##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___to ___
 Commission File Number: 0-13599
 OMEGA FINANCIAL CORPORATION
  Pennsylvania
    
    25-1420888(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 366 Walker Drive, State College, PA 16801
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o þ o
  o þ
  
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INDEX TO QUARTERLY REPORT ON FORM 10-Q
OMEGA FINANCIAL CORPORATION
 FORWARD LOOKING STATEMENTS DISCLOSURE
    
    
    3PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  June 30, 2007 (unaudited) and December 31, 2006
    
    
    4Consolidated Statements of Income (unaudited)  for the three and six month periods ended June 30, 2007 and 2006
    
    
    6Consolidated Statements of Cash Flows (unaudited)  for the six month periods ended June 30, 2007 and 2006
    
    
    8Notes to the Consolidated Financial Statements (unaudited)
    
    
    10Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34EXHIBIT INDEX
    
    
    35
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Page 3




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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 June 30
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (Note A)AssetsCash and due from banks
    
    $
    59,595
    
    
    $
    56,225Interest bearing deposits with other banks
    
    
    10,553
    
    
    
    12,073Trading securities
    
    
    57
    
    
    
    48Investment securities available for sale
    
    
    285,290
    
    
    
    291,807Other investments
    
    
    12,193
    
    
    
    12,087Investment in unconsolidated subsidiary
    
    
    1,625
    
    
    
    1,625Loans held for sale
    
    
    
    
    
    
    204Total portfolio loans
    
    
    1,144,029
    
    
    
    1,152,188Less: Allowance for loan losses
    
    
    (12,831
    )
    
    
    (17,344
    )Net portfolio loans
    
    
    1,131,198
    
    
    
    1,134,844Premises and equipment, net
    
    
    29,777
    
    
    
    30,861Other real estate owned
    
    
    945
    
    
    
    512Bank-owned life insurance
    
    
    77,627
    
    
    
    76,341Investment in limited partnerships
    
    
    5,404
    
    
    
    5,763Core deposit intangibles
    
    
    5,273
    
    
    
    5,641Other intangibles
    
    
    1,030
    
    
    
    1,085Goodwill
    
    
    159,408
    
    
    
    159,387Other assets
    
    
    27,479
    
    
    
    27,315TOTAL ASSETS
    
    $
    1,807,454
    
    
    $
    1,815,818
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 June 30
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (Note A)Liabilities and Shareholders EquityDeposits:Non-interest bearing
    
    $
    234,332
    
    
    $
    232,335Interest bearing
    
    
    1,082,752
    
    
    
    1,093,428Total deposits
    
    
    1,317,084
    
    
    
    1,325,763Short-term borrowings
    
    
    65,382
    
    
    
    65,712ESOP debt
    
    
    1,288
    
    
    
    1,481Junior subordinated debentures
    
    
    55,944
    
    
    
    56,193Long-term debt
    
    
    27,167
    
    
    
    27,877Other interest bearing liabilities
    
    
    869
    
    
    
    858Other liabilities
    
    
    11,977
    
    
    
    12,723TOTAL LIABILITIES
    
    
    1,479,711
    
    
    
    1,490,607Shareholders EquityPreferred stock, par value $5.00 per share:Authorized - 5,000,000 shares, none issuedCommon stock, par value $5.00 per share:Authorized - 25,000,000 shares;Issued -12,860,658 shares at June 30, 2007;12,823,471 shares at December 31, 2006Outstanding -12,626,042 shares at June 30, 2007;12,622,802 shares at December 31, 2006
    
    
    64,319
    
    
    
    64,133Capital surplus
    
    
    103,973
    
    
    
    103,149Retained earnings
    
    
    167,391
    
    
    
    164,653Accumulated other comprehensive (loss) income
    
    
    (86
    )
    
    
    313Unearned compensation related to ESOP debt
    
    
    (716
    )
    
    
    (859
    )Cost of common stock in treasury:234,616 shares at June 30, 2007;200,669 shares at December 31, 2006
    
    
    (7,138
    )
    
    
    (6,178
    )TOTAL SHAREHOLDERS EQUITY
    
    
    327,743
    
    
    
    325,211TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,807,454
    
    
    $
    1,815,818
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest Income:Interest and fees on loans
    
    $
    19,900
    
    
    $
    20,372
    
    
    $
    39,723
    
    
    $
    40,209Interest and dividends on investment securities
    
    
    3,482
    
    
    
    3,077
    
    
    
    6,827
    
    
    
    6,181Other interest income
    
    
    141
    
    
    
    241
    
    
    
    313
    
    
    
    342TOTAL INTEREST INCOME
    
    
    23,523
    
    
    
    23,690
    
    
    
    46,863
    
    
    
    46,732Interest Expense:Interest on deposits
    
    
    6,647
    
    
    
    6,409
    
    
    
    13,099
    
    
    
    12,304Interest on short-term borrowings
    
    
    676
    
    
    
    663
    
    
    
    1,399
    
    
    
    1,434Interest on long-term debt and
other interest bearing liabilities
    
    
    1,256
    
    
    
    1,248
    
    
    
    2,497
    
    
    
    2,512TOTAL INTEREST EXPENSE
    
    
    8,579
    
    
    
    8,320
    
    
    
    16,995
    
    
    
    16,250NET INTEREST INCOME
    
    
    14,944
    
    
    
    15,370
    
    
    
    29,868
    
    
    
    30,482Provision for loan losses
    
    
    745
    
    
    
    100
    
    
    
    1,355
    
    
    
    220INCOME FROM CREDIT ACTIVITIES
    
    
    14,199
    
    
    
    15,270
    
    
    
    28,513
    
    
    
    30,262Other Income:Service fees on deposit accounts
    
    
    2,654
    
    
    
    2,598
    
    
    
    5,051
    
    
    
    4,952Service fees on loans
    
    
    430
    
    
    
    443
    
    
    
    757
    
    
    
    825Earnings on bank-owned life insurance
    
    
    646
    
    
    
    552
    
    
    
    1,286
    
    
    
    1,159Trust fees
    
    
    1,101
    
    
    
    1,025
    
    
    
    2,194
    
    
    
    2,145Investment and insurance product sales
    
    
    701
    
    
    
    618
    
    
    
    1,552
    
    
    
    1,542(Loss) gain on sale of loans and other assets
    
    
    (48
    )
    
