there is a related
      allowance  |          | 20,272,000 |          |   | 5,676,000 | 
|Amount of allowance for impaired loans                              |          | 6,677,538  |          |   | 1,217,000 | 
|Impaired loan balance for which there is no related
      allowance |          |           |          |   |          | 
|Average recorded  investment                                        |          | 21,866,767 |          |   | 4,933,000 | 
|Interest income recognized (on a cash basis)                        |          | 1,189,000  |          |   | 138,000   | 
|                                                                    |          |            |         

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8. BANK-OWNED LIFE INSURANCE
Omega holds bank-owned life insurance (BOLI), with a cash surrender
value of $76.3 million and $75.1 million at December 31, 2006 and 2005, respectively. The cash surrender
value on the BOLI increased by $1.2 million, $2.3 million, and $1.6 million in 2006, 2005 and 2004,
respectively. The increase in cash surrender value in 2006 was the result of $2.4 million in earnings, recorded as non-interest income, offset by a death benefit payout of $1.2 million. The
cash surrender value increases recorded in 2005 and 2004 were a result of earnings recorded as non-interest
income. The policies owned by Omega are with various insurance companies. The credit rating on the
policies varies annually based on the insurance companys investment portfolio returns in their
general fund and market conditions. The coverage can be moved from any carrier with no penalties
or surrender charges.
9. PREMISES AND EQUIPMENT
Premises and equipment consist of the following (in thousands):
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                           | ****                       |            | **December 31,** |         
|------------------------------------------ | -------------------------- | ---------- | ---------------- | --------
|                                           | **Estimated 
Useful Life** |            |                  |         
|                                           |                            | **2006**   |                  | **2005**
|                                           |                            |           
|Land                                       |                            |           |                  | $       
|Premises and leasehold improvements        |                            | 540 years |                  |         
|Furniture, computer software and equipment |                            | 320 years |                  |         
|Construction in progress                   |                            |           |                  |         
|                                           |                            |            |                  |         
|                                           |                            |            |                  |         
|Less: accumulated depreciation             |                            |            |                  |         
|                                           |                            |            |                  |         
|Premises and equipment, net                |                            |            |                  | $       
|                                           |                            |            |                  |         

|                                                                                                                                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Depreciation expense for continuing operations was $3.8 million,
$3.2 million and $2.6 million for 2006, 2005 and 2004, respectively. Depreciation expense for discontinued
operations was $51,000, $107,000 and $27,000 for 2006, 2005 and 2004, respectively.
10. TIME DEPOSITS
Time deposits consist of the following (in thousands):
|                                                                                                                                                                                                                                                                                                                                        

|                                  | **December 31,** |        
|--------------------------------- | ---------------- | -------
|                                  |                  |        
|                                  | **2006**         |        
|                                  |                  |        
|Time deposits $100,000 or greater | $                | 93,091 
|Other time deposits               |                  | 450,856
|                                  |                  |        
|                                  | $                | 543,947
|                                  |                  |        

|                                                                                                                       
|-----------------------------------------------------------------------------------------------------------------------
|Aggregate amount of scheduled maturities of time deposits as of
December 31, 2006 include the following (in thousands):
|                                                                                                                       

|             | **Time Deposits**              |       
|------------ | ------------------------------ | ------
|             |                                |       
|             | **$100,000 
      or Greater** |       
|             |                                |       
|Maturing in: |                                |       
|2007         | $                              | 69,408
|2008         |                                | 7,430 
|2009         |                                | 3,454 
|2010         |                                | 8,435 
|2011         |                                | 4,218 
|Later        |                                | 146   
|             |                                |       
|             | $                              | 93,091
|             |                                |       

|                                                                  
|------------------------------------------------------------------
|11. BORROWINGS
Borrowings consist of the following (in thousands):
|                                                                  

|                                                                                               | **December 31,** |       
|---------------------------------------------------------------------------------------------- | ---------------- | ------
|                                                                                               |                  |       
|                                                                                               | **2006**         |       
|                                                                                               |                  |       
|Short-Term Borrowings:                                                                         |                  |       
|Retail repurchase agreements                                                                   | $                | 53,712
|Overnight borrowing with Federal Home Loan Bank, at
   fixed rate of 4.20%                     |                  |      
|Note payable to Federal Home Loan Bank, with fixed rate of 3.07%                               |                  | 5,000 
|Overnight borrowing with another financial institution with a 
   fixed interest rate of 5.25% |                  | 3,400 
|Overnight borrowing with another financial institution with a 
   fixed interest rate of 4.38% |                  |      
|Note payable to another financial institution with a fixed 
   interest rate of 2.84%          |                  | 3,600 
|Note payable to another financial institution with a fixed 
   interest rate of 2.42%          |                  |      
|Note payable to Federal Home Loan Bank, with fixed rate of 2.65%                               |                  |      
|                                                                                               |                  |       
|Total Short-Term Borrowings                                                                    | $                | 65,712
|                                                                                               |                  |       
|Long-Term Debt:                                                                                |                  |       
|Notes payable to Federal Home Loan Bank, with fixed rates
   between 2.65% and 6.80%           | $                | 27,877
|Note payable to another financial institution with a fixed
   interest rate of 2.47%           |                  |      
|                                                                                               |                  |       
|Total Long-Term Borrowings                                                                     | $                | 27,877
|                                                                                               |                  |       
|ESOP Debt Guarantee                                                                            | $                | 1,481 

|                                                                                                                                                                                                                                                                                                                                                                                                     
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Omega has repurchase agreements with several of its depositors,
under which customers funds are invested daily into an interest bearing account. The Corporation
carries these funds as short-term debt. It is Omegas policy to have repurchase agreements collateralized
100% with U.S. Government securities. The interest rate paid on these funds is variable and subject
to change monthly.
38

|
|



|The fixed rate short-term note payable to the Federal Home Loan
Bank as of December 31, 2005 in the amount of $5.0 million matured in January 2006 and was renewed
at a fixed rate of 5.16% for a term of three years.
Long-term notes payable to the Federal Home Loan Bank have maturities
ranging from 2008 through 2019. Omegas current total borrowing capacity with the Federal Home
Loan Bank of Pittsburgh is $67.0 million, with $32.9 million drawn as of December 31, 2006. With
additional FHLB capital stock purchases, Omegas borrowing capacity could reach approximately
$565.7 million The Federal Home Loan Bank is a source of both short-term and long-term funding. The
Corporation must maintain sufficient qualifying collateral, as defined, to secure all outstanding
advances.
Omega has lines of credit established with various financial institutions
for overnight funding needs. These lines provided a total availability of $63.5 million as of December
31, 2006 and $52.5 million as of December 31, 2005, with interest payable at approximately the daily
federal funds rate. There was $3.4 million drawn against these credit facilities as of December 31,
2006 and $5.0 million as of December 31, 2005.
Omega also has securities and 14 family mortgages pledged
at the Federal Reserve Bank Discount Window in the amount of $18.9 million. These overnight lines
are typically only utilized by Omega as a last resort as it is normally priced at approximately 100
basis points over the Federal Funds rate.
Omega guarantees debt incurred by the Employee Stock Ownership
Plan (ESOP). This loan carries a fixed rate of 5.90% through its maturity date of July 1, 2010, and
is collateralized by a mortgage on the Corporations administration center (see Note 19).
12. JUNIOR SUBORDINATED DEBT AND
  TRUST PREFERRED SECURITIES
On September 20, 2004, Omega formed Omega Financial Capital Trust
I (Capital Trust I). Capital Trust I was formed for the purpose of issuing $36.0 million in Trust
Preferred Securities through a pooled trust preferred program. The Trust Preferred Securities were
issued and sold in private placement offerings. The proceeds from the sale thereof were invested
in Junior Subordinated Deferrable Interest Debentures issued by Omega Financial Corporation. All
proceeds from the sale of the Trust Preferred Securities and the common securities issued by Capital
Trust I are invested in Junior Subordinated Debentures, which are the sole assets of the Capital
Trust I. Capital Trust I pays dividends on the Trust Preferred Securities at the same rate as the
distributions paid by Omega on the Junior Subordinated Debentures held by the Capital Trust I. Capital
Trust I provides Omega with the option to defer payment of interest on the debentures for an aggregate
of 20 consecutive quarterly periods. If this option is used, Omega may not declare or pay dividends
on its common stock during any such period. The Trust Preferred Securities are guaranteed by Omega
pursuant to a guarantee issued by Omega in favor of the Wilmington Trust as trustee for the trust.
With the Sun acquisition in 2004, Omega now owns Sun Bancorp Statutory
Trust I (Sun Trust I), a trust that was formed by Sun for the purpose of issuing $16.5 million in Trust Preferred Securities through a similar pooled trust preferred
program. These Trust Preferred Securities
were originally issued and sold in private placement offerings, with the proceeds from the sale invested
in Junior Subordinated Deferrable Interest Debentures originally issued by Sun. All proceeds from
the sale of the Trust Preferred Securities and the common securities issued by Sun Trust I are invested
in Junior Subordinated Debentures, which are the sole assets of the Trust. Sun Trust I pays dividends
on the Trust Preferred Securities at the same rate as the distributions paid by Omega on the Junior
SubordinatedDebentures held by the Trust. Sun Trust I provides Omega with the option to defer payment of interest
on the debentures for an aggregate of up to 10 consecutive semi-annual periods. If this option is
used, Omega may not declare or pay dividends on its common stock during any such period. The Trust
Preferred Securities are guaranteed by Omega pursuant to a guarantee issued by Omega in favor of
the U.S. Bank as trustee for the trust.
Omega accounts for Capital Trust I and Sun Trust I (collectively
the Trusts) under the provisions of FIN 46. The Trusts are special purpose trusts, formed
for the issuance of Trust Preferred Securities to outside investors, and Omega does not absorb a
majority of the expected losses or residual returns of the Trusts. The Trusts are not consolidated,
and therefore, the Trust Preferred Securities are not included in the Corporations Consolidated
Balance Sheet. The Junior Subordinated Debt obligations to the special purpose trusts are presented
as a separate category of long-term debt on the Consolidated Balance Sheet. The equity investment
in the common stock of the special purpose trusts is recognized as an investment in unconsolidated
subsidiaries on the Consolidated Balance Sheet.
The Trust Preferred Securities and the Junior Subordinated Debt
associated with Capital Trust I carry a fixed interest rate of 5.98% through October 18, 2009 and
a variable rate equal to LIBOR plus 2.19% thereafter. The securities are redeemable at par at anytime
after October 18, 2009. Proceeds from the issuance of the Junior Subordinated Debt were used to fund
the Sun Bancorp acquisition on October 1, 2004.
The Trust Preferred Securities and the Junior Subordinated Debt
associated with Sun Trust I carry a fixed interest rate of 8.64%. The securities are redeemable at
par at anytime after February 22, 2011, and at a declining premium annually of 105.10% to 100%.
The Federal Reserve Board currently allows bank holding companies
to include Trust Preferred Securities, up to a certain limit, in Tier 1 Capital. The following table
shows Omegas Trust subsidiaries with outstanding Trust Preferred Securities as of December
31, 2006 (in thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                           | **As of December 31, 2006** |                                                                                
|-------------------------- | --------------------------- | -------------------------------------------------------------------------------
|                           |                             |                                                                                
|                           | **Capital Trust I**         |                                                                                
|                           |                             |                                                                                
|Trust preferred securities | $                           | 36,000                                                                         
|Common securities          |                             | 1,114                                                                          
|Junior subordinated debt   |                             | 37,114                                                                         
|Stated maturity date       |                             | 10/18/34                                                                       
|Optional redemption date   |                             | 10/18/09                                                                       
|Rate                       |                             | 5.98% until
      October 2009, 
      then LIBOR
      plus 219 
 basis points

