##### Table of Contents



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 September 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
 (814) 231-7680
 Not applicable
  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  September 30, 2007 (unaudited) and December 31, 2006
    
    
    4Consolidated Statements of Income (unaudited)  for the three and nine month periods ended September 30, 2007 and 2006
    
    
    6Consolidated Statements of Cash Flows (unaudited)  for the nine month periods ended September 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
    
    
    30PART 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
    
    
    32Item 6.
    
    Exhibits
    
    
    32SIGNATURES
    
    
    33EXHIBIT INDEX
    
    
    34Section 302 Certification of Chief Executive OfficerSection 906 Certification of Chief Financial OfficerSection 906 Certification of Chief Executive OfficerSection 906 Certification of Chief Financial Officer
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (Note A)AssetsCash and due from banks
    
    $
    51,904
    
    
    $
    56,225Interest bearing deposits with other banks
    
    
    11,163
    
    
    
    12,073Federal funds sold
    
    
    17,760
    
    
    
    Trading securities
    
    
    60
    
    
    
    48Investment securities available for sale
    
    
    274,871
    
    
    
    291,807Other investments
    
    
    12,104
    
    
    
    12,087Investment in unconsolidated subsidiary
    
    
    1,625
    
    
    
    1,625Loans held for sale
    
    
    
    
    
    
    204Total portfolio loans
    
    
    1,126,974
    
    
    
    1,152,188Less: Allowance for loan losses
    
    
    (12,805
    )
    
    
    (17,344
    )Net portfolio loans
    
    
    1,114,169
    
    
    
    1,134,844Premises and equipment, net
    
    
    29,428
    
    
    
    30,861Other real estate owned
    
    
    945
    
    
    
    512Bank-owned life insurance
    
    
    75,156
    
    
    
    76,341Investment in limited partnerships
    
    
    5,202
    
    
    
    5,763Core deposit intangibles
    
    
    5,089
    
    
    
    5,641Other intangibles
    
    
    1,003
    
    
    
    1,085Goodwill
    
    
    159,567
    
    
    
    159,387Other assets
    
    
    22,335
    
    
    
    27,315TOTAL ASSETS
    
    $
    1,782,381
    
    
    $
    1,815,818
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (Note A)Liabilities and Shareholders EquityDeposits:Non-interest bearing
    
    $
    237,436
    
    
    $
    232,335Interest bearing
    
    
    1,055,058
    
    
    
    1,093,428Total deposits
    
    
    1,292,494
    
    
    
    1,325,763Short-term borrowings
    
    
    62,880
    
    
    
    65,712ESOP debt
    
    
    1,189
    
    
    
    1,481Junior subordinated debentures
    
    
    55,820
    
    
    
    56,193Long-term debt
    
    
    26,803
    
    
    
    27,877Other interest bearing liabilities
    
    
    864
    
    
    
    858Other liabilities
    
    
    11,126
    
    
    
    12,723TOTAL LIABILITIES
    
    
    1,451,176
    
    
    
    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 -12,867,243 shares at September 30, 2007;
12,823,471 shares at December 31, 2006
    
    
    64,352
    
    
    
    64,133Outstanding -12,632,627 shares at September 30, 2007; 
12,622,802 shares at December 31, 2006Capital surplus
    
    
    104,078
    
    
    
    103,149Retained earnings
    
    
    169,321
    
    
    
    164,653Accumulated other comprehensive income
    
    
    1,234
    
    
    
    313Unearned compensation related to ESOP debt
    
    
    (642
    )
    
    
    (859
    )Cost of common stock in treasury:234,616 shares at September 30, 2007; 
200,669 shares at December 31, 2006
    
    
    (7,138
    )
    
    
    (6,178
    )TOTAL SHAREHOLDERS EQUITY
    
    
    331,205
    
    
    
    325,211TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,782,381
    
    
    $
    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest Income:Interest and fees on loans
    
    $
    19,877
    
    
    $
    20,621
    
    
    $
    59,600
    
    
    $
    60,830Interest and dividends on investment securities
    
    
    3,433
    
    
    
    3,043
    
    
    
    10,260
    
    
    