    
    64
    
    
    
    30
    
    
    
    121Net (loss) gain on the sale of investment securities
    
    
    (37
    )
    
    
    176
    
    
    
    338
    
    
    
    238Other
    
    
    1,291
    
    
    
    1,215
    
    
    
    2,659
    
    
    
    2,381TOTAL OTHER INCOME
    
    
    6,738
    
    
    
    6,691
    
    
    
    13,867
    
    
    
    13,363Other Expense:Salaries and employee benefits
    
    
    6,882
    
    
    
    7,308
    
    
    
    14,099
    
    
    
    14,793Net occupancy expense
    
    
    1,096
    
    
    
    1,083
    
    
    
    2,151
    
    
    
    2,188Equipment expense
    
    
    1,195
    
    
    
    1,143
    
    
    
    2,330
    
    
    
    2,271Data processing service
    
    
    599
    
    
    
    673
    
    
    
    1,209
    
    
    
    1,318Pennsylvania shares tax
    
    
    786
    
    
    
    728
    
    
    
    1,572
    
    
    
    1,440Amortization of intangible assets
    
    
    212
    
    
    
    222
    
    
    
    423
    
    
    
    443Other
    
    
    3,634
    
    
    
    3,870
    
    
    
    6,668
    
    
    
    7,449TOTAL OTHER EXPENSE
    
    
    14,404
    
    
    
    15,027
    
    
    
    28,452
    
    
    
    29,902Income before income taxes and discontinued operations
    
    
    6,533
    
    
    
    6,934
    
    
    
    13,928
    
    
    
    13,723Income tax expense
    
    
    1,570
    
    
    
    1,568
    
    
    
    3,382
    
    
    
    3,051Income from continuing operations
    
    
    4,963
    
    
    
    5,366
    
    
    
    10,546
    
    
    
    10,672Discontinued operations:Income from discontinued operations, net of tax
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    162Loss on disposal of discontinued operations, net of tax
    
    
    
    
    
    
    (146
    )
    
    
    
    
    
    
    (146
    )(Loss) income from discontinued operations
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    16NET INCOME
    
    $
    4,963
    
    
    $
    5,345
    
    
    $
    10,546
    
    
    $
    10,688
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Net income per common shareBasic
    
    $
    0.39
    
    
    $
    0.43
    
    
    $
    0.83
    
    
    $
    0.85Diluted
    
    $
    0.39
    
    
    $
    0.42
    
    
    $
    0.83
    
    
    $
    0.85Net income per common share from continuing operationsBasic
    
    $
    0.39
    
    
    $
    0.43
    
    
    $
    0.83
    
    
    $
    0.85Diluted
    
    $
    0.39
    
    
    $
    0.43
    
    
    $
    0.83
    
    
    $
    0.85Net income (loss) per common share
from discontinued operationsBasic
    
    $
    0.00
    
    
    $
    (0.00
    )
    
    $
    0.00
    
    
    $
    0.00Diluted
    
    $
    0.00
    
    
    $
    (0.00
    )
    
    $
    0.00
    
    
    $
    0.00Weighted average shares and equivalentsBasic
    
    
    12,624
    
    
    
    12,572
    
    
    
    12,630
    
    
    
    12,579Diluted
    
    
    12,641
    
    
    
    12,616
    
    
    
    12,650
    
    
    
    12,624Dividends declared per shareCommon
    
    $
    0.31
    
    
    $
    0.31
    
    
    $
    0.62
    
    
    $
    0.62
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    10,546
    
    
    $
    10,688Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,696
    
    
    
    2,516Provision for loan losses and off-balance sheet reserve
    
    
    1,387
    
    
    
    232Gain on sale of investment securities
    
    
    (338
    )
    
    
    (238
    )Gain on sale of fixed assets and other property owned
    
    
    (14
    )
    
    
    (81
    )Provision for deferred income tax
    
    
    1,737
    
    
    
    1,065Increase in cash surrender value of bank owned life insurance
    
    
    (1,286
    )
    
    
    (1,160
    )Increase in interest receivable and other assets
    
    
    (354
    )
    
    
    (802
    )(Decrease) increase in interest payable
    
    
    (111
    )
    
    
    138(Decrease) increase in taxes payable
    
    
    (1,264
    )
    
    
    150Amortization of deferred loan fees, net
    
    
    (165
    )
    
    
    (172
    )Deferral of net loan fees
    
    
    75
    
    
    
    99Decrease in accounts payable and accrued expenses
    
    
    (900
    )
    
    
    (1,165
    )Total adjustments
    
    
    1,463
    
    
    
    582Net cash provided by operating activities
    
    
    12,009
    
    
    
    11,270Cash flows from investing activities:Investment securities available for sale:Proceeds from sales
    
    
    560
    
    
    
    18,615Proceeds from maturities
    
    
    84,752
    
    
    
    30,309Cash used for purchases
    
    
    (79,034
    )
    
    
    (22,562
    )Proceeds from sale of Trading Account
    
    
    
    
    
    
    435Net change in interest bearing deposits with other banks
    
    
    1,520
    
    
    
    (1,256
    )Decrease in loans and leases
    
    
    825
    
    
    
    18,175Gross proceeds from sale of loans and leases
    
    
    1,088
    
    
    
    2,312Return of capital (investment) in limited partnership
    
    
    (45
    )
    
    
    32Capital expenditures
    
    
    (830
    )
    
    
    (1,150
    )Sale of fixed assets and other property owned
    
    
    268
    
    
    
    195(Increase) in federal funds sold
    
    
    
    
    
    
    (16,275
    )Net cash provided by investing activities
    
    
    9,104
    
    
    
    28,830Cash flows from financing activities:Net change in demand deposits, checking with interest and savings
    
    
    3,731
    
    
    
    (19,402
    )Net Change in time deposits
    
    
    (12,659
    )
    
    
    18,027Decrease in short-term borrowings, net
    
    
    (330
    )
    
    
    (29,819
    )Issuance of long term debt
    
    
    5,000
    
    
    
    1,500Principal payment on long term debt
    
    
    (5,710
    )
    
    
    (667
    )Net change in other interest bearing liabilities
    
    
    11
    
    
    
    (57
    )Dividends paid
    
    
    (7,836
    )
    
    
    (7,830
    )Issuance of common stock
    
    
    1,010
    
    
    
    2,145Acquisition of treasury stock
    
    
    (960
    )
    
    
    (4,194
    )Net cash used in financing activities
    
    
    (17,743
    )
    
    
    (40,297
    )Net increase (decrease) in cash and cash equivalents
    
    $
    3,370
    
    
    $
    (197
    )
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2007
    
    
    2006Cash and cash equivalents at beginning of period
    
    $
    56,225
    
    
    $
    56,194Cash and cash equivalents at end of period
    
    
    59,595
    
    
    
    55,997Net increase (decrease) in cash and cash equivalents
    
    $
    3,370
    
    
    $
    (197
    )Supplemental InformationInterest paid
    
    $
    17,106
    
    
    $
    16,121Income taxes paid
    
    
    2,884
    
    
    
    2,094Supplemental schedule of noncash investing and financing activities:Transfers of loans to other real estate owned
    
    $
    645
    
    
    $
    531
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
   A.
    
