##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 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 
  (814) 231-7680 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ o
 Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). þ o
 Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: The number of shares outstanding of each of the issuers classes of common stock as of May 5, 2005:
12,615,383 shares of Common Stock, $5.00 par value   Page 1




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PART I. Financial Information Item 1. Financial Statements OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) March 31,
    
    
    December 31,2005
    
    
    2004AssetsCash and due from banks
    
    $
    49,424
    
    
    $
    47,877Interest bearing deposits with other banks
    
    
    29,899
    
    
    
    31,122Federal funds sold
    
    
    17,000
    
    
    
    36,350Investment securities available for sale
    
    
    315,108
    
    
    
    327,979Investment in unconsolidated subsidiary
    
    
    1,625
    
    
    
    1,625Loans available for sale
    
    
    69
    
    
    
    22,515Total portfolio loans
    
    
    1,280,783
    
    
    
    1,305,735Less: Allowance for loan losses
    
    
    (15,487
    )
    
    
    (15,644
    )Net portfolio loans
    
    
    1,265,296
    
    
    
    1,290,091Premises and equipment, net
    
    
    36,979
    
    
    
    35,509Other real estate owned
    
    
    2,639
    
    
    
    3,082Bank-owned life insurance
    
    
    73,420
    
    
    
    72,845Investment in limited partnerships
    
    
    7,338
    
    
    
    8,605Core deposit intangibles
    
    
    7,349
    
    
    
    13,927Other intangibles
    
    
    2,731
    
    
    
    2,799Goodwill
    
    
    161,218
    
    
    
    156,959Other assets
    
    
    34,064
    
    
    
    31,286TOTAL ASSETS
    
    $
    2,004,159
    
    
    $
    2,082,571Liabilities and Shareholders EquityDeposits:Non-interest bearing
    
    $
    220,520
    
    
    $
    228,408Interest bearing
    
    
    1,268,265
    
    
    
    1,273,674Total deposits
    
    
    1,488,785
    
    
    
    1,502,082Short-term borrowings
    
    
    78,251
    
    
    
    90,259ESOP debt
    
    
    2,107
    
    
    
    2,192Junior subordinated debentures
    
    
    57,066
    
    
    
    57,190Long-term debt
    
    
    43,853
    
    
    
    99,579Other interest bearing liabilities
    
    
    848
    
    
    
    854Other liabilities
    
    
    16,816
    
    
    
    14,676TOTAL LIABILITIES
    
    
    1,687,726
    
    
    
    1,766,832Shareholders 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 and outstanding-12,608,133 shares at March 31, 2005;12,593,524 shares at December 31, 2004
    
    
    63,057
    
    
    
    62,968Capital surplus
    
    
    98,734
    
    
    
    98,370Retained earnings
    
    
    154,929
    
    
    
    152,249Accumulated other comprehensive income
    
    
    1,026
    
    
    
    3,526Unearned compensation related to ESOP debt
    
    
    (1,313
    )
    
    
    (1,374
    )TOTAL SHAREHOLDERS EQUITY
    
    
    316,433
    
    
    
    315,739TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,004,159
    
    
    $
    2,082,571
 Page 2




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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Unaudited Three Months EndedMarch 31,2005
    
    
    2004Interest Income:Interest and fees on loans
    
    $
    19,347
    
    
    $
    11,197Interest and dividends on investment securities
    
    
    2,367
    
    
    
    1,853Other interest income
    
    
    358
    
    
    
    56TOTAL INTEREST INCOME.
    
    
    22,072
    
    
    
    13,106Interest Expense:Interest on deposits
    
    
    4,692
    
    
    
    2,692Interest on short-term borrowings
    
    
    490
    
    
    
    76Interest on long-term debt and
other interest bearing liabilities
    
    
    1,648
    
    
    
    248TOTAL INTEREST EXPENSE
    
    
    6,830
    
    
    
    3,016NET INTEREST INCOME
    
    
    15,242
    
    
    
    10,090Provision for loan losses
    
    
    142
    
    
    
    INCOME FROM CREDIT ACTIVITIES
    
    
    15,100
    
    
    
    10,090Other Income:Service fees on deposit accounts
    
    
    2,140
    
    
    
    1,339Service fees on loans
    
    
    312
    
    
    
    281Earnings on bank-owned life insurance
    
    
    575
    
    
    
    354Trust fees
    
    
    1,666
    
    
    
    915Investment and insurance product sales
    
    
    1,072
    
    
    
    302Gain on the early extinguishment of debt
    
    
    1,043
    
    
    
    Loss on sale of loans and other assets
    
    
    (339
    )
    
    
    (1
    )Net gains on the sale of investment securities
    
    
    988
    
    
    
    8Other
    
    
    1,029
    
    
    
    540TOTAL OTHER INCOME
    
    
    8,486
    
    
    
    3,738Other Expense:Salaries and employee benefits
    
    
    7,551
    
    
    
    4,955Net occupancy expense
    
    
    1,111
    
    
    
    627Equipment expense
    
    
    1,089
    
    
    
    702Data processing service
    
    
    626
    
    
    
    423Pennsylvania shares tax
    
    
    619
    
    
    
    384Amortization of intangible assets
    
    
    163
    
    
    
    3Other
    
    
    3,810
    
    
    
    2,139TOTAL OTHER EXPENSE
    
    
    14,969
    
    
    
    9,233Income before taxes
    
    
    8,617
    
    
    
    4,595Income tax expense
    
    
    2,040
    
    
    
    991NET INCOME
    
    $
    6,577
    
    
    $
    3,604Net income per common share:Basic
    
    $
    0.52
    
    
    $
    0.43Diluted
    
    $
    0.52
    
    
    $
    0.42Weighted average shares and equivalents:Basic
    
    
    12,596
    
    
    
    8,471Diluted
    
    
    12,659
    
    
    
    8,559Dividends declared per share:Common
    
    $
    .31
    
    
    $
    .30
 Page 3




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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS  Three Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    6,577
    
    
    $
    3,604Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    969
    
    
    
    1,027Provision for loan losses
    
    
    142
    
    
    
    Gain on sale of investment securities
    
    
    (988
    )
    
    
    (8
    )Gain on early extinguishment of debt
    
    
    (1,043
    )
    
    
    Gain on sale of fixed assets and other property owned
    
    
    (42
    )
    