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|13. OPERATING LEASE OBLIGATIONS
The Corporation has entered into a number of leasing arrangements
that are classified as operating leases. The operating leases are for several branch locations, signs,
automatic teller machines (ATM), ATM sites and printing equipment. The majority of the branch location
and ATM site leases are renewable at the Corporations option. In addition, future rental payments
on many of the branch and ATM site leases are subject to change in relation to fluctuations in the
Consumer Price Index. Future minimum lease commitments are based on current rental payments.

|                                                
|------------------------------------------------
|39Omega Financial Corporation 2006 Annual Report

|
|



|The following is a summary of future minimum rental payments for
the next five years required under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 2006 (in thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                            

|Years Ending December 31,       |   |       | 
|------------------------------- | - | ----- | 
|2007                            | $ | 553   | 
|2008                            |   | 363   | 
|2009                            |   | 325   | 
|2010                            |   | 184   | 
|2011                            |   | 100   | 
|Later years                     |   | 554   | 
|                                |   |      
|Total minimum payments required | $ | 2,079 | 
|                                |   |      

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Rental expense charged to operations, net of sublease income, was
$0.3 million in 2006, 2005 and 2004, which includes short-term cancelable leases. Included in these
amounts are net rental income from discontinued operations of $0.1 million in 2006 and 2005, and
net rental expense of $.003 million in 2004.
14. GOODWILL AND OTHER INTANGIBLE ASSETS
During 2004, Omega acquired goodwill and additional intangible
assets through its acquisition of Sun. Omega has finite-lived intangible assets capitalized on its
balance sheet pertaining to core deposit and customer relationships. In 2004, Omega recorded preliminary
estimates of fair values of assets acquired, including core deposit intangibles and goodwill of $14.4
million and $157.0 million, respectively. Omega completed its deter­mination of the value of
the core deposit intangible in 2005. This revised valuation was lower than originally estimated by
$6.5 million; accordingly the value of goodwill was increased by $4.2 million. Additionally, other
purchase accounting adjustments recorded during 2005 and 2006 resulted in a decrease to goodwill
of $0.2 million. As part of the sale of Sentry Trust in 2006, goodwill was reduced by $1.6 million
(see Note 25). Goodwill carried on the balance sheet as of December 31, 2006 was $159.4 million.
Impairment testing for goodwill is completed on at least an annual basis.
The original average weighted life of the finite-lived intangibles
assets was ten years, and the remaining average weighted life as of December 31, 2006 was eight years.
The estimates included in the valuation of the core deposit intangible are generally consistent with
the runoff experienced to date on the acquired deposits. None of the intangible assets below were
deemed to be impaired as of December 31, 2006.
A summary of intangible assets at December 31 follows (in thousands):
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                          | **2006** |       | **2005** |  
|----------------------------------------- | -------- | ----- | -------- | -
|                                          |         
|Core deposit intangible:                  |          |       |          |  
|Gross carrying amount                     | $        | 7,480 |          | $
|Less: Accumulated amortization            |          | 1,839 |          |  
|                                          |         
|Net carrying amount                       |          | 5,641 |          |  
|Customer relationship intangibles:        |          |       |          |  
|Gross carrying amount                     |          | 1,200 |          |  
|Less: Accumulated amortization            |          | 245   |          |  
|                                          |         
|Net carrying amount                       |          | 955   |          |  
|Trade name intangible with finite life:   |          |       |          |  
|Gross carrying amount                     |          |      |          |  
|Less: Accumulated amortization            |          |      |          |  
|                                          |         
|Net carrying amount                       |          |      |          |  
|Total finite-lived intangibles:           |          |       |          |  
|Gross carrying amount                     |          | 8,680 |          |  
|Less: Accumulated amortization            |          | 2,084 |          |  
|                                          |         
|Net carrying amount                       |          | 6,596 |          |  
|Trade name intangible with infinite life: |          |       |          |  
|Gross carrying amount                     | $        | 130   |          | $
|                                          |          |      

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Amortization expense for core deposits and other intangibles recognized
in non-interest expense included $1.0 million for the years ended December 31, 2006 and 2005, and
$0.4 million for year ended December 31, 2004. Intangible amortization expense projected for the
succeeding five years is $0.8 million for each year 2007 through 2011.
15. INCOME TAXES
The components of income tax expense from continuing operations
for the three years ended December 31, 2006 were (in thousands):
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                     | **2006** |       | **2005** |   | **2004** | 
|-------------------- | -------- | ----- | -------- | - | -------- | 
|                     |          |      
|Current tax expense  | $        | 4,737 |          | $ | 3,755    | 
|Deferred tax expense |          | 965   |          |   | 2,458    | 
|                     |          |      
|Total tax expense    | $        | 5,702 |          | $ | 6,213    | 
|                     |          |      

|                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Income tax expense related to realized securities gains, which
are included in continuing operations, was $0.1 million in 2006, $0.8 million in 2005, and $0.3 million
in 2004.
The reasons for the differences between the income tax expense
and the amount computed by applying the statutory federal income tax rate to pre-tax earnings are
as follows:
|                                                                                                                                                                                                                                                                                                                                                            

|                                   | **Years Ended December 31,** |     
|---------------------------------- | ---------------------------- | ----
|                                   |                              |     
|                                   | **2006**                     |     
|                                   |                              |     
|Federal tax at statutory rate      |                              | 35.0
|Tax exempt income                  |                              | (4.2
|Bank-owned life insurance earnings |                              | (3.2
|ESOP stock dividends               |                              | (1.2
|Low income housing credits         |                              | (4.2
|Other, net                         |                              | (0.6
|                                   |                              |     
|Effective rate                     |                              | 21.6
|                                   |                              |     

|                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Deductible temporary differences and taxable temporary differences
gave rise to a net deferred tax asset for Omega as of December 31, 2006 and 2005. The components
giving rise to the net deferred tax asset are detailed below (in thousands):
|                                                                                                                                                                                                                                                