    Basis of PresentationThe accompanying Consolidated Financial Statements include Omega Financial Corporation
(Omega, the Company or the Corporation), a financial holding company, and the combined
results of its wholly owned banking and non-banking subsidiaries. The accompanying unaudited
financial statements have been prepared in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete annual financial
statements. In the opinion of management, all adjustments, including normal recurring
accruals, considered necessary for a fair presentation have been included. Operating
results for the three and six months ended June 30, 2007 are not necessarily indicative of
the results that may be experienced for the fiscal year ending December 31, 2007 or any
other interim period. The consolidated balance sheet as of December 31, 2006 has been
derived from the audited financial statements included in the Companys 2006 Annual Report
on Form 10-K. For further information, refer to the Consolidated Financial Statements and
notes there to included in the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2006.B.
    
    Significant Accounting PoliciesThe following significant accounting policies should be read in conjunction with the summary
of Significant Accounting Policies included in the notes to consolidated financial
statements included in the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2006.Allowance for loan lossesFor 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.Goodwill and other intangible assetsGoodwill 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 unit 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.Stock-based compensationOmega has six stock-based compensation plans, which provide for the granting of stock
options and other stock-based awards to both employees and/or 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).
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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. Omega granted stock awards in the first quarter of 2007; however, all
compensation expense related to these awards was reversed in the second quarter because
management believes it is now unlikely that performance conditions for these awards will be
met in 2007.The ESPP provides for the grant of options to purchase common stock of Omega to all
employees of Omega and its subsidiaries who meet certain service requirements. ESPP options
outstanding at June 30, 2007 have a current weighted-average exercise price of $31.15 and a
weighted average remaining contractual life of 1.80 years. There were 88,162 options
outstanding under the ESPP as of June 30, 2007 and all of these options are exercisable.The 1986 Plan, the 1996 Plan and the 2006 Plan (collectively, the SOPs or the Plans)
provide for the grant of options to purchase common stock of Omega to officers and key
employees of Omega. 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. The SOPs options outstanding
at June 30, 2007 had a weighted average exercise price of $33.14 and a weighted average
remaining contractual life of 4.21 years. As of June 30, 2007, there were 405,041 options
outstanding under the SOPs and all are exercisable. In 2007, 2,553 restricted stock units
were issued under the 2006 Plan.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. Options outstanding under the Director Plans at June 30, 2007 had a weighted
average exercise price of $32.60 and an average remaining contractual life of 4.76 years.
As of June 30, 2007, 21,572 of these options were outstanding and exercisable.A summary of the status of Omegas stock-based compensation plans as of June 30, 2007 is
presented below:
 ESPP
    
    SOPsWeighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding, December 31, 2006
    
    
    107,284
    
    
    $
    31.85
    
    
    
    455,887
    
    
    $
    32.94Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (12,269
    )
    
    
    26.18
    
    
    
    (24,918
    )
    
    
    27.64Forfeited
    
    
    (6,853
    )
    
    
    31.59
    
    
    
    (25,928
    )
    
    
    34.91Outstanding, June 30, 2007
    
    
    88,162
    
    
    $
    31.15
    
    
    
    405,041
    
    
    $
    33.14Options exercisable at June 30, 2007
    
    
    88,162
    
    
    
    
    
    
    
    405,041
 Director PlansWeighted-AverageExerciseShares
    
    PriceOutstanding, December 31, 2006
    
    
    23,264
    
    
    $
    32.31Granted
    
    
    Exercised
    
    
    Forfeited
    
    
    (1,692
    )
    
    
    28.67Outstanding, June 30, 2007
    
    
    21,572
    
    
    $
    32.60Options exercisable at June 30, 2007
    
    
    21,572
 Page 11




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##### 



The following table summarized information about Restricted Stock Unit (RSU) activity for the
six months ended June 30, 2007:
 WeightedNumber of
    
    
    AverageRestricted
    
    
    Grant DateStock
    
    
    Fair ValueUnits
    
    
    Per ShareNon-vested at December 31, 2006
    
    
    
    
    
    $
    Awarded
    
    
    2,553
    
    
    
    28.59Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Non-vested at June 30, 2007
    
    
    2,553
    
    
    $
    28.59
 During the second quarter of 2007, management adjusted current year compensation expense to zero
related to the non-vested RSUs granted in 2007 because, based on managements current
expectations, it is not probable that the performance conditions will be met. If the performance
conditions are met, total compensation expense related to these RSUs would be $73,000.C.
    
    Discontinued OperationsOn September 15, 2006, the Corporation completed the sale of Sentry Trust Company, a
non-depository trust company. The results of Sentry Trust are presented as discontinued
operations on the consolidated statements of income. The following is a summary of the
income from discontinued operations for the three and six months ended June 30, 2006 (in
thousands):
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2006Other Income:Trust fees
    
    $
    509
    
    
    $
    972Investment and insurance product sales
    
    
    14
    
    
    
    36Other
    
    
    
    
    
    
    Total other Income
    
    
    523
    
    
    
    1,008Other expense:Salaries and employee benefits
    
    
    170
    
    
    
    439Net occupancy expense
    
    
    3
    
    
    
    8Equipment expense
    
    
    10
    
    
    
    21Pennsylvania shares tax
    
    
    20
    
    
    
    41Amortization of intangible assets
    
    
    34
    
    
    
    74Other
    
    
    96
    
    
    
    176Total other expense
    
    
    333
    
    
    
    759Income from discontinued operations before taxes and disposal
    
    
    190
    
    
    
    249Income tax expense
    
    
    65
    
    
    
    87Income from discontinued operations before loss on disposal
    
    
    125
    
    
    
    162Gain on disposal of discontinued operations
    
    
    425
    
    
    
    425Income tax expense
    
    
    571
    
    
    
    571Income (loss) from disposal of discontinued operations
    
    
    (146
    )
    
    
    (146
    )Income (loss) from discontinued operations
    
    $
    (21
    )
    
    $
    16
 Page 12




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##### 



The following is a summary of the cash flows from discontinued operations for the six months
ended June 30, 2006 (in thousands):
 Six Months EndedJune 30, 2006Net cash provided by (used in) operating activities
    
    $
    36Net cash provided by (used in) investing activities
    
    
    (342
    )Net cash provided by (used in) financing activities
    
    
    0Net decrease in cash and cash equivalents of discontinued operations
    
    $
    (306
    )
 D.
    