    
    (1
    )Loss on sale of loans and leases
    
    
    381
    
    
    
    2Non-monetary gift
    
    
    45
    
    
    
    Provision for deferred income tax
    
    
    1,494
    
    
    
    38Increase in cash surrender value of bank owned life insurance
    
    
    (575
    )
    
    
    (354
    )Increase in interest receivable and other assets
    
    
    (772
    )
    
    
    (1,471
    )(Decrease) decrease in interest payable
    
    
    (657
    )
    
    
    8Increase (decrease) in taxes payable
    
    
    546
    
    
    
    937Amortization of deferred net loan fees
    
    
    (78
    )
    
    
    (72
    )Deferral of net loan fees
    
    
    79
    
    
    
    763Decrease in accounts payable and accrued expenses
    
    
    (2,065
    )
    
    
    (419
    )Total adjustments
    
    
    (2,564
    )
    
    
    450Net cash provided by operating activities
    
    
    4,013
    
    
    
    4,054Cash flows from investing activities:Investment securities available for sale:Proceeds from sales
    
    
    51,403
    
    
    
    4,425Proceeds from maturities
    
    
    14,340
    
    
    
    25,077Cash used for purchases
    
    
    (51,842
    )
    
    
    (5,559
    )Net change in interest bearing deposits with other banks
    
    
    1,223
    
    
    
    (4,635
    )Decrease in loans and leases
    
    
    23,626
    
    
    
    119Gross proceeds from sale of loans and leases
    
    
    23,189
    
    
    
    (2
    )Investment in limited partnerships
    
    
    (69
    )
    
    
    Sale of investment in limited partnership
    
    
    1,088
    
    
    
    Capital expenditures
    
    
    (2,416
    )
    
    
    (552
    )Sale of fixed assets and other property owned
    
    
    524
    
    
    
    12Net change in federal funds sold
    
    
    19,350
    
    
    
    (11,250
    )Net cash provided by investing activities
    
    
    80,416
    
    
    
    7,635Cash flows from financing activities:Net change in deposits
    
    
    (12,687
    )
    
    
    (9,093
    )Decrease in short-term borrowings, net
    
    
    (12,008
    )
    
    
    (1,747
    )Principal payment on long term debt
    
    
    (54,727
    )
    
    
    (295
    )Net change in other interest bearing liabilities
    
    
    (6
    )
    
    
    (6
    )Dividends paid
    
    
    (3,907
    )
    
    
    (2,545
    )Issuance of common stock
    
    
    453
    
    
    
    930Net cash used in financing activities
    
    
    (82,882
    )
    
    
    (12,756
    )Net increase (decrease) in cash and cash equivalents
    
    $
    1,547
    
    
    $
    (1,067
    )Cash and cash equivalents at beginning of period
    
    $
    47,877
    
    
    $
    32,420Cash and cash equivalents at end of period
    
    
    49,424
    
    
    
    31,353Net increase (decrease) in cash and cash equivalents
    
    $
    1,547
    
    
    $
    (1,067
    )Interest paid
    
    $
    7,487
    
    
    $
    3,008Income taxes paid
    
    
    
    
    
    
    Supplemental schedule of noncash investing and financing activities:Transfers of loans to other real estate owned
    
    
    72
    
    
    
    27
 Page 4




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Cash and cash equivalents
Cash equivalents consist of non-interest bearing deposits with other banks. OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   THREE MONTHS ENDED MARCH 31, 2005 AND 2004  A.
    Basis of Presentation: The accompanying unaudited financial statements have been prepared in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, including normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the three months ended March 31,
2005 are not necessarily indicative of the results that may be experienced for the year
ending December 31, 2005 or any other interim period. For further information, refer to the
Consolidated Financial Statements and Footnotes included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2004. Summary of Significant Accounting Policies (to be read in conjunction with Summary of
Significant Accounting Policies included in the Footnotes of the Companys Annual Report on
Form 10-K for the year ended December 31, 2004): 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. In the first
quarter of 2005, management refined its policy to expand the historical loan loss experience
data to a five-year period (formerly a one-year history was used). Management believes that
the five-year horizon better reflects the inherent risk in the loan portfolio. Stock-based compensation Omega accounts for stock-based compensation using the intrinsic value method in accordance
with Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to
Employees, and has adopted the disclosure provisions of FASB No. 148, Accounting for
Stock-Based Compensation. The following pro forma information regarding net income and
earnings per share assumes the adoption of Statement No. 123 for stock options granted
subsequent to December 31, 1994. The estimated fair value of the options is amortized to
expense over the vesting period. In December 2004, the FASB revised Statement No. 123. In April 2005, the SEC announced that
it would require registrants that are not small business issuers to adopt Statement 123R no
later than the beginning of the first fiscal year beginning after June 15, 2005. Omega will
adopt Statement 123R on January 1, 2006. Management has not yet determined the method of
adoption it will use and therefore, cannot project the impact of adoption at this time. Page 5




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The fair value was estimated at the date of grant using a Black-Scholes option-pricing model
utilizing various assumptions. Compensation expense, net of related tax, is included in the
pro forma net income reported below (in thousands, except per share data). Quarter ended March 31,2005
    
    
    2004Net income
    As reported

    $
    6,577
    
    
    $
    3,604Pro forma

    
    6,571
    
    
    
    3,501Compensation expense, net of tax
    

    
    6
    
    
    
    103Basic earnings per share
    As reported

    $
    0.52
    
    
    $
    0.43Pro forma

    
    0.52
    
    
    
    0.42Diluted earnings per share
    As reported

    $
    0.52
    
    
    $
    0.42Pro forma

    
    0.52
    
    
    