    9,224Other interest income
    
    
    459
    
    
    
    516
    
    
    
    772
    
    
    
    858TOTAL INTEREST INCOME
    
    
    23,769
    
    
    
    24,180
    
    
    
    70,632
    
    
    
    70,912Interest Expense:Interest on deposits
    
    
    6,882
    
    
    
    6,824
    
    
    
    19,981
    
    
    
    19,128Interest on short-term borrowings
    
    
    620
    
    
    
    708
    
    
    
    2,019
    
    
    
    2,142Interest on long-term debt and
other interest bearing liabilities
    
    
    1,266
    
    
    
    1,259
    
    
    
    3,763
    
    
    
    3,771TOTAL INTEREST EXPENSE
    
    
    8,768
    
    
    
    8,791
    
    
    
    25,763
    
    
    
    25,041NET INTEREST INCOME
    
    
    15,001
    
    
    
    15,389
    
    
    
    44,869
    
    
    
    45,871Provision for loan losses
    
    
    205
    
    
    
    900
    
    
    
    1,560
    
    
    
    1,120INCOME FROM CREDIT ACTIVITIES
    
    
    14,796
    
    
    
    14,489
    
    
    
    43,309
    
    
    
    44,751Other Income:Service fees on deposit accounts
    
    
    2,640
    
    
    
    2,594
    
    
    
    7,691
    
    
    
    7,546Service fees on loans
    
    
    350
    
    
    
    445
    
    
    
    1,107
    
    
    
    1,270Earnings on bank-owned life insurance
    
    
    643
    
    
    
    620
    
    
    
    1,929
    
    
    
    1,779Trust fees
    
    
    1,063
    
    
    
    919
    
    
    
    3,257
    
    
    
    3,064Investment and insurance product sales
    
    
    687
    
    
    
    668
    
    
    
    2,239
    
    
    
    2,210(Loss) gain on sale of loans and other assets
    
    
    (25
    )
    
    
    112
    
    
    
    5
    
    
    
    233Net gains on the sale of investment securities
    
    
    153
    
    
    
    577
    
    
    
    491
    
    
    
    815Other
    
    
    1,719
    
    
    
    1,226
    
    
    
    4,378
    
    
    
    3,607TOTAL OTHER INCOME
    
    
    7,230
    
    
    
    7,161
    
    
    
    21,097
    
    
    
    20,524Other Expense:Salaries and employee benefits
    
    
    7,233
    
    
    
    7,396
    
    
    
    21,332
    
    
    
    22,189Net occupancy expense
    
    
    995
    
    
    
    1,019
    
    
    
    3,146
    
    
    
    3,207Equipment expense
    
    
    1,155
    
    
    
    1,111
    
    
    
    3,485
    
    
    
    3,382Data processing service
    
    
    607
    
    
    
    683
    
    
    
    1,816
    
    
    
    2,001Pennsylvania shares tax
    
    
    661
    
    
    
    598
    
    
    
    2,233
    
    
    
    2,038Amortization of intangible assets
    
    
    211
    
    
    
    221
    
    
    
    634
    
    
    
    664Other
    
    
    3,514
    
    
    
    3,518
    
    
    
    10,182
    
    
    
    10,967TOTAL OTHER EXPENSE
    
    
    14,376
    
    
    
    14,546
    
    
    
    42,828
    
    
    
    44,448Income before income taxes and discontinued operations
    
    
    7,650
    
    
    
    7,104
    
    
    
    21,578
    
    
    
    20,827Income tax expense
    
    
    1,804
    
    
    
    1,638
    
    
    
    5,186
    
    
    
    4,689Income from continuing operations
    
    
    5,846
    
    
    
    5,466
    
    
    
    16,392
    
    
    
    16,138Discontinued operations:Income from discontinued operations, net of tax
    
    
    
    
    
    
    284
    
    
    
    
    
    
    
    446Loss on disposal of discontinued operations, net of tax
    
    
    
    
    
    
    (393
    )
    
    
    
    
    
    
    (539
    )Loss from discontinued operations
    
    
    
    
    
    
    (109
    )
    
    
    