    Commitments, Contingent Liabilities and GuaranteesThe 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, and standby letters of credit.Standby letters of credit are instruments issued by the Corporations bank subsidiary that
guarantee the beneficiary payment by the bank in the event of default by the banks customer
in the non-performance of an obligation or service. Most standby letters of credit are
issued for one-year periods. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers. The bank
holds collateral supporting those commitments for which collateral is deemed necessary. At
June 30, 2007, standby letters of credit issued and outstanding amounted to $30.7 million
compared to $29.9 million on December 31, 2006. The fair market value of the standby letters
of credit at both June 30, 2007 and December 31, 2006 was $0.2 million. The fair market
value of standby letters of credit is recorded as a liability in accordance with FIN 45.At June 30, 2007, the bank had $284.6 million outstanding in loan commitments and other
unused lines of credit extended to its customers. Of this amount $206.7 million, or 72.6%,
were commercial commitments. The remaining amounts of $77.9 million were commitments to
consumers for mortgage and home equity loans and personal lines of credit.Omegas Employee Stock Ownership Plan (ESOP) incurred debt in 1990 of $5.0 million, which
is collateralized by a mortgage on the Corporations administrative center and the
Corporations guarantee. As of June 30, 2007, the balance of the ESOP debt was $1.3 million
as compared to $1.5 million at December 31, 2006.E.
    
    Investment SecuritiesThe following schedule presents the composition of the investment portfolio as of June 30,
2007 and December 31, 2006 (in thousands):
 Securities Classified as Available for SaleGross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketJune 30, 2007
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    189,522
    
    
    $
    36
    
    
    $
    (1,233
    )
    
    $
    188,325Obligations of state and political subdivisions
    
    
    4,905
    
    
    
    
    
    
    
    (46
    )
    
    
    4,859Corporate and other securities
    
    
    2,575
    
    
    
    7
    
    
    
    (19
    )
    
    
    2,563Mortgage-backed securities
    
    
    82,353
    
    
    
    32
    
    
    
    (1,200
    )
    
    
    81,185Common Stock
    
    
    6,087
    
    
    
    2,282
    
    
    
    (11
    )
    
    
    8,358Total
    
    $
    285,442
    
    
    $
    2,357
    
    
    $
    (2,509
    )
    
    $
    285,290
 Page 13




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##### 



Securities Classified as Available for SaleGross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketDecember 31, 2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    188,205
    
    
    $
    102
    
    
    $
    (1,327
    )
    
    $
    186,980Obligations of state and political subdivisions
    
    
    4,540
    
    
    
    2
    
    
    
    (46
    )
    
    
    4,496Corporate and other securities
    
    
    3,257
    
    
    
    7
    
    
    
    (25
    )
    
    
    3,239Mortgage-backed securities
    
    
    90,377
    
    
    
    111
    
    
    
    (1,129
    )
    
    
    89,359Common Stock
    
    
    4,947
    
    
    
    2,805
    
    
    
    (19
    )
    
    
    7,733Total
    
    $
    291,326
    
    
    $
    3,027
    
    
    $
    (2,546
    )
    
    $
    291,807
 The following table shows gross unrealized losses and fair value, aggregated by category and
length of time that individual investment securities have been in a continuous unrealized
loss position, at June 30, 2007 and December 31, 2006 (in thousands):
 Less Than 12 Months
    
    
    12 Months or LongerFair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedJune 30, 2007
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    105,931
    
    
    $
    (653
    )
    
    $
    67,229
    
    
    $
    (580
    )Obligations of state and political subdivisions
    
    
    3,882
    
    
    
    (28
    )
    
    
    977
    
    
    
    (18
    )Corporate and other securities
    
    
    549
    
    
    
    (2
    )
    
    
    1,393
    
    
    
    (17
    )Mortgage-backed securities
    
    
    26,373
    
    
    
    (140
    )
    
    
    51,047
    
    
    
    (1,060
    )Debt securities
    
    
    136,735
    
    
    
    (823
    )
    
    
    120,646
    
    
    
    (1,675
    )Common stock
    
    
    207
    
    
    
    (7
    )
    
    
    20
    
    
    
    (4
    )Total temporarily impaired securities
    
    $
    136,942
    
    
    $
    (830
    )
    
    $
    120,666
    
    
    $
    (1,679
    )
 Less Than 12 Months
    
    
    12 Months or LongerFair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDecember 31, 2006
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    25,512
    
    
    $
    (96
    )
    
    $
    136,818
    
    
    $
    (1,231
    )Obligations of state and political subdivisions
    
    
    1,178
    
    
    
    (17
    )
    
    
    1,316
    
    
    
    (29
    )Corporate and other securities
    
    
    102
    
    
    
    (2
    )
    
    
    1,586
    
    
    
    (23
    )Mortgage-backed securities
    
    
    17,283
    
    
    
    (42
    )
    
    
    56,078
    
    
    
    (1,087
    )Debt securities
    
    
    44,075
    
    
    
    (157
    )
    
    
    195,798
    
    
    
    (2,370
    )Common stock
    
    
    144
    
    
    
    (19
    )
    
    
    
    
    
    
    Total temporarily impaired securities
    
    $
    44,219
    
    
    $
    (176
    )
    