    0.41
 The Black-Scholes option valuation model was developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because Omegas employee stock options have
characteristics significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The accompanying Consolidated Financial Statements include Omega Financial Corporation
(Omega), a bank holding company and the combined results of its wholly-owned banking and
non-banking subsidiaries.  B.
    Commitments, Contingent Liabilities and Guarantees: In the ordinary course of business, Omega makes commitments to extend credit to its
customers through letters of credit and lines of credit. Standby letters of credit are instruments issued by the Corporations bank subsidiary that
guarantee the beneficiary payment by the bank in the event of default by the banks customer
in the non-performance of an obligation or service. Most standby letters of credit are
extended for one-year periods. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers. The bank
holds collateral supporting those commitments for which collateral is deemed necessary. At
March 31, 2005, standby letters of credit issued and outstanding amounted to $25,955,000 as
compared to $24,064,000 on December 31, 2004. The fair market value of the standby letters
of credit at March 31, 2005 and December 31, 2004 was $139,000 and $138,000, respectively.
The fair market value of standby letters of credit is recorded as a liability in accordance
with FIN 45. At March 31, 2005, the bank had $249,245,000 outstanding in loan commitments and other
unused lines of credit extended to its customers. Of this amount, $169,608,000, or 68.0%,
were commercial commitments. The remaining amounts of $79,637,000 were commitments to
consumers for mortgage and home equity loans and personal lines of credit. Omegas Employee Stock Ownership Plan (ESOP) incurred debt in 1990 of $5,000,000, which is
collateralized by a mortgage on the Corporations administrative center and the
Corporations guarantee. As of March 31, 2005, the balance of the ESOP debt was $2,107,000
as compared to $2,192,000 at December 31, 2004. Page 6




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C.
    Investment Securities:The following schedule details characteristics of the investment portfolio as of March 31,
2005 and December 31, 2004 (in thousands). Securities Classified as Available for SaleGross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMarch 31, 2005U.S. Treasury securities and
obligations of other U.S. Government agencies and corporations
    
    $
    181,124
    
    
    $
    14
    
    
    
    ($2,772
    )
    
    $
    178,366Obligations of state and
political subdivisions
    
    
    67,615
    
    
    
    370
    
    
    
    (536
    )
    
    
    67,449Corporate securities
    
    
    3,974
    
    
    
    11
    
    
    
    (41
    )
    
    
    3,944Mortgage backed securities
    
    
    48,273
    
    
    
    172
    
    
    
    (435
    )
    
    
    48,010Equity securities
    
    
    12,543
    
    
    
    4,801
    
    
    
    (5
    )
    
    
    17,339Total
    
    $
    313,529
    
    
    $
    5,368
    
    
    
    ($3,789
    )

    
    $
    315,108
 Securities Classified as Available for SaleGross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2004U.S. Treasury securities and
obligations of other U.S. Government agencies and corporations
    
    $
    134,223
    
    
    $
    37
    
    
    
    ($1,330
    )
    
    $
    132,930Obligations of state and
political subdivisions
    
    
    80,628
    
    
    
    664
    
    
    
    (373
    )
    
    
    80,919Corporate securities
    
    
    4,035
    
    
    
    19
    
    
    
    (20
    )
    
    
    4,034Mortgage backed securities
    
    
    86,990
    
    
    
    765
    
    
    
    (74
    )
    
    
    87,681Equity securities
    
    
    16,679
    
    
    
    5,736
    
    
    
    
    
    
    
    22,415Total
    
    $
    322,555
    
    
    $
    7,221
    
    
    
    ($1,797
    )
    
    $
    327,979
 In accordance with the disclosure requirements of EITF 03-01, the following table shows
gross unrealized losses and fair value, aggregated by category and length of time that
individual investment securities have been in a continuous unrealized loss position, at
March 31, 2005 (in thousands): Less Than 12 Months
    
    
    12 Months or LongerFair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    LossesDescription of SecuritiesU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    109,683
    
    
    $
    1,267
    
    
    $
    50,457
    
    
    $
    1,505Obligations of state and political subdivisions
    
    
    20,784
    
    
    
    172
    
    
    
    15,043
    
    
    
    364Corporate and other securities
    
    
    733
    
    
    
    6
    
    
    
    1,566
    
    
    $
    35Mortgage-backed securities
    
    
    36,359
    
    
    
    385
    
    
    $
    1,727
    
    
    $
    50Subtotal, debt securities
    
    
    167,559
    
    
    
    1,830
    
    
    
    68,793
    
    
    
    1,954Common stock
    
    
    86
    
    
    
    5
    
    
    
    
    
    
    
    Total temporarily impaired securities
    
    $
    167,645
    
    
    $
    1,835
    
    
    $
    68,793
    
    
    $
    1,954
 Page 7




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##### 



The unrealized losses noted above are considered to be temporary impairments, as the
majority of the investments are debt securities whose decline in value is due 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 includes 55 investments in U.S. Government agency
debt securities, 24 investments in mortgage-backed securities, six investments in corporate
securities and 51 investments in obligations of state and municipal subdivisions. Debt
securities with unrealized losses for a period of 12 months or longer includes 28
investments in U.S. Government agency debt securities, 10 investments in corporate
securities, five investments in obligations of state and
municipal subdivisions and one investment in mortgage-backed securities. Debt securities
included in the above table have maturity or pre-refund dates ranging from April 2005 to
September 2022. The unrealized loss position for each security ranges from .02% to 7.27% of
the securities amortized cost as of March 31, 2005. Unrealized losses for a period of less
than 12 months on common stock are driven by one equity investment. Omegas policy requires quarterly reviews of 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 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.  D.
    Income Taxes:The effective tax rate for the three months ended March 31, 2005 was 23.7%, compared to the
same period in 2004 when the effective tax rate was 21.6%. For the year ended December 31,
2004, the effective tax rate was 23.8%.E.
    Long term Debt:On October 1, 2004, Omega acquired Sun Bancorp, Inc. (Sun). In the first quarter of 2005,
Omega extinguished indebtedness to the Federal Home Loan Bank, completing its systematic
program of reducing the leverage of Suns balance sheet acquired in the acquisition. The
final extinguishment resulted in a gain of $1,043,000. Following is a schedule showing the
change in composition of long-term debt since December 31, 2004 (in thousands of dollars). March 31, 2005
    
    
    December 31, 2004Long-Term Debt:Notes payable to Federal Home Loan Bank, with fixed rates
between 2.65% and 6.80%
    
    $
    25,194
    
    
    $
    25,373Notes payable to Federal Home Loan Bank, with variable rate
payable at LIBOR plus 8 basis points and prime less 271 basis points
    
    
    
    
    
    
    55,153Note payable to another financial institution with a variable interest
rate payable at three month LIBOR plus 125 basis points
    
    
    11,572
    
    
    
    12,000Note payable to another financial institution with a fixed interest
rate of 2.47%
    
    
    7,087
    
    
    