|                                                | **December 31,** |       
|----------------------------------------------- | ---------------- | ------
|                                                |                  |       
|                                                | **2006**         |       
|                                                |                  |       
|Deferred Tax Assets                             |                  |       
|Loan loss reserve                               | $                | 6,273 
|Deferred compensation                           |                  | 1,780 
|Employee benefits                               |                  | 249   
|Intangible amortization                         |                  | 2,043 
|Unrealized net gains on securities              |                  |      
|Low income housing investments                  |                  | 615   
|State net operating loss carryforward           |                  | 2,464 
|Tax credit carryforwards                        |                  | 4,727 
|Other                                           |                  | 924   
|                                                |                  |       
|Total deferred tax assets                       |                  | 19,075
|Allowance for deferred tax assets               |                  | (2,692
|                                                |                  |       
|Net deferred tax assets                         |                  | 16,383
|Deferred Tax Liabilities                        |                  |       
|Depreciation                                    |                  | (1,770
|Unrealized net gains on securities              |                  | (168  
|Purchase accounting adjustments                 |                  | (1,849
|Leases (net)                                    |                  | (17   
|Other                                           |                  | (78   
|                                                |                  |       
|Total deferred tax liabilities                  |                  | (3,882
|Allowance for deferred tax liabilities          |                  | 32    
|                                                |                  |       
|Net deferred tax liabilities                    |                  | (3,850
|                                                |                  |       
|Net deferred tax asset included in other assets | $                | 12,533
|                                                |                  |       

|  
|--
|40

|
|



|The tax credit carryforwards are comprised of general business
credits and alternative minimum tax credits. General business credits of $2.1 million can carry forward
20 years and will expire between 2024 and 2026. Alternative minimum tax credits of $2.7 million have
an indefinite life.
Omega establishes a valuation allowance when it is more likely
than not that the Corporation will not be able to realize the benefit of the deferred tax assets,
i.e., when future deductibility is uncertain. Periodically, the valuation allowance is reviewed and
adjusted based on managements assessments of realizable deferred tax assets. Gross deferred
tax assets as of December 31, 2006 and 2005 were reduced by a valuation allowance of $2.7 million
and $1.1 million, respectively, related to state income tax net operating losses generated, as utilization
of these losses is not likely. The state net operating loss carryforwards will expire in the years
2018 through 2026.
16. SHAREHOLDERS EQUITY
The Corporation is authorized to issue 5,000,000 shares of preferred
stock with a par value of $5.00 per share. The Board has the ability to fix the voting, dividend,
redemption and other rights of the preferred stock, which can be issued in one or more series.
In 1990, there were 219,781 shares of Class A cumulative convertible
preferred stock issued to Omegas Employee Stock Ownership Plan (ESOP) for a total of $5.0 million.
The preferred stock was convertible into Omegas common stock at the rate of 1.575 common shares
for one preferred share in certain events. The preferred stock was restricted to the ESOP and could
be redeemed by the Corporation at any time. Dividends on the preferred stock were fixed at $1.80
per share per year, and were required to be paid prior to any dividend payments on the common stock.
The preferred stock had preference in liquidation over the common stock in the amount of $22.75 per
share, plus all dividend arrearages, prior to payments to common shareholders. The holder of the
preferred stock was entitled to 1.575 votes for each share held. In 2003, the holder of the preferred
stock converted it into 346,155 shares of common stock.
In March of 2004, the Board approved a share repurchase program
to begin immediately, authorizing management to buy back an additional 10% of its common stock. At
that time, there were 8,483,950 common shares outstanding with 848,395 shares eligible to be repurchased.
This program was no longer in effect at December 31, 2004. While the program was in effect, 73,212
shares had been repurchased in conjunction with this program.
As a result of the acquisition of Sun Bancorp, Inc. on October
1, 2004, Omega issued 4,117,116 shares of common stock, of which 1,659,545 were from treasury.
In April of 2005, the Board approved a share repurchase program
to begin immediately, authorizing management to buy back an additional 10% of its outstanding common stock, or 1,261,095 shares. During 2005, management repurchased 67,069
shares under this program. This program was no longer in effect at December 31, 2005.
On January 23, 2006, the Board of Directors of Omega Financial
Corporation approved a new share repurchase program authorizing the buy back of up to 10% of Omegas
outstanding common stock. At that time, there were 12,604,477 common shares outstanding with 1,260,447
shares eligible to be repurchased. As of December 31, 2006, 133,600 shares have been repurchased
in conjunction with this program, at an average cost of $31.39 per share. The program will remain
in effect until the 10% limit is reached, however the Board of Directors may discontinue it at any time.
17. CALCULATION OF EARNINGS PER SHARE
The following table shows the calculation of earnings per share
for the years ended December 31, 2006, 2005 and 2004 (in thousands, except per share data):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                                                               | 2006 |        | 2005 |   | 2004   | 
|-------------------------------------------------------------- | ---- | ------ | ---- | - | ------ | 
|                                                               |      |       
|Numerator                                                      |      |        |      |   |        | 
|Income from continuing operations                              | $    | 20,745 |      | $ | 22,763 | 
|Income (loss) from discontinued
      operations               |      | (314   | )    |   | 112    | 
|                                                               |      |       
|Net Income                                                     | $    | 20,431 |      | $ | 22,875 | 
|Denominator                                                    |      |        |      |   |        | 
|Basic weighted-average shares
      outstanding                |      | 12,577 |      |   | 12,601 | 
|Dilutive potential shares from
      stock-basked compensation |      | 29     |      |   | 40     | 
|Potential Shares required for
      contract settlement        |      | 4      |      |   | 4      | 
|                                                               |      |       
|Dilutive weighted-average
      shares outstanding             |      | 12,610 |      |   | 12,645 | 
|                                                               |      |       
|Earnings per shareBasic                                       |      |        |      |   |        | 
|Income from continuing operations                              | $    | 1.65   |      | $ | 1.81   | 
|Income (loss) from discontinued
      operations               |      | (0.02  | )    |   | 0.01   | 
|                                                               |      |       
|Net income(1)                                                  | $    | 1.62   |      | $ | 1.82   | 
|                                                               |      |       
|Earnings per shareDiluted                                     |      |        |      |   |        | 
|Income from continuing operations                              | $    | 1.65   |      | $ | 1.80   | 
|Income (loss) from discontinued
      operations               |      | (0.02  | )    |   | 0.01   | 
|                                                               |      |       
|Net Income(1)                                                  | $    | 1.62   |      | $ | 1.81   | 
|                                                               |     
|(1) Totals may not sum due to rounding                        

|                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Certain outstanding stock options as of the end of each period
presented were not included in the fully diluted earnings per share computation because they would
have been antidilutive. The number of stock options was 307,061, 404,275 and 231,118 on December
31, 2006, 2005 and 2004, respectively.
|                                                                                                                                                                                                                                                                                                         

|                                                     
|-----------------------------------------------------
|41
    Omega Financial Corporation 2006 Annual Report

|
|



|18. COMPREHENSIVE INCOME
    Components of other comprehensive income (loss) consist of the following (in thousands):
|---------------------------------------------------------------------------------------------------------------------
|                                                                                                                     

|                                                                      | Year Ended December 31, 2006 |      
|--------------------------------------------------------------------- | ---------------------------- | -----
|
|
|
|Unrealized gains on available for sale securities:                    |                              |      
|Unrealized holding gains arising
   during the period                 | $                            | 2,756
|Less: reclassification adjustment
   for gains included in net income |                              | (389 
|
|Other comprehensive income                                            | $                            | 2,367
|

|                                                                      |   |       
|--------------------------------------------------------------------- | - | ------
|
|
|
|
|Unrealized gains on available for sale securities:                    |   |       
|Unrealized holding gains arising
   during the period                 | $ | (4,983
|Less: reclassification adjustment
   for gains included in net income |   | (2,327
|
|Other comprehensive income                                            | $ | (7,310
|                                                                      |   |       

|                                                                      |   |       
|--------------------------------------------------------------------- | - | ------
|
|
|
|
|Unrealized gains on available for sale securities:                    |   |       
|Unrealized holding gains arising
   during the period                 | $ | (1,626
|Less: reclassification adjustment
   for gains included in net income |   | (963  
|
|Other comprehensive income                                            | $ | (2,589
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The basis on which the amount reclassified out of accumulated other
comprehensive income into earnings was determined using the average cost method.
19. EMPLOYEE BENEFIT PLANS
Omega Stock Compensation Plans
Omega has six stock-based compensation plans, the Employee Stock
Purchase Plan, the Stock Option Plan (1986) (the 1986 Plan), the 1996 Employee Stock
Option Plan (the 1996 Plan), the 2006 Equity Incentive Plan (the 2006 Plan),
the Non-Employee Director Stock Option Plan (1994) (the 1994 Plan) and the 2004 Stock
Option Plan for Non-Employee Directors (the 2004 Plan). The 1996 Plan replaced the 1986
Plan pursuant to which no options were issuable after 1996. The 2004 Plan replaced the 1994 Plan
pursuant to which no options were issuable after 2004. The 2006 Plan replaced the 1996 Plan and the
2004 Plan. The 2006 Plan also authorizes awards of stock, restricted stock, restricted stock units
and other equity awards. Awards under the 2006 Plan can also be made to Omegas directors. As
of December 31, 2006, no awards have been granted under the 2006 Plan. Omega accounts for these plans
under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation
cost for these plans been determined consistent with the fair value method under SFAS No. 148, Omegas
net income and earnings per share would have been reduced to the amounts disclosed in Note 1.
These computations were derived using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for options granted in 2005 and 2004.
No options were granted by Omega in 2006.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                         | Employee Stock
      Purchase 
      Plan |   | Employee Stock
      Option 
      Plan 
      (1996) |  | Director 
      Stock
      Option 
      Plan |  
|------------------------ | ----------------------------------------- | - | ----------------------------------------------------- |  | ---------------------------------------------- | -
|                         |                                           |  
|Options Granted in 2005  |                                           |   |                                                       |  |                                                |  
|Expected life of options |                                           |  |                                                       |  | 6 years                                        |  
|Risk-free interest rate  |                                           |  |                                                       |  | 4.35                                           | %
|Expected volatility      |                                           |  |                                                       |  | 35.51                                          | %
|Expected dividend yield  |                                           |  |                                                       |  | 3.39                                           | %

|                         |  |        |   |  |         |  
|------------------------ |  | ------ | - |  | ------- | -
|
|                         |  |       
|Options Granted in 2004  |  |        |   |  |         |  
|Expected life of options |  | 1 year |   |  | 6 years |  
|Risk-free interest rate  |  | 2.75   | % |  | 3.63    | %
|Expected volatility      |  | 25.15  | % |  | 34.56   | %
|Expected dividend yield  |  | 3.23   | % |  | 3.23    | %