    $
    195,798
    
    
    $
    (2,370
    )
 Page 14




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##### 



The unrealized losses at June 30, 2007 are considered to be temporary, as the majority of
the investments are debt securities whose decline in value is due primarily to interest rate
fluctuations. As a result, management believes the payment of contractual cash flows,
including principal repayment, is not at risk. Management has the intent and ability to hold
these investments until market recovery or maturity. Debt securities with unrealized losses
for a period of less than 12 months include 33 investments in U.S. Government agency debt
securities, 12 investments in mortgage-backed securities, 4 investments in corporate
securities and 5 investments in obligations of state and municipal subdivisions. Debt
securities with unrealized losses for a period of 12 months or longer include 28 investments
in U.S. Government agency debt securities, 9 investments in corporate securities, 4
investments in obligations of state and municipal subdivisions and 35 investments in
mortgage-backed securities. Debt securities included in the above table have maturity or
pre-refund dates ranging from July 2007 to September 2022. The unrealized loss position for
each individual security ranges from .01% to 4.36% of the securities amortized cost as of
June 30, 2007. The Corporation has no debt securities in its investment portfolio which
provide exposure to the sub-prime mortgage market.Common stock with unrealized losses for a period of less than 12 months includes 2
investments. Unrealized losses on common stock for a period over 12 months reflect one
investment, which has been at an unrealized loss for 15 months. At this time, management
believes the impairment of this investment is temporary.Omegas policy requires quarterly reviews of all impaired securities. This review includes
analyzing the length of the time and the extent to which the market value has been less than
cost, the financial condition and near-term prospects of the Company, 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.Trading securities consist of assets held in Rabbi Trusts, including mutual funds and cash
equivalents.Other investments primarily include Federal Reserve Bank and Federal Home Loan Bank stock.F.
    
    Allowance for Loan LossesAt June 30, 2007, $1.8 million of the total allowance for loan losses of $12.8 million was
specifically allocated to one large commercial borrower who emerged from bankruptcy
reorganization in May 2007. This represents a decrease of $3.5 million in the amount
allocated to this lending relationship, from $5.3 million at December 31, 2006. As part of
the bankruptcy reorganization, $4.4 million in loans to this borrower were charged off,
resulting in $14.2 million in outstanding loans for this borrower as of June 30, 2007.
Omega has estimated and provided for probable losses related to this credit, however,
evaluations of this credit are ongoing. Further developments and the resultant analysis may
cause Omegas allocation to change in the future, and actual losses resulting from this
credit may differ significantly from current estimates.Based on the results of our analysis of the allowance for loan losses at June 30, 2007,
management believes that the allowance is adequate to provide for probable losses inherent
in the portfolio.G.
    
    Long-term DebtThe following schedule shows the composition of long-term debt (in thousands):
 June 30,
    
    
    December 31,2007
    
    
    2006Notes payable to Federal Home Loan Bank, with fixed rates
between 3.875% and 6.800%
    
    $
    27,167
    
    
    $
    27,877Total Long Term Debt
    
    $
    27,167
    
    
    $
    27,877ESOP Debt Guarantee
    
    $
    1,288
    
    
    $
    1,481
 Page 15




---



##### 



H.
    
    Junior Subordinated Debt and Trust Preferred SecuritiesThe following schedule shows the composition of junior subordinated debt and trust preferred
securities (in thousands):
 As of June 30, 2007Capital Trust I
    
    Sun Trust ITrust preferred securities
    
    $
    36,000
    
    
    $
    16,500Common securities
    
    
    1,114
    
    
    
    511Junior subordinated debt
    
    
    37,114
    
    
    
    18,830Stated maturity date
    
    
    10/18/2034
    
    
    
    2/22/2031Optional redemption date
    
    
    10/18/2009
    
    
    Annuallybeginning2/22/2011At variousredemption  
      pricesRate
    
    5.98% until
    
    
    8.64
    %October 2009,then LIBORplus 219basis points
 I.
    
    Comprehensive IncomeComponents of other comprehensive income consist of the following (in thousands):
 Three Months June 30, 2007
    
    
    Three Months June 30, 2006Before
    
    
    Tax Expense
    
    
    
    
    
    
    Before
    
    
    Tax ExpenseTax
    
    
    or
    
    
    Net-of-Tax
    
    
    Tax
    
    
    or
    
    
    Net-of-TaxAmount
    
    
    (Benefit)
    
    
    Amount
    
    
    Amount
    
    
    (Benefit)
    
    
    AmountNet income from
continuing operations
    
    $
    6,533
    
    
    $
    1,570
    
    
    $
    4,963
    
    
    $
    6,934
    
    
    $
    1,568
    
    
    $
    5,366Net income (loss) from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    615
    
    
    
    636
    
    
    
    (21
    )Net income
    
    
    6,533
    
    
    
    1,570
    
    
    
    4,963
    
    
    
    7,549
    
    
    
    2,204
    
    
    
    5,345Other comprehensive income:Unrealized gains (losses) on available
for sale securities :Unrealized holding gains
(losses) arising during the
period
    
    
    (889
    )
    
    
    (311
    )
    
    
    (578
    )
    
    
    (524
    )
    
    
    (183
    )
    
    
    (341
    )Less reclassification adjustment
for gain (loss) included in
net income
    
    
    37
    
    
    
    13
    
    
    
    24
    
    
    
    (176
    )
    
    
    (62
    )
    
    
    (114
    )Other comprehensive income (loss)
    
    
    (852
    )
    
    
    (298
    )
    
    
    (554
    )
    
    
    (700
    )
    
    
    (245
    )
    
    
    (455
    )Total comprehensive income
    
    $
    5,681
    
    
    $
    1,272
    
    
    $
    4,409
    
    
    $
    6,849
    
    
    $
    1,959
    
    
    $
    4,890
 Page 16




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##### 



Six Months June 30, 2007
    
    
    Six Months June 30, 2006Before
    
    
    Tax Expense
    
    
    
    
    
    
    Before
    
    
    Tax ExpenseTax
    
    
    or
    
    
    Net-of-Tax
    
    
    Tax
    
    
    or
    
    
    Net-of-TaxAmount
    
    
    (Benefit)
    
    
    Amount
    
    
    Amount
    
    
    (Benefit)
    
    
    AmountNet income from
continuing operations
    
    $
    13,928
    
    
    $
    3,382
    
    
    $
    10,546
    
    
    $
    13,723
    
    
    $
    3,051
    
    
    $
    10,672Net income from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    674
    
    
    
    658
    
    
    