    
    
    
    (93
    )NET INCOME
    
    $
    5,846
    
    
    $
    5,357
    
    
    $
    16,392
    
    
    $
    16,045
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Net income per common shareBasic
    
    $
    0.46
    
    
    $
    0.43
    
    
    $
    1.30
    
    
    $
    1.28Diluted
    
    $
    0.46
    
    
    $
    0.43
    
    
    $
    1.30
    
    
    $
    1.27Net income per common share from
continuing operationsBasic
    
    $
    0.46
    
    
    $
    0.44
    
    
    $
    1.30
    
    
    $
    1.28Diluted
    
    $
    0.46
    
    
    $
    0.43
    
    
    $
    1.30
    
    
    $
    1.28Net income (loss) per common share
from discontinued operationsBasic
    
    $
    0.00
    
    
    
    ($0.01
    )
    
    $
    0.00
    
    
    
    ($0.01
    )Diluted
    
    $
    0.00
    
    
    
    ($0.01
    )
    
    $
    0.00
    
    
    
    ($0.01
    )Weighted average shares and equivalentsBasic
    
    
    12,625
    
    
    
    12,560
    
    
    
    12,628
    
    
    
    12,573Diluted
    
    
    12,638
    
    
    
    12,592
    
    
    
    12,644
    
    
    
    12,615Dividends declared per shareCommon
    
    $
    0.31
    
    
    $
    0.31
    
    
    $
    0.93
    
    
    $
    0.93
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    16,392
    
    
    $
    16,045Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    3,838
    
    
    
    3,827Provision for loan losses and off-balance sheet reserve
    
    
    1,570
    
    
    
    1,147Gain on sale of investment securities
    
    
    (491
    )
    
    
    (815
    )Gain on sale of fixed assets and other property owned
    
    
    (5
    )
    
    
    (272
    )Provision for deferred income tax
    
    
    1,926
    
    
    
    1,272Increase in cash surrender value of bank owned life insurance
    
    
    (1,915
    )
    
    
    (1,779
    )Decrease (increase) in interest receivable and other assets
    
    
    551
    
    
    
    (298
    )(Decrease) increase in interest payable
    
    
    (591
    )
    
    
    (645
    )Increase in taxes payable
    
    
    1,892
    
    
    
    552Amortization of deferred loan fees, net
    
    
    (235
    )
    
    
    275Deferral of net loan fees
    
    
    44
    
    
    
    (442
    )Decrease in accounts payable and accrued expenses
    
    
    (1,250
    )
    
    
    1,549Total adjustments
    
    
    5,334
    
    
    
    4,371Net cash provided by operating activities
    
    
    21,726
    
    
    
    20,416Cash flows from investing activities:Investment securities available for sale:Proceeds from sales
    
    
    834
    
    
    
    11,869Proceeds from maturities
    
    
    128,114
    
    
    
    74,300Cash used for purchases
    
    
    (109,783
    )
    
    
    (58,713
    )Proceeds from sale of Trading Account
    
    
    
    
    
    
    435Net change in interest bearing deposits with other banks
    
    
    910
    
    
    
    (2,756
    )Decrease in loans and leases
    
    
    17,641
    
    
    
    27,371Gross proceeds from sale of loans and leases
    
    
    1,069
    
    
    
    6,409Proceeds from bank-owned life insurance death benefit
    
    
    3,100
    
    
    
    1,217(Investment) return of capital in limited partnership
    
    
    (45
    )
    
    
    46Capital expenditures
    
    
    (1,442
    )
    
    
    (1,719
    )Sale of fixed assets and other property owned
    
    
    296
    
    
    
    1,316Sale of discontinued operations
    
    
    
    
    
    
    4,875Increase in federal funds sold
    
    
    (17,760
    )
    
    
    (7,150
    )Net cash provided by investing activities
    
    
    22,934
    
    
    
    57,500Cash flows from financing activities:Net change in demand deposits, checking with interest and savings
    
    
    (14,770
    )
    
    
    (48,779
    )Net Change in time deposits
    
    
    (18,748
    )
    
    
    16,744Decrease in short-term borrowings, net
    
    
    (2,832
    )
    