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Employee Stock Purchase Plan (ESPP) is administered
by the Compensation Committee (Committee) of the Omega Board of Directors (Board),
consisting of members who are not eligible to receive options under the ESPP. The Committee is authorized
to grant options to purchase common stock of Omega to all employees of Omega and its subsidiaries
who meet certain service requirements. The ESPP qualifies as a non-compensatory plan under Section
423 of the Internal Revenue Code. All options granted under the ESPP are immediately vested. For
27 months following the date of the grant, options are exercisable at the lesser of 90% of the fair
market value of the shares on the date of grant or 90% of the fair market value on the date of exercise.
After 27 months, the options are exercisable at 90% of the fair market value on the exercise date.
Outstanding options are scheduled to expire through December 31, 2009. 107,284 ESPP options are outstanding
at December 31, 2006 and have a current weighted-average exercise price of $31.85 and a weighted-average
remaining contractual life of 2.24 years. All of these options are exercisable.
The 1986 Plan and the 1996 Plan (collectively, the SOPs)
are administered by the Committee, whose members are not eligible to receive options under the SOPs.
The Committee determines, among other things, which officers and key employees will receive options,
the number of shares to be subject to each option, the option price and the duration of the option.
Options vest over one year and are exercisable at the fair market value of the shares at date of
grant. These options are scheduled to expire through December 2015. The SOPs option outstanding at
December 31, 2006 have exercise prices between $18.78 and $51.64, with a weighted-average exercise
price of $32.94 and a weighted-average remaining contractual life of 4.53 years. 455,877 of these
options are outstanding and exercisable.
42

|
|



|The 1994 Plan and the 2004 Plan (collectively the Director
Plans) are administered by the Board. Options are granted automatically each year to non-employee
directors of Omega. Options vest over one year and are exercisable at the fair market value of the
shares at the date of grant. These options are scheduled to expire through December 19, 2015. Director
Plans options outstanding at December 31, 2006 have exercise prices between $24.10 and $50.75, with
a weighted-average exercise price of $32.31 and a weighted-average remaining contractual life of
4.89 years. 23,264 of these options are exercisable; their weighted-average exercise price is $32.31.
Based on terms of the Merger Agreement with Sun Bancorp, all options
outstanding from Suns plans were substituted with Omega options. Conversion was made based
upon the stock exchange ratio of 0.664 shares of Omega for 1 share of Sun. Option prices were converted
using the same ratio. All options were converted as 100% vested on October 1, 2004, with all remaining
terms the same. A total of 257,511 shares were added to Omegas outstanding options as a result
of this transaction.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|A summary of the status of Omegas six stock-based compensation plans as of December 31, 2006, 2005 and 2004, and changes during the years ending on those dates is presented below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                                  |            |                                                  |           
|----------------------------------------------------------------- | ---------- | ------------------------------------------------ | ----------
|                                                                  |           
|**Employee Stock Purchase Plan**                                  | **Shares** | **Weighted-
      Average
      Exercise Price** | **Shares**
|                                                                  |           
|Outstanding at beginning of year                                  |            | 156,259                                          |           
|Granted                                                           |            |                                                 |           
|Acquired options                                                  |            |                                                 |           
|Exercised                                                         |            | (31,179                                          | )         
|Forfeited                                                         |            | (17,796                                          | )         
|Outstanding at end of year                                        |            | 107,284                                          |           
|                                                                  |            |                                                  |           
|Options exercisable at year-end                                   |            | 107,284                                          |           
|                                                                  |            |                                                  |           
|Weighted-average fair value of
   options granted during the year | $          |                                                 |           
|                                                                  |            |                                                 
|**2006**                                                          | **2005**   | **2004**                                        
|                                                                  |           
|**Employee Stock Purchase Plan**                                  | **Shares** | **Weighted-
      Average
      Exercise Price** | **Shares**
|                                                                  |           
|Outstanding at beginning of year                                  |            | 601,460                                          |           
|Granted                                                           |            |                                                 |           
|Acquired options                                                  |            |                                                 |           
|Exercised                                                         |            | (120,823                                         | )         
|Forfeited                                                         |            | (24,750                                          | )         
|                                                                  |            |                                                  |           
|Outstanding at end of year                                        |            | 455,887                                          |           
|                                                                  |            |                                                  |           
|Options exercisable at year-end                                   |            | 455,887                                          |           
|Weighted-average fair value of
   options granted during the year | $          |                                                 |           
|                                                                  |            |                                                 
|**2006**                                                          | **2005**   | **2004**                                        
|                                                                  |           
|**Director Stock Option Plans**                                   | **Shares** | **Weighted-
      Average
      Exercise Price** | **Shares**
|                                                                  |           
|Outstanding at beginning of year                                  |            | 36,210                                           |           
|Granted                                                           |            |                                                 |           
|Acquired options                                                  |            |                                                  |           
|Exercised                                                         |            | (1,146                                           | )         
|Forfeited                                                         |            | (11,800                                          | )         
|                                                                  |            |                                                  |           
|Outstanding at end of year                                        |            | 23,264                                           |           
|                                                                  |            |                                                  |           
|Options exercisable at year-end                                   |            | 23,264                                           |           
|Weighted-average fair value of
   options granted during the year | $          |                                                 |           

|                                                
|------------------------------------------------
|43
Omega Financial Corporation2006 Annual Report