    16Net income
    
    
    13,928
    
    
    
    3,382
    
    
    
    10,546
    
    
    
    14,397
    
    
    
    3,709
    
    
    
    10,688Other comprehensive income:Unrealized gains (losses)
on available for sale
securities :Unrealized holding
losses arising during
the period
    
    
    (296
    )
    
    
    (104
    )
    
    
    (192
    )
    
    
    (1,005
    )
    
    
    (352
    )
    
    
    (653
    )Less reclassification
for (gains) included in
net income
    
    
    (338
    )
    
    
    (118
    )
    
    
    (220
    )
    
    
    (238
    )
    
    
    (83
    )
    
    
    (155
    )Other comprehensive income
(loss)
    
    
    (634
    )
    
    
    (222
    )
    
    
    (412
    )
    
    
    (1,243
    )
    
    
    (435
    )
    
    
    (808
    )Total comprehensive income
    
    $
    13,294
    
    
    $
    3,160
    
    
    $
    10,134
    
    
    $
    13,154
    
    
    $
    3,274
    
    
    $
    9,880
 J.
    
    Earnings Per ShareBasic earnings per share are computed by dividing income available to common stockholders by
the weighted average number of shares outstanding for the period. On a diluted basis, shares
outstanding are adjusted to assume the conversion of all potentially dilutive securities
into common stock (in thousands, except per share amounts.)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006NumeratorIncome from continuing operations
    
    $
    4,963
    
    
    $
    5,366
    
    
    $
    10,546
    
    
    $
    10,672Income (loss) from discontinued operations
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    16Net income
    
    $
    4,963
    
    
    $
    5,345
    
    
    $
    10,546
    
    
    $
    10,688DenominatorBasic weighted-average shares outstanding
    
    
    12,624
    
    
    
    12,572
    
    
    
    12,631
    
    
    
    12,579Dilutive potential shares from stock-basked compensation
    
    
    13
    
    
    
    40
    
    
    
    15
    
    
    
    41Potential shares required for contract settlement
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Dilutive weighted-average shares outstanding
    
    
    12,641
    
    
    
    12,616
    
    
    
    12,650
    
    
    
    12,624Earnings per share  BasicIncome from continuing operations
    
    $
    0.39
    
    
    $
    0.43
    
    
    $
    0.83
    
    
    $
    0.85Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    0.39
    
    
    $
    0.43
    
    
    $
    0.83
    
    
    $
    0.85Earnings per share  DilutedIncome from continuing operations
    
    $
    0.39
    
    
    $
    0.43
    
    
    $
    0.83
    
    
    $
    0.85Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (1)
    
    $
    0.39
    
    
    $
    0.42
    
    
    $
    0.83
    
    
    $
    0.85
 
 (1)
    
    Total may not sum due to rounding. Page 17




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##### 



K.
    
    Goodwill and Other Intangible AssetsThe recorded goodwill balance at June 30, 2007 was $159.4 million. A summary of intangible
assets at June 30, 2007 and December 31, 2006 follows (in thousands):
 June 30,
    
    December 31,2007
    
    2006Core deposit intangible:Gross carrying amount
    
    $
    7,480
    
    
    $
    7,480Less: accumulated amortization
    
    
    2,207
    
    
    
    1,839Net carrying amount
    
    
    5,273
    
    
    
    5,641Customer relationship intangibles:Gross carrying amount
    
    
    1,200
    
    
    
    1,200Less: accumulated amortization
    
    
    300
    
    
    
    245Net carrying amount
    
    
    900
    
    
    
    955Total finite-lived intangibles:Gross carrying amount
    
    
    8,680
    
    
    
    8,680Less: accumulated amortization
    
    
    2,507
    
    
    
    2,084Net carrying amount
    
    
    6,173
    
    
    
    6,596Trade name intangible with infinite life:Gross carrying amount
    
    $
    130
    
    
    $
    130
 L.
    
    New Accounting PronouncementsIn 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 its consolidated financial
condition, results of operations or cash flows.In September 2006, the FASB issued SFAS 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. Management has not yet completed the
analysis to determine the impact of adoption on the Companys financial statements.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, which permits entities to choose to measure eligible financial
instruments and certain other items at fair value that are not currently required to be
measured at fair value. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings at each subsequent reporting date. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company will consider
adopting this pronouncement in the first quarter of 2008 and is currently evaluating the
impact of this pronouncement on its consolidated financial condition, results of operations,
and cash flows.
 Page 18




---



##### 



M.
    
    Implementation of FIN 48The Company adopted the provisions of FIN 48 Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, as of January 1, 2007. As a result of implementing
FIN 48, the Company completed a comprehensive review of its portfolio of uncertain tax
positions in accordance with recognition standards established by FIN 48. In this regard, an
uncertain tax position represents the Companys expected treatment of a tax position taken
in a filed tax return, or planned to be taken in a future tax return, that has not been
reflected in measuring income tax expense for financial reporting purposes. As a result of
this review, the Company adjusted the estimated value of its uncertain tax positions by
recognizing additional liabilities totaling $0.03 million through a charge to retained
earnings, and increased the carrying value of uncertain tax positions resulting from prior
acquisitions by $0.02 million through an increase of goodwill. Upon the adoption of FIN 48,
the estimated value of the Companys uncertain tax positions is a liability of $0.37 million
resulting from unrecognized net tax benefits. The liability for uncertain tax positions is
carried in other liabilities in the consolidated condensed statement of financial position
as of June 30, 2007. If the Companys positions are sustained by the taxing authority in
favor of the Company, approximately $0.33 million would be treated as a reduction of
goodwill, and the balance of $0.04 million would reduce the Companys effective tax rate.
The Company does not expect material changes to the estimated amount of liability associated
with its uncertain tax positions through January 1, 2008.The Company recognizes accrued interest and penalties related to uncertain tax positions in
other expenses on its consolidated statements of income. As of January 1, 2007, the Company
did not accrue any penalties and had accrued approximately $0.04 million for the payment of
tax-related interest.The Company files federal income tax returns and various state income tax returns. The
Company is no longer subject to examination by U.S. Federal taxing authorities for years
before 2002 and for all state income taxes through 2000. For the six months ended June 30,
2007, there were no material changes to the liability for uncertain tax positions other than
to accrue an additional $0.01 million for interest expense.In May 2007, the FASB issued FASB Staff Position (FSP) FIN 48-1 Definition of Settlement
in FASB Interpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to
determine whether a tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1,
2007. Adoption of this standard did not have a material impact on our consolidated
financial position or results of operations.
 Page 19