    
    (36,045
    )Issuance of long term debt
    
    
    5,000
    
    
    
    1,500Principal payment on long term debt
    
    
    (6,074
    )
    
    
    (1,008
    )Net change in other interest bearing liabilities
    
    
    6
    
    
    
    (67
    )Dividends paid
    
    
    (11,751
    )
    
    
    (11,728
    )Issuance of common stock
    
    
    1,148
    
    
    
    2,677Acquisition of treasury stock
    
    
    (960
    )
    
    
    (4,194
    )Net cash used in financing activities
    
    
    (48,981
    )
    
    
    (80,900
    )Net decrease in cash and cash equivalents
    
    $
    (4,321
    )
    
    $
    (2,984
    )
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,2007
    
    
    2006Cash and cash equivalents at beginning of period
    
    $
    56,225
    
    
    $
    56,194Cash and cash equivalents at end of period
    
    
    51,904
    
    
    
    53,210Net decrease in cash and cash equivalents
    
    $
    (4,321
    )
    
    $
    (2,984
    )Supplemental InformationInterest paid
    
    $
    26,354
    
    
    $
    25,695Income taxes paid
    
    
    3,911
    
    
    
    3,706Supplemental schedule of noncash investing and financing activities:Transfers of loans to other real estate owned
    
    $
    645
    
    
    $
    582Cash and cash equilavents consist of non-interest bearing deposits
with other banks and are classified as follows:Cash and due from banks
    
    $
    51,904
    
    
    $
    52,733Cash included in Assets held for sale
    
    
    
    
    
    
    477Total cash
    
    $
    51,904
    
    
    $
    53,210
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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 nine months ended September 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 thereto 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. These estimates are reviewed and adjusted at
least quarterly and are reported in earnings in the periods in which they become known.
Actual losses may vary from estimates. 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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ESPP
    
    SOPsWeighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding, December 31, 2006
    
    
    107,284
    
    
    $
    31.85
    
    
    
    455,887
    
    
    $
    32.94Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (16,191
    )
    
    
    25.27
    
    
    
    (27,581
    )
    
    
    26.78Forfeited
    
    
    (8,849
    )
    
    
    31.66
    
    
    
    (33,861
    )
    
    
    35.20Outstanding, September 30, 2007
    
    
    82,244
    
    
    $
    32.06
    
    
    
    394,445
    
    
    $
    33.18Options exercisable at September 30, 2007
    
    
    82,244
    
    
    
    
    
    
    
    394,445
 Director PlansWeighted-AverageExerciseShares
    
    PriceOutstanding, December 31, 2006
    
    
    23,264
    
    
    $
    32.31Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (1,692
    )
    
    
    28.67Outstanding, September 30, 2007
    
    
    21,572
    
    
    $
    32.60Options exercisable at September 30, 2007
    
    
    21,572
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##### Table of Contents



WeightedNumber of
    
    
    AverageRestricted
    
    
    Grant DateStock
    
    
    Fair ValueUnits
    
    
    Per ShareNon-vested at December 31, 2006
    
    
    
    
    
    $
    Awarded
    
    
    2,533
    
    
    
    28.59Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Non-vested at September 30, 2007
    
    
    2,533
    
    
    $
    28.59
  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 2006 (in thousands):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2006Other Income:Trust fees
    
    $
    633
    
    
    $
    1,606Investment and insurance product sales
    
    
    5
    
    
    
    41Other
    
    
    50
    
    
    
    50Total other Income
    
    
    688
    
    
    
    1,697Other expense:Salaries and employee benefits
    
    
    145
    
    
    
    585Net occupancy expense
    
    
    (4
    )
    
    
    4Equipment expense
    
    
    
    
    
    
    21Pennsylvania shares tax
    
    
    40
    
    
    
    81Amortization of intangible assets
    
    
    28
    
    
    
    102Other
    
    
    40
    
    
    
    216Total other expense
    
    
    249
    
    
    
    1,009Income from discontinued operations before taxes and
disposal
    
    
    439
    
    
    
    688Income tax expense
    
    
    155
    
    
    