|
|



|Omega Employee Stock Ownership Plan
Omega has an Employee Stock Ownership Plan (ESOP) for
the benefit of employees that meet certain age and service requirements. ESOP transactions are accounted
for under SOP 76-3, Accounting Practices for Certain Employee Stock Ownership Plans.
As such, all ESOP shares are considered outstanding when calculating earnings per share and dividends
paid on ESOP shares are treated the same as those paid on Non-ESOP shares. For the years ended December
31, 2006, 2005 and 2004, expenses incurred under this plan were $1.2 million, $1.4 million and $0.8
million, respectively. The increase in expense in 2005 related to the inclusion of the former employees
in the ESOP plan during 2005. The level of annual contributions is based upon a percentage of employee
salary expense. Funds obtained through these contributions are primarily used to purchase Omega stock,
meet debt service or fund the cash portion of the plan. In 2006, 3,821 shares of Omega stock were
acquired at a cost of $0.1 million and $0.04 million was applied to debt service. In 2005, 25,441
shares were acquired at a cost of $0.8 million and $0.04 million was applied to debt service. In
2004, $0.06 million was applied to debt service and no shares of Omega common stock were acquired.
At December 31, 2006 the ESOP held 798,908 shares of Omega common stock, which included 346,155 shares
from the conversion of 219,781 shares of preferred stock. The converted shares are pledged to secure
the loan described in the next paragraph. Of the 346,155 shares of leveraged stock, 285,824 shares
have been allocated to participants of the plan as of December 31, 2006, based upon principal repayment
of the debt outstanding. Fair value of the 60,331 unallocated shares was $1.9 million. The ESOP is
administered by a Board of Trustees and an Administrative Committee appointed by the Board. All of
the Trustees are officers, employees, or directors of Omega.
On July 1, 1990, the ESOP entered into a $5.0 million leveraged
transaction for the purpose of acquiring 219,781 shares of convertible preferred stock from the Corporation
for $22.75 per share. The original term of the loan was for twenty years and carried a fixed interest
rate of 10.65% for the first ten years. Thereafter, the ESOP had the option to take a fixed rate
or various variable rate options for the remaining term of the loan. Effective January 1, 2003, this
loan was refinanced at a fixed rate of 5.90% through its maturity date of July 1, 2010. The loan
is collateralized by a mortgage on the Corporations administration center and the Corporations
guarantee.
In order to meet the future annual debt service of $0.5 million,
which includes principal and interest, the ESOP will receive dividends from 346,155 shares of common
stock (which was converted from preferred stock in 2003) and the remainder in contributions from
the Corporation. In each of the years 2006, 2005 and 2004 the debt service required was $0.5 million,
of which $0.1 million represented interest expense incurred by the ESOP. Outstanding ESOP debt as
of December 31, 2006 was $1.5 million. Scheduled principal repayments on the ESOP debt are as follows
(in thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|2007 | $ | 396 | 
|---- | - | --- | 
|2008 |   | 415 | 
|2009 |   | 440 | 
|2010 |   | 230 | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Defined Contribution Plan
Omega maintains a defined contribution plan for eligible employees,
as defined. Employer contributions to the plan totaled $0.2 million in each of the years ended December
31, 2006, 2005 and 2004.
When Sun Bancorp Inc. was acquired on October 1, 2004, a defined
contribution plan was in place for employees in that organization. This plan was maintained through
December 31, 2004 and subsequently merged into Omegas existing plan as of January 1, 2005.
Employer contributions to this plan totaled $0.1 million in 2004.
Supplemental Executive Retirement Plan
The Supplemental Executive Retirement Plan (SERP) is
a non-qualified executive benefit in which the Corporation agrees to pay certain key executives for
a specified period of time after retirement. This plan was established in 2000 and replaced the former
Executive Supplemental Income Plan. The present value of the supplemental retirement benefits to
be paid under the SERP program is being accrued over the estimated remaining service period of the
three officers designated to receive these benefits. Accrued liabilities from the discontinued plan
were transferred to the SERP, which is included in Other Liabilities. At December 31, 2006 and 2005,
the liability for these future obligations was $3.1 million. For the years ended December 31, 2006,
2005 and 2004, $0.3 million, $0.2 million and $0.3 million, respectively, were charged to operations
in connection with this program.
Supplemental Director Retirement Plan
With the Sun Bancorp acquisition, Omega assumed liabilities to
provide supplemental payments to certain former directors of Guaranty Bank and Steelton Bank. Life
insurance contracts are being used to fund this supplemental payment to the former directors. Expense
related to this obligation was $0.03 million in 2006 and $0.05 million in 2005. The carrying value
of this future obligation included in Other Liabilities is $0.7 million as of December 31, 2006
and 2005.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure about Fair Value of Financial Instruments,
requires the Corporation to disclose the estimated fair value of its financial instruments. The fair
value disclosures are made based on relevant market information for financial instruments with similar
re-pricing characteristics and credit risk and management assumptions. The estimated values do not
reflect any premium or discount that may be realized from offering for sale at one time the Corporations
entire holdings of a particular financial instrument.
The following describes the estimated fair value of the Corporations
financial instruments as well as the significant methods and assumptions used to determine these
estimated fair values.
Carrying values approximate fair value for cash and due from banks,
interest-bearing deposits, federal funds sold, interest receivable, demand deposits, savings deposits,
short-term borrowings, other interest bearing liabilities and interest payable given.
Investment SecuritiesThe fair value of investment securities
is determined by reference to quoted market prices or dealer quotes (see Note 5).
Commercial, Financial and Agricultural Loans, Real Estate-Commercial
Loans and Real Estate-Construction LoansThese loans are made on either a floating, adjustable
or fixed rate basis. The estimated fair value of these loans is determined by discounting the future
contractual cash flows using rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturity or repricing period. The discount rates utilized
for these loans are indexed to either the national prime rate or the comparable U.S. Treasury rate.
Loans discounted at the prime rate have a spread of approximately 50 to 15 basis points at
December 31, 2006 and a spread of approximately 45 to 60 basis points at December 31, 2005. Loans
discounted using the U.S. Treasury rate carry a spread of 275 to 325 basis
44

|
|



|points as of December 31, 2006 and a spread of approximately 265 basis points at December 31, 2005.
Real Estate Mortgage LoansThis category is comprised primarily
of residential mortgages that are adjustable rate mortgages (ARMs) or fixed rate mortgages. The estimated
fair value of these loans is arrived at by discounting the future contractual cash flows, adjusted
for prepayments, at the current market rate for these loans. Prepayments, or acceleration of cash
flows, are calculated at speeds at which a pool of loans with similar characteristics would be expected
to prepay. The rates utilized for adjustable rate mortgages are equivalent to the U.S. Treasury rate
for the same term plus a spread of approximately 275 basis points as of December 31, 2006 and 275
basis points as of December 31, 2005. The market rate for fixed rate mortgages was approximately
6.18% at December 31, 2006 and 6.24% at December 31, 2005.
Home Equity LoansThis category is comprised primarily of
fixed rate loans, but does include home equity lines of credit that have floating rates. The fair
value of the fixed rate loans is estimated by discounting the future contractual cash flows using
rates at which similar loans would be made to borrowers for the same remaining maturity. The discount
rate utilized for home equity installment loans is the current national market rate for new mortgages
plus a spread of 110 to 155 basis points as of December 31, 2006 and 0 to 50 basis points as of December
31, 2005. Home equity lines of credit are on a floating basis and approximate current market rates.
Personal Loans and Lease FinancingThis category is comprised
pri­marily of fixed rate loans, but does include personal lines of credit that have floating
rates. The fair value of the fixed rate loans is estimated by discounting the future contractual
cash flows. The discount factor for these loans is the current national market rate for a 48-month
automobile loan plus a spread of 75 to 100 basis points as of December 31, 2006 and a spread
of 15 to 230 basis points as of December 31, 2005. Personal lines of credit are on a floating basis
and approximate current market rates.
Fixed Rate Time DepositsThe estimated fair value is determined
by discounting the contractual future cash flows, using the rates currently offered for deposits
of similar remaining maturities. The rates utilized for time deposits are equivalent to the U.S.
Treasury rate for the same term with a spread of 145 to 5 basis points at December 31, 2006
and a spread of 90 to 10 basis points at December 31, 2005.
ESOP DebtThe estimated fair value is determined by discounting
the contractual cash flows, using rates currently available to the Corporation for debt with similar
terms and remaining maturities.
Junior Subordinated DebenturesThe estimated fair value is
determined by discounting the contractual cash flows, using rates currently offered to the Corporation
for debentures with similar terms and remaining maturities.
Long-Term DebtThe fair value of long-term debt is determined
by discounting the contractual cash flows at rates that approximate the current FHLB borrowing rate
for borrowings with similar terms and maturity. The appropriate FHLB borrowing rates ranged from
5.43% to 5.53% at December 31, 2006 and 4.85% to 5.01% at December 31, 2005. The carrying amounts
of all other borrowings approximate fair value due to the short-term nature of these instruments.
Standby Letters of CreditThe fair value is equal to the premium
received at inception of the guarantee.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Many of the fair value estimates presented are based upon the use of assumptions that are inherently subjective in nature. Changes in these assumptions can significantly affect the estimates. In addition, the fair value estimates do not consider the potential income taxes or other expenses that would be incurred in the actual sale of an asset or settlement of a liability. Management does not believe that the aggregate fair value information represents the true underlying value of the Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(In thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                       |                                 |                      
|-------------------------------------- | ------------------------------- | ---------------------
|                                      
|**Book 
      Value**                  | **Estimated 
      Fair Value** | **Book 
      Value**
|                                      
|Loans (net of unearned interest):      |                                 |                      
|Commercial, financial and agricultural | $                               | 250,906              
|Real estatecommercial                 |                                 | 432,062              
|Real estateconstruction               |                                 | 21,562               
|Real estatemortgage                   |                                 | 218,104              
|Home equity                            |                                 | 164,800              
|Personal                               |                                 | 45,600               
|Lease financing                        |                                 | 19,358               
|Allowance for loan losses              |                                 | (17,344              
|                                      
|Total loans                            | $                               | 1,135,048            
|                                      
|Fixed rate time deposits               | $                               | 530,558              
|ESOP debt                              |                                 | 1,481                
|Junior subordinated debentures         |                                 | 56,193               
|Long-term debt                         |                                 | 27,877               
|Standby letters of credit              |                                 |                     
|Outstanding loan commitments           |                                 |                     
|Unused lines of credit                 |                                 |                     

|                                                        
|--------------------------------------------------------
|45
        Omega Financial Corporation2006 Annual Report