    7,053Total Long Term Debt
    
    $
    43,853
    
    
    $
    99,579ESOP Debt Guarantee
    
    $
    2,107
    
    
    $
    2,192
 Page 8




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##### 



F.
    Comprehensive Income:Components of other comprehensive income consist of the following (in thousands): Three Months March 31, 2005
    
    
    Three Months March 31, 2004Before
    
    
    Tax Expense
    
    
    
    
    
    
    Before
    
    
    Tax ExpenseTax
    
    
    or
    
    
    Net-of-Tax
    
    
    Tax
    
    
    or
    
    
    Net-of-TaxAmount
    
    
    (Benefit)
    
    
    Amount
    
    
    Amount
    
    
    (Benefit)
    
    
    AmountNet income
    
    $
    8,617
    
    
    $
    2,040
    
    
    $
    6,577
    
    
    $
    4,595
    
    
    $
    991
    
    
    $
    3,604Other comprehensive income:Unrealized gains on available for sale securitiesUnrealized holding gains (losses) arising during
the period
    
    
    (2,858
    )
    
    
    (1,000
    )
    
    
    (1,858
    )
    
    
    546
    
    
    
    191
    
    
    
    355Less reclassification adjustment for
gains included in net income
    
    
    (988
    )
    
    
    (346
    )
    
    
    (642
    )
    
    
    (8
    )
    
    
    (3
    )
    
    
    (5
    )Other comprehensive income (loss)
    
    
    (3,846
    )
    
    
    (1,346
    )
    
    
    (2,500
    )
    
    
    538
    
    
    
    188
    
    
    
    350Total comprehensive income
    
    $
    4,771
    
    
    $
    694
    
    
    $
    4,077
    
    
    $
    5,133
    
    
    $
    1,179
    
    
    $
    3,954
  G.
    Earnings Per Share Data:Basic earnings per share are computed by dividing income available to common stockholders by
the weighted average number of shares outstanding for the period. On a diluted basis, both
earnings and shares outstanding are adjusted to assume the conversion of all potentially
dilutive securities into common stock. Computations of Earnings per Share
(In thousands, except per share amounts)
(Unaudited) Quarter Ended March 31, 2005
    
    
    Quarter Ended March 31, 2004Income
    
    
    Shares
    
    
    Per-Share
    
    
    Income
    
    
    Shares
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    Amount
    
    
    Numerator
    
    
    Denominator
    
    
    AmountBasic EPSIncome available to common
shareholders
    
    
    6,577
    
    
    
    12,596
    
    
    $
    0.52
    
    
    
    3,604
    
    
    
    8,471
    
    
    $
    0.43Effect of Dilutive SecuritiesImpact of:Assumed exercises of outstanding
options
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    88Diluted EPSIncome available to common
shareholders plus assumed
conversions
    
    $
    6,577
    
    
    
    12,660
    
    
    $
    0.52
    
    
    $
    3,604
    
    
    
    8,559
    
    
    $
    0.42
 Page 9




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##### 



H.
    Acquisition:On October 1, 2004, Omega completed its acquisition of Sun Bancorp, Inc. (Sun) for a total
purchase price of $187,729,000. 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. (in thousands, except per share data)For the three
    
    
    For the threemonths ended
    
    
    months endedMarch 31, 2005
    
    
    March 31, 2004As Reported
    
    
    ProformaNet interest income
    
    $
    15,242
    
    
    $
    17,772Provision for loan losses
    
    
    142
    
    
    
    435Net interest income after provision for loan losses
    
    
    15,100
    
    
    
    17,337Non-interest income
    
    
    8,486
    
    
    
    7,333Non-interest expense
    
    
    14,969
    
    
    
    16,056Income before income taxes
    
    
    8,617
    
    
    
    8,614Income tax expense
    
    
    2,040
    
    
    
    1,705Net income
    
    $
    6,577
    
    
    $
    6,909Net income per common share:Basic
    
    $
    0.52
    
    
    $
    0.56Diluted
    
    
    0.52
    
    
    
    0.55Weighted average shares and equivalents:Basic
    
    
    12,596
    
    
    
    12,419Diluted
    
    
    12,659
    
    
    
    12,543
 The pro forma results include amortization of fair value adjustments on loans, deposits
and debt and amortization on newly created intangibles but exclude post-merger acquisition
related charges and the effects of restructuring the balance sheet. 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 and 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 2004, nor are they necessarily indicative of future results. Page 10




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##### 



I.
    Goodwill and Other Intangible Assets:As a result of the acquisition of Sun in the fourth quarter of 2004, Omega recorded
preliminary estimates of fair values of assets acquired, including core deposit intangibles
and goodwill of $14,211,000 and $156,959,000, respectively. In the first quarter of 2005,
Omega revised its determination of the value of the core deposit intangible. This revised
valuation was lower than originally estimated by $6,483,000 and reduced amortization costs
for the first quarter of 2005 as compared to the fourth quarter of 2004 by $230,000.
Accordingly, the value of goodwill was increased by $4,214,000 and the deferred tax asset
acquired was increased by $2,269,000. The weighted average life of all finite-lived
intangible assets is 10.23 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. A summary of intangible assets at March 31, 2005 and December 31, 2004
follows (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Core deposit intangibleGross carrying amount
    
    $
    7,885
    
    
    $
    14,368Less: accumulated amortization
    
    
    536
    
    
    
    441Net carrying amount
    
    
    7,349
    
    
    
    13,927Customer relationship intangiblesGross carrying amount
    
    
    2,700
    
    
    
    2,700Less: accumulated amortization
    
    
    123
    
    
    
    61Net carrying amount
    
    
    2,577
    
    
    
    2,639Trade name intangible with finte lifeGross carrying amount
    
    
    36
    
    
    
    36Less: accumulated amortization
    
    
    12
    
    
    
    6Net carrying amount
    
    
    24
    
    
    
    30Total finite-lived intangiblesGross carrying amount
    
    
    10,621
    
    
    
    17,104Less: accumulated amortization
    
    
    671
    
    
    
    508Net carrying amount
    
    $
    9,950
    
    
    $
    16,596Trade name intangible with infinite lifeGross carrying amount
    
    
    130
    
    
    