    242Income from discontinued operations before loss on disposal
    
    
    284
    
    
    
    446(Loss) gain on disposal of discontinued operations
    
    
    (388
    )
    
    
    37Income tax expense
    
    
    5
    
    
    
    576Loss from disposal of discontinued operations
    
    
    (393
    )
    
    
    (539
    )Loss from discontinued operations
    
    $
    (109
    )
    
    $
    (93
    )
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##### Table of Contents



The following is a summary of the cash flows from discontinued operations for 2006 (in
thousands):
 Nine Months EndedSeptember 30, 2006Net cash provided by operating activities
    
    $
    206Net cash provided by investing activities
    
    
    712Net cash used in financing activities
    
    
    (1,430
    )Net decrease in cash and cash equivalents of discontinued operations
    
    $
    (512
    )
 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
September 30, 2007, standby letters of credit issued and outstanding amounted to $30.6
million compared to $29.9 million on December 31, 2006. The fair market value of the standby
letters of credit at both September 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 September 30, 2007, the bank had $318.4 million outstanding in loan commitments and other
unused lines of credit extended to its customers. Of this amount $242.3 million, or 76.1%,
were commercial commitments. The remaining amounts of $76.1 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 September 30, 2007, the balance of the ESOP debt was $1.2
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 September
30, 2007 and December 31, 2006 (in thousands):
 Securities Classified as Available for SaleGross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketSeptember 30, 2007
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    177,497
    
    
    $
    1,268
    
    
    $
    (283
    )
    
    $
    178,482Obligations of state and political subdivisions
    
    
    3,533
    
    
    
    4
    
    
    
    (16
    )
    
    
    3,521Corporate and other securities
    
    
    2,568
    
    
    
    9
    
    
    
    (6
    )
    
    
    2,571Mortgage-backed securities
    
    
    83,133
    
    
    
    63
    
    
    
    (928
    )
    
    
    82,268Common Stock
    
    
    6,242
    
    
    
    1,841
    
    
    
    (54
    )
    
    
    8,029Total
    
    $
    272,973
    
    
    $
    3,185
    
    
    $
    (1,287
    )
    
    $
    274,871
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##### Table of Contents



Securities Classified as Available for SaleGross
    
    
    GrossAmortized
    
    
    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 September 30, 2007 and December 31, 2006 (in thousands):
 Less Than 12 Months
    
    
    12 Months or LongerFair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedSeptember 30, 2007
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    2,800
    
    
    $
    (23
    )
    
    $
    39,669
    
    
    $
    (260
    )Obligations of state and political subdivisions
    
    
    1,906
    
    
    
    (4
    )
    
    
    983
    
    
    
    (12
    )Corporate and other securities
    
    
    101
    
    
    
    
    
    
    
    905
    
    
    
    (6
    )Mortgage-backed securities
    
    
    24,439
    
    
    
    (115
    )
    
    
    48,482
    
    
    
    (813
    )Debt securities
    
    
    29,246
    
    
    
    (142
    )
    
    
    90,039
    
    
    
    (1,091
    )Common stock
    
    
    632
    
    
    
    (48
    )
    
    
    18
    
    
    
    (6
    )Total temporarily impaired securities
    
    $
    29,878
    
    
    $
    (190
    )
    
    $
    90,057
    
    
    $
    (1,097
    )
 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
    )
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##### Table of Contents



The unrealized losses at September 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 Omega has the
ability to hold these investments until market recovery or maturity. Debt securities with
unrealized losses for a period of less than 12 months include one investment in U.S.
Government agency debt securities, nine investments in mortgage-backed securities, one
investment in corporate securities and four investments in obligations of state and
municipal subdivisions. Debt securities with unrealized losses for a period of 12 months or
longer include sixteen investments in U.S. Government agency debt securities, seven
investments in corporate securities, four 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 October 2007 to September
2022. The unrealized loss positions for each individual security range from .01% to 4.49%
of the securities amortized costs as of September 30, 2007. To the best of its knowledge,
the Corporation has no debt securities in its investment portfolio that provide exposure to
the sub-prime mortgage market.Common stock with unrealized losses for a period of less than 12 months includes four
investments. Unrealized losses on common stock for a period over 12 months reflect one
investment, which has been at an unrealized loss for 18 months. At this time, management
believes the impairment of this investment is temporary.Omegas policy requires quarterly reviews of our investment portfolio for indications of
impairment. 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.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 September 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 of
the allowance for loan loss allocated to this borrower, 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 against the allowance for loan loss, reducing the amount of outstanding loans to
this borrower to $14.9 million as of September 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 ultimate 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 September 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):
 September 30,
    