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|21.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The Corporation is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its customers and to reduce
its own exposure to fluctuations in interest rates. These financial instruments may include commitments
to extend credit, financial guarantees, financial options and interest exchange agreements. These
instruments involve, to varying degrees, elements of credit and interest rate risk that are not recognized
in the consolidated financial statements.
Exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and financial guarantees
written is represented by the contractual notional amount of those instruments. The Corporation uses
the same credit policies in making these commitments as it does for on-balance sheet instruments.
The Corporation controls the credit risk of its financial options and interest exchange agreements
through credit approvals, limits and monitoring procedures; however, it does not generally require
collateral for such financial instruments since there is no principal credit risk.
The Corporation had outstanding loan origination commitments aggregating
$44.6 million and $45.9 million at December 31, 2006 and 2005, respectively. In addition, the Corporation
had $198.2 million and $215.7 million outstanding in unused lines of credit commitments extended
to its customers at December 31, 2006 and 2005, respectively.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment of a fee. Since
portions of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Corpo­ration evaluates each
customers creditworthiness on a case-by-case basis. The amount of collateral obtained by the
Corporation upon extension of credit is based on managements credit evaluation of the counterparty.
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 a one-year period. 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 December 31, 2006 and 2005, standby
letters of credit issued and outstanding amounted to $29.9 million and $26.5 million, respectively.
The liability recorded in accordance with FIN 45 representing fair market value of the standby letters
of credit at December 31, 2006 and 2005 were $0.2 million and $0.1 million, respectively.
Omega has a diversified loan portfolio; however, at December 31,
2006, there was one industry where concentration of credit equaled 10% or more of total outstanding
loans. Outstanding loans in the real estate rental industry totaled $152.3 million, or 13.2% of total
outstanding loans. Omegas business activities are geographically concentrated throughout central
and northeastern Pennsylvania. A substantial portion of its debtors ability to honor their
obligations is dependent upon the economy in central and northeastern Pennsylvania.
22. RELATED-PARTY TRANSACTIONS
Omegas banks have granted loans to certain officers and directors
of Omega and its subsidiaries and to their associates. These loans were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons, and in the opinion of management, do not involve more than normal
risk of collection. The aggregate dollar amount of these loans was $9.1 million, $19.9 million, and
$19.2 million at December 31, 2006, 2005 and 2004, respectively. During 2006, there were $2.8 million
of new loans, repayments totaled $11.7 million and loans removed for retired directors totaled $1.9
million. None of these loans were past due, in non-accrual status or restructured at December 31, 2006.
23. COMMITMENTS AND CONTINGENT LIABILITIES
In 2006, the Corporation renewed a five-year agreement to obtain
data processing services from an outside service bureau. The agreement provides for termination penalties
if the Corporation cancels it prior to the end of the commitment period. If the contract had been
canceled as of December 31, 2006, termination penalties of approximately $11.3 million would have
been assessed.
The Corporation, from time to time, may be a defendant in legal
proceedings relating to the conduct of its banking business. Most of such legal proceedings are a
normal part of the banking business, and in managements opinion, the financial condition and
results of operations of the Corporation would not be materially affected by the outcome of such
legal proceedings. Currently the Corporation does not have any material litigation.
24. REGULATORY MATTERS
The Corporation and its bank subsidiaries are subject to risk-based
capital standards by which all bank holding companies and banks are evaluated in terms of capital
adequacy. These regulatory capital requirements are administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on the
Corporations financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Corporation and its bank subsidiary must meet specific capital
guidelines that involve quantitative measures of the Corporations and bank subsidiarys
assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. The Corporations and bank subsidiarys capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the bank subsidiary to each maintain minimum amounts and ratios
(set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and Tier I capital (as defined) to average assets (as defined). Management believes,
as of December 31, 2006 and 2005, that Omega and its bank subsidiary meet all capital adequacy requirements
to which they were subject.
As of December 31, 2006, the most recent notification from the
regu­latory banking agencies categorized Omega and its bank subsidiary as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well capitalized Omega
and its bank subsidiary must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table. To the knowledge of management, there are no conditions or events
since these notifications that have changed the institutions category.
46

|
|



|The table below provides a comparison of Omega and its bank subsidiarys
risk-based capital ratios and leverage ratios to the minimum regulatory requirements for the periods
indicated (in thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                       

|                                         | Actual |         | Minimum
      Requirement for 
      Capital Adequacy
      Purposes |      | Minimum Regulatory
      Requirements to Be 
Well Capitalized |  
|---------------------------------------- | ------ | ------- | -------------------------------------------------------------------- | ---- | --------------------------------------------------------------- | -
|
|
|
|OMEGA FINANCIAL CORPORATION              |        |         |                                                                      |      |                                                                 |  
|As of December 31, 2006:                 |        |         |                                                                      |      |                                                                 |  
|Total Capital (to Risk Weighted Assets)  | $      | 227,266 |                                                                      | 18.9 | %                                                               | $
|Tier 1 Capital (to Risk Weighted Assets) |        | 212,370 |                                                                      | 17.6 | %                                                               |  
|Tier 1 Capital (to Average Assets)       |        | 212,370 |                                                                      | 12.3 | %                                                               |  
|As of December 31, 2005:                 |        |         |                                                                      |      |                                                                 |  
|Total Capital (to Risk Weighted Assets)  | $      | 219,125 |                                                                      | 17.0 | %                                                               | $
|Tier 1 Capital (to Risk Weighted Assets) |        | 203,147 |                                                                      | 15.7 | %                                                               |  
|Tier 1 Capital (to Average Assets)       |        | 203,147 |                                                                      | 11.1 | %                                                               |  
|OMEGA BANK                               |        |         |                                                                      |      |                                                                 |  
|As of December 31, 2006:                 |        |         |                                                                      |      |                                                                 |  
|Total Capital (to Risk Weighted Assets)  | $      | 206,237 |                                                                      | 17.4 | %                                                               | $
|Tier 1 Capital (to Risk Weighted Assets) |        | 191,341 |                                                                      | 16.1 | %                                                               |  
|Tier 1 Capital (to Average Assets)       |        | 191,341 |                                                                      | 11.2 | %                                                               |  
|As of December 31, 2005:                 |        |         |                                                                      |      |                                                                 |  
|Total Capital (to Risk Weighted Assets)  | $      | 201,871 |                                                                      | 15.8 | %                                                               | $
|Tier 1 Capital (to Risk Weighted Assets) |        | 185,893 |                                                                      | 14.6 | %                                                               |  
|Tier 1 Capital (to Average Assets)       |        | 185,893 |                                                                      | 10.3 | %                                                               |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Certain restrictions exist regarding the ability of Omega Bank
to transfer funds to Omega in the form of cash dividends, loans and advances. Omega Bank is required
to obtain the approval of the Comptroller of the Currency to pay dividends in excess of earnings
retained in the current year plus retained net profits for the preceding two years.
Under Federal Reserve restrictions, Omega Bank is limited in the
amount it may loan to its affiliates, including Omega. At December 31, 2006, Omega Bank had an aggregate
lending limit to affiliates of $31.4 million and no amount was outstanding with Omega.
25. DISCONTINUED OPERATIONS
On September 15, 2006, the Corporation completed the sale of Sentry
Trust Company, a non-depository trust company with approximately $450.0 million in assets under management.
Proceeds from the sale were $4.9 million, and the Corporation recognized a loss of $0.8 million from
the sale, net of tax. The results of Sentry are reflected as discontinued operations in the consolidated
statements of income. The related assets and liabilities of Sentry have been segregated as such on
the consolidated balance sheet as of December 31, 2005.
The following is a summary of the assets and liabilities of discontinued
operations related to the sale of Sentry (in thousands):
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                      | September 15,
      2006 |       | December 31,
      2005 |  
|--------------------- | ------------------------ | ----- | ----------------------- | -
|
|Assets:               |                          |       |                         |  
|Premise and equipment | $                        | 2,343 |                         | $
|Goodwill              |                          | 1,610 |                         |  
|Other intangible      |                          | 1,233 |                         |  
|Other assets          |                          |      |                         |  
|
|Total assets          | $                        | 5,186 |                         | $
|
|Liabilities:          |                          |       |                         |  
|Other liabilities     | $                        | 348   |                         | $
|
|Total liabilities     | $                        | 348   |                         | $
|

|                                                                                                                                      
|--------------------------------------------------------------------------------------------------------------------------------------
|The following is a summary of the income from discontinued operations
for years ended December 31, 2006, 2005 and 2004 (in thousands).
|                                                                                                                                      

|                                                   | 2006 |       | 2005 |   | 2004  |  
|-------------------------------------------------- | ---- | ----- | ---- | - | ----- | -
|
|Other Income:                                      |      |       |      |   |       |  
|Trust fees                                         | $    | 1,606 |      | $ | 1,867 |  
|Investment and insurance product sales             |      | 41    |      |   | 112   |  
|Other                                              |      | 50    |      |   | 0     |  
|
|Total other income                                 |      | 1,697 |      |   | 1,979 |  
|Other Expense:                                     |      |       |      |   |       |  
|Salaries and employee benefits                     |      | 585   |      |   | 1,173 |  
|Net occupancy expense                              |      | 4     |      |   | 22    |  
|Equipment expense                                  |      | 21    |      |   | 49    |  
|Pennsylvania shares tax                            |      | 81    |      |   | 84    |  
|Amortization of intangible assets                  |      | 102   |      |   | 160   |  
|Other                                              |      | 216   |      |   | 410   |  
|
|Total other expense                                |      | 1,009 |      |   | 1,898 |  
|
|Income from discontinued operations
  before taxes |      | 688   |      |   | 81    |  
|Income tax expense                                 |      | 242   |      |   | (31   | )
|
|Income (loss) from discontinued
  operations       | $    | 446   |      | $ | 112   |  
|

|                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------
|The following is a summary of the cash flows from discontinued
operations for 2006, 2005 and 2004 (in thousands).
|                                                                                                                 