    130
 Page 11




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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  In analyzing whether to make, or to continue to make, an investment in Omega, investors
should consider, among other factors, certain investment considerations more particularly
described in Item 1: Business  Investment Considerations in the Companys Annual Report
on Form 10-K for the year ended December 31, 2004. A copy of this report can be obtained by
written request to David N. Thiel, Senior Vice President, Omega Financial Corporation, 366
Walker Drive, State College, Pennsylvania 16801 or through our website at
OmegaFinancial.com.Forward Looking StatementsThe information in this Quarterly Report on Form 10-Q contains forward looking statements
(as such term is defined in the Securities Exchange Act of 1934 and the regulations
thereunder), including without limitation, statements as to the future loan and deposit
volumes, the allowance and provision for possible loan losses, future interest rates and
their effect on Omegas financial condition or results of operations, the classification of
Omegas investment portfolio or as to trends or managements beliefs, expectations or
opinions and other statements other than historical facts. Such forward looking statements
are subject to risks and uncertainties and may be affected by various factors which may
cause actual results to differ materially from those in the forward looking statements. In
addition to the factors discussed in this report, certain risks, uncertainties and other
factors, including without limitation, risks arising from economic conditions and related
uncertainties, changes in interest rates, federal and state regulation, competition and the
adequacy of the allowance and provision for loan losses, are discussed in the Companys 2004
Annual Report to Shareholders or in the Companys Annual Report on Form 10-K for the year
ended December 31, 2004. Copies of these reports may be obtained from Omega upon request and
without charge (except for the exhibits thereto) as described above. 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 A. Certain of these policies require numerous estimates and economic
assumptions, based upon information available as of the date of the financial statements. As
such, over time, they may prove inaccurate or vary 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.The allowance for loan losses is maintained at a level believed adequate by management to
absorb probable losses and related provision expense. The allowance for loan losses is
maintained at a level believed adequate by management to absorb probable 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. Page 12




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##### 



Omegas accounting policy for the determination of goodwill and other intangibles also has a
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 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. Managements current analysis indicates that a 15.7% decline in
market capitalization could have a material impact on the carrying value of goodwill.Intangible assets with finite lives include core deposits, customer relationships and trade
names. Intangible assets are subject to impairment testing whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Core deposit,
customer relationship and certain trade name intangibles are amortized over a period of time
that represents their expected life using method of amortization that reflects the pattern
of economic benefit. Management estimates that consecutive annual declines of more that 10%
of the acquired customer base subsequent to March 31, 2005 could result in an impairment of
the core deposit intangible and affect Omegas operating results in future years. Page 13




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##### 



1.
    Comparison of the Three Months Ended March 31, 2005 and 2004 Operations Overview  In order to effectively discuss changes in operating results between the first quarter of
2004 and the first quarter of 2005, the effects of the Sun acquisition must be taken into
consideration. The addition of the former Sun operation significantly impacted every element
of Omegas income statement. The merger was completed on October 1, 2004, and since that
time, management has restructured the combined balance sheet in an effort to enhance future
performance, revised its initial estimate of the value of the core deposit intangible and
goodwill, begun execution of its plan to reduce redundant costs, opened two new branch
offices, invested in technology to update delivery services and incurred integration costs
to standardize the overall Omega operation.In addition to the comparison of operating results between the first quarter of 2004 and the
first quarter of 2005, the following discussion will include a comparison between the first
quarter of 2005 and the fourth quarter of 2004, the first quarter which included combined
operations after the Sun merger. A summary of the results of the two periods follows (in
thousands). 1st Quarter
    
    
    4th Quarter2005
    
    
    2004NET INTEREST INCOME
    
    $
    15,242
    
    
    $
    15,956Provision (credit) for loan losses
    
    
    142
    
    
    
    (300
    )INCOME FROM CREDIT ACTIVITIES
    
    
    15,100
    
    
    
    16,256Other Income:Service fees on deposit accounts
    
    
    2,140
    
    
    
    2,508Service fees on loans
    
    
    312
    
    
    
    668Earnings on bank-owned life insurance
    
    
    575
    
    
    
    578Trust fees
    
    
    1,666
    
    
    
    1,438Investment and insurance product sales
    
    
    1,072
    
    
    
    861Gain on the early extinguishment of debt
    
    
    1,043
    
    
    
    570Gain on sale of loans and other assets
    
    
    (339
    )
    
    
    (115
    )Net gains on investment securities
    
    
    988
    
    
    
    692Other
    
    
    1,029
    
    
    
    1,266TOTAL OTHER INCOME
    
    
    8,486
    
    
    
    8,466Other Expense:Salaries and employee benefits
    
    
    7,551
    
    
    
    8,193Net occupancy expense
    
    
    1,111
    
    
    
    1,057Equipment expense
    
    
    1,089
    
    
    
    1,109Data processing service
    
    
    626
    
    
    
    547Pennsylvania shares tax
    
    
    619
    
    
    
    562Amortization of intangible assets
    
    
    163
    
    
    
    394Other
    
    
    3,810
    
    
    
    4,884TOTAL OTHER EXPENSE
    
    
    14,969
    
    
    
    16,746Income before taxes
    
    
    8,617
    
    
    
    7,976Income tax expense
    
    
    2,040
    
    
    
    2,042NET INCOME
    
    $
    6,577
    
    
    $
    5,934Net income per common share:Basic
    
    $
    0.52
    
    
    $
    0.47Diluted
    
    $
    0.52
    
    
    $
    0.47Weighted average shares and equivalents:Basic
    
    
    12,596
    
    
    
    12,631Diluted
    
    
    12,659
    
    
    
    12,627Dividends declared per share:Common
    
    $
    .31
    
    
    $
    .30
  The first quarters income before income taxes increased $4,022,000 when compared to
the same period in 2004. Income from credit activities increased by $5,010,000, from
$10,090,000 in the first quarter of Page 14




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##### 



2004 to $15,100,000 in the first quarter of 2005. Other income increased $4,748,000, or
127.0% while other expense increased by $5,736,000, or 62.1%.After the income tax provision (which increased by $1,049,000, or 105.9% compared to the
same period in 2004) was deducted from earnings, net income was $2,973,000, or 82.5%, higher
than the first quarter of 2004. The effective tax rate for the first quarter of 2005 was
23.7%, as compared to the first quarter of 2004 of 21.6%.In the first quarter of 2005, income before income taxes was $641,000, or 8.0% higher than
in the fourth quarter of 2004. Income from credit activities decreased by 7.1%, other income
increased by $20,000, or 0.2% and total other expense decreased by $1,777,000, or 10.6%. Net
income was $643,000, or 10.8% higher in the first quarter of 2005, as compared to the fourth
quarter of 2004.Following are selected key ratios for the periods: Three Months EndedMarch 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2004Return on average assets (annualized)
    