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##### 



OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Investment Considerations
  Application of Critical Accounting Policies and Estimates
    
 Page 20




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##### 



1. Operations Overview
 A. Three Months Ended June 30, 2007 and 2006
    B. Six Months Ended June 30, 2007 and 2006
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    2006
    
    
    2007
    
    2006Return on average assets*
    
    
    1.10
    %
    
    
    1.12
    %
    
    
    
    1.17
    %
    
    
    1.12
    %Return on average tangible assets*
    
    
    1.21
    
    
    
    1.23
    
    
    
    
    1.29
    
    
    
    1.23Return on average stated equity*
    
    
    6.01
    
    
    
    6.64
    
    
    
    
    6.39
    
    
    
    6.65Return on average tangible equity*
    
    
    12.07
    
    
    
    14.06
    
    
    
    
    12.87
    
    
    
    14.09Dividend payout ratio
    
    
    78.84
    
    
    
    72.78
    
    
    
    
    74.21
    
    
    
    72.80Average equity to average assets (stated)
    
    
    18.34
    
    
    
    16.86
    
    
    
    
    18.31
    
    
    
    16.81Average equity to average assets (tangible)
    
    
    10.06
    
    
    
    8.74
    
    
    
    
    10.02
    
    
    
    8.70
 
 *
    
    annualized Page 21




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##### 



Net Interest Income
  A. Three Months Ended June 30, 2007 and 2006
    B. Six Months Ended June 30, 2007 and 2006
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Yield on average earning assets
    
    
    6.45
    %
    
    
    6.10
    %
    
    
    6.43
    %
    
    
    6.01
    %Cost to fund earning assets
    
    
    2.35
    
    
    
    2.14
    
    
    
    2.34
    
    
    
    2.10Net interest margin
    
    
    4.10
    
    
    
    3.96
    
    
    
    4.09
    
    
    
    3.91Net interest margin  tax equivalent
    
    
    4.19
    
    
    
    4.09
    
    
    
    4.19
    
    
    
    4.04
 Page 22




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##### 



Effects of Interest Rate Changes on Net Interest Income
  June 30, 2007
    
    December 31, 2006Change in
    
    Change in Net
    
    
    
    
    
    Change in
    
    Change in NetInterest Rates
    
    Interest
    
    Percent
    
    Interest Rates
    
    Interest
    
    Percent(Basis points)
    
    Income $
    
    Change
    
    (Basis points)
    
    Income $
    
    Change200
    
    
    1,219
    
    
    
    1.9
    %
    
    
    200
    
    
    
    2,133
    
    
    
    3.6
    %100
    
    
    608
    
    
    
    0.9
    %
    
    
    100
    
    
    
    1,068
    
    
    
    1.8
    %0
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0(100)
    
    
    (622
    )
    
    
    (1.0
    )%
    
    
    (100
    )
    
    
    (1,023
    )
    
    
    (1.7
    )%(200)
    
    
    (1,292
    )
    
    
    (2.0
    )%
    
    
    (200
    )
    
    
    (2,162
    )
    
    
    (3.6
    )%
 Provision for Loan Losses
   
    
    A specific provision of $0.9 million for loans to a large commercial borrower going
through the bankruptcy reorganization process (recorded in the first quarter)
    
    A specific provision of $0.4 million for
$2.9 million in commercial loans related to two restaurant
franchises (recorded in the second quarter)
    
    Charge-offs of approximately $1.0 million for three commercial loans previously reserved
for (charged-off in the second quarter)
    
    A $4.4 million charge-off as a result of the bankruptcy reorganization process for the
large commercial borrower discussed earlier
 Page 23




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##### 



Other Income and Expense
 A. Three months ended June 30, 2007 and 2006
 Other Income
   Other Expense
   B. Six months ended June 30, 2007 and 2006
 Other Income
   Other Expense
   Page 24




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##### 



Income Taxes
 Six months ended June 30, 2007 and year ended December 31, 2006
  2. Consolidated Balance Sheet Review
 Overview
  
    
    a $6.4 million decline in the investment portfolio, due to scheduled maturities
of investment securities;
    
    a decrease in our loan portfolio of $3.8 million; and
    
    a $8.7 million decline in deposits, due to rate sensitive consumers withdrawing
funds to move into other investment options in response to the increasing interest
rate environment.
 A. Investment and Other Securities
      B. Loans
  Page 25




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##### 



June 30,
    
    
    December 31,2007
    
    
    2006Commercial, financial and agricultural
    
    $
    234,270
    
    
    $
    250,906Real estate  commercial
    
    
    441,790
    
    
    
    432,062Real estate  construction
    
    
    25,548
    
    
    
    21,562Real estate  mortgage
    
    
    206,287
    
    
    
    218,104Home equity
    
    
    170,839
    
    
    
    164,800Personal
    
    
    42,182
    
    
    
    45,602Lease financing
    
    
    27,624
    
    
    
    23,143Unearned interest
    
    
    (4,511
    )
    
    
    (3,787
    )Total loans
    
    $
    1,144,029
    
    
    $
    1,152,392Nonaccrual loans
    
    $
    20,717
    
    
    $
    21,001
 C. The Allowance for Loan Losses
    June 30,2007
    
    
    2006Balance of allowance  beginning of period
    
    $
    17,344
    
    
    $
    15,482Transfer to off balance sheet credit exposure
    
    
    (184
    )Loans charged off:Commercial, financial and agricultural
    
    
    4,637
    
    
    
    307Real estate  commercial
    
    
    915
    
    
    
    Real estate  mortgage
    
    
    97
    
    
    
    25Personal and lease financing loans
    
    
    139
    
    
    
    110Total charge-offs
    
    
    5,788
    
    
    
    442Recoveries of loans previously charged off:Commercial, financial and agricultural
    
    
    4
    
    
    
    14Real estate  commercial
    
    
    
    
    
    
    Real estate  mortgage
    
    
    40
    
    
    
    Personal and lease financing loans
    
    
    60
    
    
    
    36Total recoveries
    
    
    104
    
    
    
    50Net charge-offs
    
    
    5,684
    
    
    
    392Provision for loan losses
    
    
    1,355
    
    
    