|                                                                                    | 2006 |        | 2005 |   | 2004 |  
|----------------------------------------------------------------------------------- | ---- | ------ | ---- | - | ---- | -
|
|Net cash provided by (used in)
  operating activities                               | $    | 206    |      | $ | (23  | )
|Net cash provided by (used in)
  investing activities                               |      | 712    |      |   | (65  | )
|Net cash provided by (used in)
  financing activities                               |      | (1,430 | )    |   | 600  |  
|
|Net increase (decrease) in cash and
  cash equivalents of discontinued
  operations | $    | (512   | )    | $ | 512  |  
|

|                                                
|------------------------------------------------
|47Omega Financial Corporation 2006 Annual Report

|
|



|26. OMEGA FINANCIAL CORPORATION (PARENT COMPANY ONLY)
|-----------------------------------------------------
|                                                     
|Financial information (in thousands):                
|                                                     
|CONDENSED BALANCE SHEETS(Unaudited)                  
|                                                     

|                                           | December 31, |        
|------------------------------------------ | ------------ | -------
|
|
|                                           |              |        
|ASSETS:                                    |              |        
|Cash                                       | $            | 4,883  
|Investment in bank subsidiaries            |              | 334,935
|Investment in non-bank subsidiaries        |              | 37,927 
|Investment in unconsolidated subsidiaries  |              | 1,625  
|Investment securities available for sale   |              | 548    
|Premises and equipment, net                |              | 4,309  
|Other assets                               |              | 548    
|
|TOTAL ASSETS                               | $            | 384,775
|
|LIABILITIES:                               |              |        
|Junior subordinated debentures             | $            | 56,193 
|ESOP debt                                  |              | 1,481  
|Accounts payable and other liabilities     |              | 1,890  
|
|TOTAL LIABILITIES                          |              | 59,564 
|SHAREHOLDERS EQUITY                       |              | 325,211
|
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY | $            | 384,775
|

|                                         
|-----------------------------------------
|CONDENSED STATEMENTS OF INCOME(Unaudited)
|                                         

|                                                                                     | Years Ended December 31, |       
|------------------------------------------------------------------------------------ | ------------------------ | ------
|
|
|
|INCOME:                                                                              |                          |       
|Dividends from:                                                                      |                          |       
|Bank subsidiaries                                                                    | $                        | 18,116
|Non-bank subsidiaries                                                                |                          | 2,013 
|Unconsolidated subsidiaries                                                          |                          | 120   
|Securities available for sale                                                        |                          | 37    
|Fees received from subsidiaries                                                      |                          | 596   
|Other income                                                                         |                          | (1    
|
|TOTAL INCOME                                                                         |                          | 20,881
|EXPENSE:                                                                             |                          |       
|Interest expense                                                                     |                          | 4,122 
|Amortization                                                                         |                          | (597  
|Salaries and employee benefits                                                       |                          | 580   
|Other                                                                                |                          | 506   
|
|TOTAL EXPENSE                                                                        |                          | 4,611 
|
|INCOME BEFORE INCOME TAXES AND EQUITY IN
   UNDISTRIBUTED NET INCOME OF SUBSIDIARIES |                          | 16,270
|Income tax benefit                                                                   |                          | (1,673
|
|                                                                                     |                          | 17,943
|Equity in undistributed net income of subsidiaries                                   |                          | 2,488 
|
|NET INCOME                                                                           | $                        | 20,431
|

|  
|--
|48

|
|



|CONDENSED STATEMENT OF CASH FLOWS(Unaudited)
|--------------------------------------------
|                                            

|                                                                                       | Years Ended December 31, |        
|-------------------------------------------------------------------------------------- | ------------------------ | -------
|
|
|
|Cash flows from operating activities:                                                  |                          |        
|Net income                                                                             | $                        | 20,430 
|Adjustments to reconcile net income to net cash provided 
    by operating activities: |                          |        
|Depreciation and amortization                                                          |                          | (370   
|Gain on sale of assets                                                                 |                          | 1      
|(Increase) decrease in tax receivable                                                  |                          |       
|Decrease in interest and other receivable                                              |                          | (34    
|Increase (decrease) in taxes payable                                                   |                          | (2,155 
|(Decrease) increase in accounts payable and accrued expenses                           |                          | (464   
|(Increase) decrease in undistributed earnings of subsidiaries                          |                          | (2,488 
|
|Total adjustments                                                                      |                          | (5,510 
|
|Net cash provided by operating activities                                              |                          | 14,920 
|Cash flows from investing activities:                                                  |                          |        
|Capital expenditures                                                                   |                          | (30    
|Sale of fixed assets and other assets                                                  |                          | 442    
|Net cash paid for acquisition of Sun Bancorp, Inc.                                     |                          |       
|Investment in unconsolidated subsidiary                                                |                          |       
|
|Net cash provided by (used in) investing activities                                    |                          | 412    
|Cash flows from financing activities:                                                  |                          |        
|Issuance of demand note payable                                                        |                          |       
|Issuance of junior subordinated debt                                                   |                          |       
|Issuance of long-term debt                                                             |                          |       
|Principal payments made on debt                                                        |                          |       
|Dividends paid                                                                         |                          | (15,639
|Net change in interest bearing liabilities                                             |                          | (4     
|Capital contribution to subsidiary                                                     |                          |       
|Tax benefit from preferred stock dividend and stock option activity                    |                          | 279    
|Issuance of common stock                                                               |                          | 4,040  
|Acquisition of treasury stock                                                          |                          | (4,194 
|
|Net cash used in financing activities                                                  |                          | (15,518
|
|Net (decrease) increase in cash and due from banks                                     | $                        | (186   
|
|Cash and due from banks at beginning of period                                         | $                        | 5,069  
|Cash and due from banks at end of period                                               |                          | 4,883  
|
|Net (decrease) increase in cash and due from banks                                     | $                        | (186   
|
|Income taxes paid                                                                      | $                        | 5,650  
|Interest paid                                                                          |                          | 4,098  

|                                                
|------------------------------------------------
|49
Omega Financial Corporation2006 Annual Report

|
|



|27. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the years ended
December 31, 2006 and 2005 follow (in thousands, except per share data):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                          

|                                                        | 2006 Quarter Ended |       
|------------------------------------------------------- | ------------------ | ------
|
|
|
|Total interest income                                   | $                  | 23,042
|Total interest expense                                  |                    | 7,930 
|
|Net interest income                                     |                    | 15,112
|Provision for loan losses                               |                    | 120   
|
|Income from credit activities                           |                    | 14,992
|Other income:                                          
|Service fees                                            |                    | 2,736 
|Securities gains                                        |                    | 62    
|Other income                                            |                    | 3,873 
|Other expenses:                                        
|Salaries and benefits                                   |                    | 7,484 
|Net occupancy expense                                   |                    | 1,105 
|Equipment expense                                       |                    | 1,128 
|Data processing service                                 |                    | 645   
|Other expenses                                          |                    | 4,529 
|
|Income before income taxes                              |                    | 6,772 
|Income tax expense                                      |                    | 1,466 
|
|Net income from continuing operations                   |                    | 5,306 
|Discontinued operations:                               
|Income (loss) from discontinued operations, net of tax  |                    | 37    
|Loss on disposal of discontinued operations, net of tax |                    |      
|
|Income (loss) from discontinued operations              |                    | 37    
|
|Net Income                                              | $                  | 5,343 
|
|Basic earnings per share(2)                             | $                  | 0.42  
|Diluted earnings per share                              |                    | 0.42  

|                                                       |   |       
|------------------------------------------------------ | - | ------
|
|
|
|
|Total interest income                                  | $ | 22,072
|Total interest expense                                 |   | 6,830 
|
|Net interest income                                    |   | 15,242
|Provision for loan losses                              |   | 142   
|
|Income from credit activities                          |   | 15,100
|Other income:                                         
|Service fees                                           |   | 2,452 
|Securities gains                                       |   | 988   
|Other income                                           |   | 4,453 
|Other expenses:                                       
|Salaries and benefits                                  |   | 7,195 
|Net occupancy expense                                  |   | 1,073 
|Equipment expense                                      |   | 1,078 
|Data processing service                                |   | 626   
|Other expenses                                         |   | 4,404 
|
|Income before income taxes                             |   | 8,617 
|Income tax expense                                     |   | 2,040 
|
|Net income from continuing operations                  |   | 6,577 
|Discontinued operations:                              
|Income (loss) from discontinued operations, net of tax |   |      
|
|Income (loss) from discontinued operations             |   |      
|
|Net Income                                             | $ | 6,577 
|
|Basic earnings per share(2)                            | $ | 0.52  
|Diluted earnings per share                             |   | 0.52  

|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | Amounts have been reclassified from amounts previously presented in order to reflect discontinued operations.
|    |                                                                                                              
|(2) | Totals may not sum due to rounding.                                                                          

|  
|--
|50

|
|



|Omega Financial Corporation and Subsidiaries                                                                                                                                                                                                                                                                                                                                          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                      
|Common Stock Market Prices and Dividends
The common stock of Omega Financial Corporation is listed on the
Nasdaq Global Select Market under the symbol OMEF. As of December 31, 2006, the number of shareholders
of record of the Corporations common stock was 4,194.
The following table sets forth, for the periods indicated the high
and low sale prices and dividends declared:
|                                                                                                                                                                                                                                                                                                                                                                                      

|             | 2006 |       | 2005 |  
|------------ | ---- | ----- | ---- | -
|
|
|
|March 31     | $    | 34.21 |      | $
|June 30      |      | 34.10 |      |  
|September 30 |      | 32.38 |      |  
|December 31  |      | 33.50 |      |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|While the Corporation expects to continue its policy of regular quarterly dividend payments, no assurance of future dividend payments can be given. Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital, regulatory requirements and compliance with Trust Preferred Securities agreements. See Notes 12 and 24 of the Notes to Consolidated Financial Statements.
    Stock Performance Graph
    The following graph illustrates the five-year cumulative total return for Omegas Common Stock as compared to The NASDAQ Stock Market Composite Market Index and the Omega Peer Group (described below), assuming an investment of $100 in each on December 31, 2001 and the reinvestment of all dividends.
    