    
    1.28
    %
    
    
    1.28
    %
    
    
    1.15
    %Return on average stated equity (annualized)
    
    
    8.26
    
    
    
    8.48
    
    
    
    9.29Return on average tangible equity (annualized)
    
    
    18.14
    
    
    
    8.48
    
    
    
    29.06Dividend payout ratio
    
    
    59.40
    
    
    
    70.63
    
    
    
    63.66
 Net Interest Income  The net interest margin, at 3.63% for the first quarter of 2005, was 26 basis points lower
than the first quarter of 2004, with a $644,102,000 or 62.0% increase in average earning
assets resulting in a 51.1% increase in net interest income. Yield on earning assets in the
first quarter of 2005 increased by 21 basis points when compared to 2004s first quarter,
and cost of funding increased by 47 basis points. As compared to the fourth quarter of 2004,
the net interest margin increased by three basis points in the first quarter of 2005.Following are key net interest margin ratios (annualized): Three Months EndedMarch 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2004Yield on average earning assets
    
    
    5.27
    %
    
    
    5.06
    %
    
    
    5.30
    %Cost to fund earning assets
    
    
    1.64
    
    
    
    1.17
    
    
    
    1.70Net interest margin
    
    
    3.63
    
    
    
    3.89
    
    
    
    3.60Net interest margin  tax equivalent
    
    
    3.81
    
    
    
    4.12
    
    
    
    3.78
  At March 31, 2005, Omega had $708,443,000 of earning assets scheduled to reprice over
the next twelve months as compared to $807,146,000 in interest-sensitive liabilities,
resulting in a negative gap of $98,703,000, or 4.9% of assets. In order to predict net
interest income at risk over the next twelve months based on hypothetical rate movements, a
rate shock simulation was performed on the balance sheet, assuming that interest rates would
increase and decrease by 100 and 200 basis points. These simulations assume no volume or mix
changes in the balance sheet. As the table below indicates, Omega is exposed to a possible
loss of income over the next twelve months if interest rates fall. There have been no
material changes in reported interest rate risk since December 31, 2004. For example, net
interest income at risk for an immediate 100 basis point decrease in rates as of March 31,
2005 was $2,368,000, or 3.6%, of net interest income, compared to $2,658,000, or 4.1%, of
net interest income at risk on December 31, 2004. Conversely, the results suggest that an
immediate 100 basis point increase in interest rates would increase net interest income by
approximately $2,326,000, or 3.5%, over a 12-month period. There is no guarantee however,
that the changes in net interest income shown in this table will occur as predicted in the
event of changes in interest rates. Page 15




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##### 



Possible Effect of Interest Rate Risk on Net Interest IncomeBased on Interest Rate Shock Analysis(in $ thousands)March 31, 2005
    
    December 31, 2004Change in
    
    Change in Net
    
    
    
    
    
    Change in
    
    Change in NetInterest Rates
    
    Interest
    
    Percent
    
    Interest Rates
    
    Interest
    
    Percent(Basis Points)
    
    Income ($)
    
    Change
   
    (Basis Points)
    
    Income ($)
    
    Change200
    
    
    4,631
    
    
    
    7.0
    %
    
    200
    
    
    5,422
    
    
    
    8.3
    %100
    
    
    2,326
    
    
    
    3.5
    %
    
    100
    
    
    2,743
    
    
    
    4.2
    %0
    
    
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    (100)
    
    
    (2,368
    )
    
    
    3.6
    %
    
    (100)
    
    
    (2,658
    )
    
    
    4.1
    %(200)
    
    
    (4,729
    )
    
    
    7.2
    %
    
    (200)
    
    
    (5,420
    )
    
    
    8.3
    %
 Loan Loss Provision  During the first three months of 2005, a loan loss provision of $142,000 was recorded, while
in the first quarter of 2004 no provision to the loan loss reserve was necessary. The loan
loss provision is reflective of changes in credit quality, including movement in
non-performing loans in each quarter, as compared to the previous quarter and an analysis of
the adequacy of the allowance for loan loss reserve. Although non-performing loans decreased
by $1,179,000 from December 31, 2004 to March 31, 2005, managements analysis of the loan
loss reserve indicated the need for a provision of $142,000 to adequately provide for
probable losses inherent in the total loan portfolio. In the fourth quarter of 2004, a
credit of $300,000 was recorded to the loan loss provision. Other Income and Expense  Other income increased $4,748,000, or 127.0%, in the first quarter of 2005 as compared to
the same period in 2004. Service fee income on deposit accounts increased by $801,000, or
59.8%, as a result of an increase of 47% in non-interest bearing deposits from March 31,
2004 to March 31, 2005. As compared to the fourth quarter of 2004, service fee income on
deposit accounts decreased by $367,000 or 14.7% primarily as a result of decreased overdraft
fees, which are traditionally highest during the fourth quarter of the year. Service fees on
loans increased by $31,000, or 11.0% when compared to the first quarter of 2004, but
decreased by $355,000 or 53.2% when compared to the fourth quarter of 2004. A 96% increase
in bank-owned life insurance (BOLI) resulted in a 62.4%, or $221,000 increase in earnings on
BOLI when comparing the first quarter results of 2005 and 2004 while the first quarter of
2005 and the fourth quarter of 2004 resulted in approximately the same BOLI expense. Trust
fees increased in the first quarter of 2005 by $751,000, or 82.1% when compared to the same
time period in 2004, as assets under management increased as a result of the Sun
acquisition. When compared to the fourth quarter of 2004, trust fees increased by $228,000,
or 15.9% in 2005. Insurance and investment product sales generated $770,000 more in revenues
in the first quarter of 2005 as compared to the first quarter of 2004 and $211,000 more in
revenues as compared to the fourth quarter of 2004. This occurred as a result of doubling
the investment product sales staff and adding a full-functioning insurance agency as a
subsidiary. Other non-interest income increased by a total of $489,000, or 90.6% primarily
due to increased bank card service fees as Omegas market area increased from seven counties
to fourteen. Other non-interest income in the fourth quarter of 2004 was $237,000, or 18.7%
higher than in the first quarter of 2005. Gains on the sale of investment securities, loans
and other assets were $642,000 higher in the first quarter of 2005 than in the first quarter
of 2004. Results from the first quarter of 2005 also include a gain on the early
extinguishment of debt in the amount of $1,043,000, which was realized from the repayment of
approximately $55 million of Federal Home Loan Bank (FHLB) debt as part of the balance sheet
restructuring. Balance sheet restructuring efforts during the fourth quarter of 2004 yielded
total net gains of $1,147,000 compared to $1,692,000 in the first quarter of 2005.As a percentage of average assets, annualized other income net of gains on securities, loans
and other assets and early extinguishment of debt was 1.33 % for the first quarter of 2005
and for the same period in 2004. In the fourth quarter of 2004, the comparable ratio was
1.42%. Page 16