    120Balance of allowance  end of period
    
    $
    12,831
    
    
    $
    15,210
 Page 26




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##### 



June 30, 2007
    
    December 31, 2006Impaired loans:Recorded investment at period end
    
    $
    20,207
    
    
    $
    20,272Impaired loan balance for which there is a related allowance
    
    
    19,678
    
    
    
    20,272Amount of allowance for impaired loans
    
    
    2,731
    
    
    
    6,678Impaired loan balance for which there is no related allowance
    
    
    529
    
    
    
    Average recorded investment
    
    
    20,293
    
    
    
    21,867Interest income recognized (on a cash basis)
    
    $
    217
    
    
    $
    1,189
    Non-performing Loans(Dollars in thousands)June 30
    
    
    December 312007
    
    
    2006Non-accrual loans
    
    $
    20,717
    
    
    $
    21,001Accruing loans past due 90 days or more
    
    
    1,999
    
    
    
    2,327Total non-performing loans
    
    $
    22,716
    
    
    $
    23,328Non-performing loans as percent of allowance
    
    
    177.0
    %
    
    
    134.5
    %
  Page 27




---



##### 




    
    A provision for loan losses in the amount of $1.4 million was recorded (see
discussion on provision for loan losses)
    
    Loan charge-offs of $5.8 million were recorded during the first half of 2007, offset
by recoveries of $0.1 million;
    
    Of the $5.8 million in charge-offs, $4.4 million was related to loans to one large
commercial borrower, as a result of the bankruptcy reorganization
process. These loans were appropriately considered in previous
periods when establishing the allowance for loan loss;
    
    Additionally, charge-offs of approximately $1.0 million were recorded related to
three commercial borrowers previously provided for in the allowance; and
    
    The amount of total non-performing loans has decreased to $22.7 million at June 30,
2007 compared to $23.3 million at December 31, 2006.
    C. Deposits and Other Sources of Funds
   June 30, 2007
    
    December 31, 2006Non-interest bearing demand deposits
    
    $
    234,333
    
    
    
    17.8
    %
    
    $
    232,334
    
    
    
    17.5
    %Interest bearing demand deposits
    
    
    301,207
    
    
    
    22.9
    
    
    
    299,919
    
    
    
    22.6Savings and money market
    
    
    250,008
    
    
    
    19.0
    
    
    
    249,563
    
    
    
    18.8Time deposits less than $100,000
    
    
    445,287
    
    
    
    33.8
    
    
    
    450,882
    
    
    
    34.0Time deposits greater than $100,000
    
    
    86,250
    
    
    
    6.5
    
    
    
    93,065
    
    
    
    7.0Total Deposits
    
    $
    1,317,084
    
    
    
    100.000
    %
    
    $
    1,325,763
    
    
    
    100.000
    %
   Page 28




---



##### 



D. Liquidity and Capital Resources
    3. Regulatory Capital Compliance
   4. Share Repurchase Program
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Item 4. Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Page 29




---



##### 



Change in Internal Control Over Financial Reporting
   Page 30




---



##### 



PART II. OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
   Changes in interest rates could adversely affect our financial condition and results of
operations.
  Most of our loans are secured by real estate located in our market area. If there is a
downturn in our real estate market, these borrowers may default on their loans and we may
not be able to fully recover our loans.
  Page 31




---



##### 



We have established an allowance for loan losses based on our managements estimate. Actual
losses could differ significantly from those estimates. If the allowance is not adequate,
it could have a material adverse effect on our earnings and the price of our stock.
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   (d) Maximum Number(c) Total Number
    
    (or Approximate(a) Total
    
    
    
    
    
    of Shares (or
    
    Dollar Value) ofNumber of
    
    (b) Average
    
    Units) Purchased
    
    Shares (or Units) thatShares (or
    
    Price Paid
    
    as Part of Publicly
    
    May Yet BeUnits)
    
    per Share (or
    
    Announced Plans
    
    Purchased Under thePeriod
    
    Purchased
    
    Unit)
    
    or Programs
    
    Plans or ProgramsApril 1, 2007 to
April 30, 2007
    
    
    14,947
    
    
    $
    28.02
    
    
    
    14,947
    
    
    
    1,101,900May 1, 2007 to
May 31, 2007
    
    
    9,000
    
    
    $
    28.06
    
    
    
    9,000
    
    
    
    1,092,900June 1, 2007 to
June 30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,092,900Total
    
    

    23,947
    
    
    $
    28.03
    
    
    
    23,947
    
    
    
    1,092,900
 Item 3. Defaults upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  WithholdName
    
    For
    
    AuthorityStanton R. Sheetz
    
    
    9,087,894
    
    
    
    382,918Robert A. Szeyller
    
    
    8,958,858
    
    
    
    511,953Robert A. Hormel
    
    
    9,073,171
    
    
    
    397,639Stephen M. Krentzman
    
    
    9,119,635
    
    
    
    351,176
 Page 32




---



##### 



Item 5. Other Information
  Item 6. Exhibits
 ExhibitNumber
    
    Description31.1
    
    
    Chief Executive Officers Rule 13a-14(a)/15d-14(a) (Section 302) Certification31.2
    
    
    Chief Financial Officers Rule 13a-14(a)/15d-14(a) (Section 302) Certification32.1
    
    
    Section 1350 (Section 906) Certification by Chief Executive Officer32.2
    
    
    Section 1350 (Section 906) Certification by Chief Financial Officer
 Page 33




---



##### 



SIGNATURES
  OMEGA FINANCIAL CORPORATION(Registrant)August 9, 2007
    
    By:
    
    /s/ Donita R. KovalDate
    
    
    
    Donita R. KovalPresident and Chief Executive OfficerAugust 9, 2007
    
    By:
    
    /s/ Daniel L. WarfelDate
    
    
    
    Daniel L. WarfelExecutive Vice President and Chief Financial Officer
 Page 34




---



##### 



31.1
    
    Chief Executive Officers Rule 13a-14(a)/15d-14(a) (Section 302) Certification
    
    
    3631.2
    
    Chief Financial Officers Rule 13a-14(a)/15d-14(a) (Section 302) Certification
    
    
    3732.1
    
    Section 1350 (Section 906) Certification by Chief Executive Officer
    
    
    3832.2
    
    Section 1350 (Section 906) Certification by Chief Financial Officer
    
    
    39
 Page 35