    *Source: SNL Financial LC, Charlottesville, VA. Used with permission. All rights reserved.
    *Omega Financial Peer Group consists of commercial banks headquartered in Pennsylvania with total assets between $1-$5 billion. The Peer Group was compiled by SNL Financial and consists of 9 banking institutions: Citizens & Northern Corporation, Community Banks, Inc., First National Community Bancorp, Inc., Harleysville National Corporation, Leesport Financial Corporation, Pennsylvania Commerce Bancorp, Inc., Royal Bancshares of Pennsylvania, Inc., S&T Bancorp, Inc. and Univest Corporation of Pennsylvania. Management believes that the Peer Group selected provides a meaningful comparison because it represents a group of banking institutions that have similar characteristics as Omega and operate within the same geographic area as Omega.
    Corporate Information
    INVESTMENT CONSIDERATIONS
    In analyzing whether to make, or to continue, an investment in Omega Financial Corporation, investors should consider, among other factors, the information contained in this Annual Report and risk factors and other information more fully described in Omegas Annual Report on Form 10-K for the year ended December 31, 2006, a copy of which can be obtained as described to the right.
    REGISTRAR AND TRANSFER AGENT
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Registrar and Transfer Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10 Commerce Drive                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Cranford, NJ 07016-3572                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|Web site: www.rtco.com                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|E-mail: info@rtco.com                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|Stockholders of record may access their accounts via the Internet
to review account holdings and transaction history through Registrar and Transfer Companys
web site: www.rtco.com.
INFORMATION AVAILABILITY AND ANNUAL REPORT ON FORM 10-K
Information about the Companys financial performance may
be found at www.omegafinancial.com. Earnings releases, dividend announcements and other news releases
are typically available at this site within ten minutes of issuance. Shareholders wishing to receive
e-mail notification each time a news release or corporate event has been posted may arrange to do
so by visiting the web site and following the instructions listed under E-mail Notification.
All reports filed electronically by Omega Financial Corporation
with the United States Securities and Exchange Commission (SEC), including the Annual Report on Form
10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as any amendments
to those reports, are also accessible at no cost on the SECs web site at www.sec.gov.
Additionally, a copy of the Corporations Annual Report on
Form 10-K for the year ended December 31, 2006 will be supplied without charge (except for exhibits)
upon written request. Please direct all inquiries to Mr. David S. Runk, Secretary, 366 Walker Drive,
State College, PA 16801.
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of Omega Financial Corporation
will be held at 10:00 a.m., Monday, April 23, 2007 at Ramada Inn, 1450 South Atherton Street, State
College, PA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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|51
        Omega Financial Corporation2006 Annual Report

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|Omega Financial Corporation and Subsidiaries
|--------------------------------------------
|                                            
|Omega Financial Corporation                 
|BOARD OF DIRECTORS                          
|                                            

|David B. Lee*Chairman*
        Carl H. Baxter*President and owner, 
        Baxter Machine Products, Inc.*
        Maureen M. Bufalino*Senior Vice President and Regional 
        President, Consultant
        Omega Bank* |  | Philip E. Gingerich*Self-employed Real Estate Appraiser and Consultant, Retired*
        Jodi L. Green*Shareholder and Director
        Seligman, Friedman & Company, P.C.
        Certified Public Accountants and Consultants*
        Robert A. Hormell*Assistant Director of Susquehanna Economic Development AssociationCouncil of Governments (SEDA-COG)* |  | Donita R. Koval*President and Chief Executive Officer*
        Stephen M. Krentzman*President and owner, 
        Joe Krentzman & Son, Inc.
        Scrap Processor and Broker*
        D. Stephen Martz*Retired Officer, Omega Financial Corporation*
        Stanton R. Sheetz*President and C.E.O.
        Sheetz, Inc.
        Retail Convenience Stores* |  | Robert A. Szeyller*Retired Managing Partner, 
        Pennsylvania Financial Group, Inc.
        Pension and Insurance Consulting Firm*
        Dennis Van Benthuysen*President and owner, 
        The Colonial Furniture Company*
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                    
|OFFICERS                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                    
|David B. Lee *Chairman* 
      Donita R. Koval *President and Chief Executive Officer*                                                                                                                                       |  | Daniel L. Warfel, CPA *Executive Vice President and
      Chief Financial Officer*
      David S. Runk *Executive Vice President*                                                                                                                                                                                                                                |  | Walter Kay *Chief Information Officer*
      Teresa M. Ciambotti, CFA *Senior Vice President, Corporate Controller and Director of Investor Relations*                                                                                                                                                                                                        |  | Byron Mertz, III *Senior Vice President*
      David N. Thiel *Senior Vice President*                                                                                                                                              
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                    
|Omega BankBOARD OF DIRECTORS                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                    
|David B. Lee, *Chairman*                                                                                                                                                                                                     |  | Allen E. Gibboney, Esq.                                                                                                                                                                                                                                                                                                                                          |  | Frederick J. Kissinger                                                                                                                                                                                                                                                                                                                                        |  | Stanton R. Sheetz                                                                                                                                                                                                                  
|                                                                                                                                                                                                                            
|Carl H. Baxter                                                                                                                                                                                                               |  | Philip E. Gingerich                                                                                                                                                                                                                                                                                                                                              |  | Donita R. Koval                                                                                                                                                                                                                                                                                                                                               |  | Robert A. Szeyller                                                                                                                                                                                                                 
|                                                                                                                                                                                                                            
|Maureen M. Bufalino                                                                                                                                                                                                          |  | Jodi L. Green                                                                                                                                                                                                                                                                                                                                                    |  | Stephen M. Krentzman                                                                                                                                                                                                                                                                                                                                          |  | Dennis Van Benthuysen                                                                                                                                                                                                              
|                                                                                                                                                                                                                            
|Rodney L. Fletcher                                                                                                                                                                                                           |  | Robert A. Hormell                                                                                                                                                                                                                                                                                                                                                |  | D. Stephen Martz                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                    
|OFFICERS                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                    
|David B. Lee *Chairman*
      Donita R. Koval *President and Chief Executive Officer* 
      Daniel L. Warfel, CPA *Executive Vice President, Chief Financial Officer*                                                       |  | David S. Runk *Executive Vice President, Chief Operating Officer*
      Maureen M. Bufalino *Regional President, Wilkes-Barre Region* 
      Bruce R. Erb, CFP, CTFA *Wealth Management President*                                                                                                                                                               |  | Byron Mertz, III *Regional President, Susquehanna Valley Region*
      John R. Franks, Jr. *Executive Vice President, Branch Administration*
      Thomas Bixler *Senior Vice President, Commercial Lending*                                                                                                                                                  |  | Teresa M. Ciambotti, CFA *Senior Vice President, Corporate Controller*
      Gary P. Cook *Bank Capital Services President* 
      David N. Thiel *Senior Vice President*                                                          
|                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                               | 

|MID-PENN INSURANCE ASSOCIATES, INC.             |  | OMEGA FINANCIAL MORTGAGE SOLUTIONS, LLC*
|----------------------------------------------- |  | ----------------------------------------
|                                                |  |                                         
|Daniel R. Geise, *President*                    |  | Steve DiPangrazio, *Vice President*     
|Christopher J. Fellon, *Vice President*         |  |                                         
|                                                |  | *joint venture, not a subsidiary        
|                                                |  |                                         
|BANK CAPITAL SERVICES, SUBSIDIARY OF OMEGA BANK |  |                                         
|                                                |  |                                         
|Gary P. Cook, *President*                       |  |                                         
|                                                |  |                                         

|Corporate Headquarters |  | Investor Information
|---------------------- |  | --------------------

| | Omega Financial Corporation
      366 Walker Drive 
      State College, PA 16801 
      800-494-1810 
      814-231-7680 
      OmegaFinancial.com |  | Teresa Ciambotti, Senior Vice President 
      Director of Investor Relations 
      366 Walker Drive 
      State College, PA 16801 
      800-494-1810 
      814-231-6401 
      tciambotti@omef.com
| | --------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|52

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|366 WALKER DRIVESTATE COLLEGE, PA 16801
www.omegafinancial.com

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