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##### 



Other expenses increased $5,736,000, or 62.1%, in the first quarter of 2005 as compared to
the same period in 2004. Salaries and employee benefits increased $2,596,000, or 52.4%, in
2005 as compared to the same period in 2004 as a result of staff increases principally due
to the Sun merger. Salaries and employee benefits in the first quarter of 2005 were $642,000
lower than in the fourth quarter of 2004, when staff reduction transitions were occurring.
Occupancy and equipment expense in total increased by $871,000, or 65.5%, with the addition
of 25 retail offices from the Sun region, and the planned investment in technology. As
compared to the previous quarter, occupancy and equipment costs increased by $34,000, or
1.6%. As expected, data processing service charges increased by $203,000 or 48.0% and
Pennsylvania shares tax expense increased by $235,000, or 61.2% due to the increase in
capital base when comparing the first quarter results of 2005 and 2004, and when comparing
to the fourth quarter of 2004, first quarter 2005s data processing service costs were
increased by 14.4%. Amortization of intangible assets, at $163,000 for the first quarter of
2005 represented an increase of $160,000 when compared to the first quarter of 2004, with
all of the increase related to the intangibles acquired in the Sun merger. In the fourth
quarter of 2004, amortization of intangible assets was $231,000 higher than in the first
quarter of 2005, when the core deposit intangible valuation was revised and reduced. Other
non-interest expenses increased by $1,671,000 or 78.1%, compared to the same period in 2004,
but decreased by $1,074,000 when compared to the previous quarter in 2004. Costs such as
liability insurance, training costs, postage, telephone, legal and audit fees, service
provider costs and charitable donations have increased with the growth of the company due to
the Sun merger when comparing first quarter 2004 results with prior years first quarter
results, but decreased since the fourth quarter of 2004 because of merger and
integration-related costs incurred in the first quarter of combined operations.As a percentage of average assets, annualized expenses for the quarter ended March 31, 2005
were 2.92% and were 3.28% for the same period in 2004. In the first quarter of 2005,
annualized expenses as a percentage of average assets were 3.25%. Federal Income Tax  The effective tax rate for the three months ended March 31, 2005 was 23.7%, compared to the
same period in 2004 when the effective tax rate was 21.6%. For the year ended December 31,
2004, the effective tax rate was 23.8%.2.
    Investment SecuritiesManagement of the investment portfolio entails evaluation and realignment of the size and
mix of the portfolio in order to balance various characteristics of the balance sheet,
including asset quality, liquidity, yield relationships, maturity and tax planning.During the first quarter of 2005, management continued its restructuring of the fixed income
investment portfolio acquired from Sun. Investment securities with a total amortized cost of
$47,286,000 were liquidated, providing a gain of $374,000. The average remaining maturity
of the securities sold was 12.50 years, which exceeds the two to five-year maturity period
that Omega considers acceptable for its current interest rate risk position. Proceeds from
the sale of the securities helped fund the early liquidation of $55,032,000 in long term
debt acquired from Sun. In addition, as a result of favorable market conditions, $509,000 in
equity securities were sold, providing a gain of $614,000.Total investment securities as a percentage of total assets at March 31, 2005 and December
31, 2004 were 15.7%. Amortized cost of securities maturing or repricing in one year or less
comprised 13.4% of the total amortized cost of investment securities of $313,529,000 as of
March 31, 2005, as compared to 17.2% of total investment securities of $322,555,000 as of
December 31, 2004. There was $210,000 in investments in instruments of foreign countries on
March 31, 2005 and December 31, 2004.3.
    LoansNet loans in the first three months of 2005 decreased by $47,398,000, or 3.6% from the
balance at December 31, 2004, bringing the total to $1,281,783,000 at March 31, 2005. As
part of a planned balance sheet restructuring following the Sun acquisition, a block of
loans was sold, with a carrying value of Page 17




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approximately $22 million in the first quarter of
2005. The remainder of the decrease in loans is due to balance runoffs. Following is a table
showing the composition of the loan portfolio (in thousands). March 31,
    
    
    December 31,2005
    
    
    2004Commercial, financial and agricultural
    
    $
    269,555
    
    
    $
    271,650Real estate  commercial
    
    
    501,023
    
    
    
    501,394Real estate  construction
    
    
    19,619
    
    
    
    25,301Real estate  mortgage
    
    
    261,531
    
    
    
    277,208Home equity
    
    
    130,227
    
    
    
    133,077Personal
    
    
    87,181
    
    
    
    107,859Lease financing
    
    
    13,418
    
    
    
    13,387Unearned interest
    
    
    (1,702
    )
    
    
    (1,626
    )Total
    
    $
    1,280,852
    
    
    $
    1,328,250
  Changes in the allowance for loan losses for the three months ended March 31, 2005 and
2004 were as follows (in thousands): 2005
    
    
    2004Balance of allowance  beginning of period
    
    $
    15,644
    
    
    $
    10,569Loans charged off:Commercial, financial and agricultural
    
    
    63
    
    
    
    24Real estate  commercial
    
    
    
    
    
    
    Real estate  mortgage
    
    
    18
    
    
    
    26Personal
    
    
    326
    
    
    
    93Lease financing receivables
    
    
    15
    
    
    
    Total charge-offs
    
    
    422
    
    
    
    143Recoveries of loans previously charged off:Commercial, financial and agricultural
    
    
    25
    
    
    
    1Real estate  commercial
    
    
    8
    
    
    
    Real estate  mortgage
    
    
    33
    
    
    
    1Personal
    
    
    57
    
    
    
    23Lease financing receivables
    
    
    
    
    
    
    Total recoveries
    
    
    123
    
    
    
    25Net charge-offs
    
    
    299
    
    
    
    118Provision for loan losses
    

    
    142
    
    
    
    Balance of allowance  end of period.
    
    $
    15,487
    
    
    $
    10,451
  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. March 31, 2005
    
    December 31, 2004Impaired loans:Recorded investment at period end
    
    $
    3,809,000
    
    
    $
    2,475,000Impaired loan balance for which there is
a related allowance
    
    
    1,220,000
    
    
    
    755,000Impaired loan balance for which there is
no related allowance
    
    
    2,589,000
    
    
    
    1,720,000Average recorded investment
    
    
    3,142,000
    
    
    
    1,597,000
 Three months endedMarch 31, 2005
    
    
    March 31, 2004Interest income recognized (on a cash basis)
    
    $
    13,000
    
    
    $
    46,000
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Management performs a quantitative analysis to support the adequacy of the allowance
for loan losses. This analysis includes review of historical charge-off rates for loan
categories, fluctuations and trends in the amount of classified loans and economic factors.
Significant to this analysis is any change in observable trends that may be occurring
relative to loans, to assess potential credit weaknesses. Current economic factors and
trends in risk ratings are considered in the determination and allocation of the allowance
for loan losses. The allowance for loan losses at March 31, 2005 and December 31, 2004
represented 1.21% and 1.18%, respectively, of the total loans outstanding, net of unearned
interest.Set forth below is an analysis of Omegas non-performing loans as of March 31, 2005 as
compared to December 31, 2004.  Non-performing Loans
(In thousands) March 31,
    
    
    December 31,2005
    
    
    2004Non-accrual loans
    
    $
    5,311
    
    
    $
    5,220Accruing loans past due 90 days or more
    
    
    1,399
    
    
    
    2,667Restructured loans
    
    
    218
    
    
    
    220Total non-performing loans
    
    $
    6,928
    
    
    $
    8,107Non-performing loans as percent of allowance
    
    
    44.7
    %
    
    
    51.8
    %
  The decrease of $1,179,000 in non-performing loans from December 31, 2004 to March 31, 2005
was due partially to the charge-offs of $422,000 during the first quarter of 2005 and the
improvement of the amount of accruing loans past due 90 days or more.4.
    Deposits and Other Sources of FundsDeposits provide the primary source of funding for loans and investment securities. As of
March 31, 2005, total deposits decreased by $13,297,000 as compared to December 31, 2004. As
of March 31, 2005, non-interest bearing deposits decreased by $7,888,000, or 3.5% and
interest bearing accounts decreased by $5,409,000, or 0.4% when compared to December 31,
2004.Borrowed funds are used as an additional source of funding for loans and investment
securities. As of March 31, 2005, Omega had short-term borrowings (maturities within one
year) in the amount of $78,251,000 as compared to $90,259,000 at December 31, 2004,
representing a decrease of $12,008,000, or 13.3%. Long-term debt was $43,853,000 at March
31, 2005 compared to $99,579,000 at December 31, 2004. The decrease is due to the early
extinguishment of FHLB debt acquired through the merger with Sun. Approximately $55 million
of FHLB debt was repaid in the first quarter of 2005, giving rise to a $1,043,000 gain from
the early extinguishment of debt. The balance of junior subordinated debt was $57,066,000
and $57,190,000 at March 31, 2005 and December 31, 2004, respectively.5.
    Regulatory Capital ComplianceBank regulatory authorities in the United States issue risk-based capital standards. These
capital standards relate a banking companys capital to the risk profile of its assets and
provide the basis by which all banking companies and banks are evaluated in terms of capital
adequacy. The risk-based capital standards require all banks to have Tier 1 capital of at
least 4% and total capital, including Tier 1 capital, of at least 8% of risk-adjusted
assets. Tier 1 capital includes common stockholders equity and qualifying perpetual
preferred stock together with related surpluses and retained earnings. Total capital is
comprised of Tier 1 capital, limited life preferred stock, qualifying debt instruments, and
the reserves
for possible loan losses. Banking regulators have also issued leverage ratio requirements.
The leverage ratio requirement is measured as the ratio of Tier 1 capital to adjusted
average assets.At March 31, 2005, Omega and Omega Bank, its banking subsidiary, each met the regulatory
definition of a well capitalized financial institution, i.e., a leverage ratio exceeding
5%, Tier 1 capital exceeding 6% and total capital exceeding 10%. Page 19




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Omega is impacted by market risks, and has procedures in place to evaluate and mitigate
these risks. These market risks and Omegas procedures are described in the Managements
Discussion and Analysis section of the 2004 Annual Report to Shareholders. To the knowledge
of Omega, there have been no material changes in the market risks that impact Omega or its
procedures relative to these risks, since December 31, 2004. Item 4. CONTROLS AND PROCEDURES  Quarterly evaluation of the Companys Disclosure Controls and Internal Controls.
The Companys management, with the participation of its chief executive officer and chief
financial officer, conducted an evaluation of the effectiveness of our disclosure controls
and procedures, as defined in Exchange Act Rule 13a-15(e), as of March 31, 2005. Based on
that evaluation, the Companys chief executive officer and chief financial officer concluded
that the Companys disclosure controls and procedures were effective in reaching a
reasonable level of assurance that management is alerted to material information relating to
the Company during the period when the Companys periodic reports are being prepared.During the quarter ended March 31, 2005, there has not occurred any change in the Companys
internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), that
has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.A control system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have been
detected. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. PART II. Other Information Item 1. Legal Proceedings  None of a material nature. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  None Item 3. Defaults upon Senior Securities  None Item 4. Submission of Matters to a Vote of Security Holders  None Item 5. Other Information  None Item 6. Exhibits ExhibitNumber
    
    
    Description31.1
    
    
    Chief Executive Officers Rule 13a-14/15d-14(a) (Section 302) Certification31.2
    
    
    Chief Financial Officers Rule 13a-14/15d-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
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SIGNATURES  Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OMEGA FINANCIAL CORPORATION(Registrant)
 May 6, 2005
    
    
    
    By:
    
    /s/ David B. LeeDate
    
    
    
    
    
    David B. LeeChairman andChief Executive OfficerMay 6, 2005
    

    
    
    
    
    /s/ Daniel L. WarfelDate
    
    
    
    
    
    Daniel L. WarfelExecutive Vice President andChief Financial Officer
 Page 21