    
    December 31,2007
    
    
    2006Notes payable to Federal Home Loan Bank, with fixed rates
between 3.875% and 6.800%
    
    $
    26,803
    
    
    $
    27,877ESOP Debt Guarantee
    
    $
    1,189
    
    
    $
    1,481
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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 September 30, 2007Capital Trust I
    
    Sun Trust ITrust preferred securities
    
    
    $36,000
    
    
    
    $16,500Common securities
    
    
    1,114
    
    
    
    511Junior subordinated debt
    
    
    37,114
    
    
    
    18,706Stated maturity date
    
    
    10/18/2034
    
    
    
    2/22/2031Optional redemption date
    
    
    10/18/2009
    
    
    Annually
beginning
2/22/2011
At various
redemption pricesRate
    
    5.98% until
October 2009,
then LIBOR
plus 219
basis points
    
    
    
    8.64
    %
 I.
    
    Comprehensive IncomeComponents of other comprehensive income consist of the following (in thousands):
 Three months ended
    
    
    Three months endedSeptember 30, 2007
    
    
    September 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
    
    
    7,650
    
    
    
    1,804
    
    
    
    5,846
    
    
    
    7,104
    
    
    
    1,638
    
    
    
    5,466Net income (loss) from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    160
    
    
    
    (109
    )Net income
    
    
    7,650
    
    
    
    1,804
    
    
    
    5,846
    
    
    
    7,155
    
    
    
    1,798
    
    
    
    5,357Other comprehensive income:Unrealized gains on available for sale
securities :Unrealized holding losses arising
during the period
    
    
    2,205
    
    
    
    772
    
    
    
    1,433
    
    
    
    2,860
    
    
    
    1,001
    
    
    
    1,859Less reclassification adjustment
for
gains included in net income
    
    
    (153
    )
    
    
    (54
    )
    
    
    (99
    )
    
    
    (577
    )
    
    
    (202
    )
    
    
    (375
    )Other comprehensive income
    
    
    2,052
    
    
    
    718
    
    
    
    1,334
    
    
    
    2,283
    
    
    
    799
    
    
    
    1,484Total comprehensive income
    
    $
    9,702
    
    
    $
    2,522
    
    
    $
    7,180
    
    
    $
    9,438
    
    
    $
    2,597
    
    
    $
    6,841
 Page 16




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##### Table of Contents



Nine Months ended September 30, 2007
    
    
    Nine Months ended September 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
    
    
    21,578
    
    
    
    5,186
    
    
    
    16,392
    
    
    
    20,827
    
    
    
    4,689
    
    
    
    16,138Net income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    725
    
    
    
    818
    
    
    
    (93
    )Net income
    
    
    21,578
    
    
    
    5,186
    
    
    
    16,392
    
    
    
    21,552
    
    
    
    5,507
    
    
    
    16,045Unrealized gains on available for sale
securities :Unrealized holding losses arising
during the period
    
    
    1,908
    
    
    
    668
    
    
    
    1,240
    
    
    
    1,855
    
    
    
    649
    
    
    
    1,206Less reclassification adjustment
for
gains included in net income
    
    
    (491
    )
    
    
    (172
    )
    
    
    (319
    )
    
    
    (815
    )
    
    
    (285
    )
    
    
    (530
    )Other comprehensive income (loss)
    
    
    1,417
    
    
    
    496
    
    
    
    921
    
    
    
    1,040
    
    
    
    364
    
    
    
    676Total comprehensive income
    
    $
    22,995
    
    
    $
    5,682
    
    
    $
    17,313
    
    
    $
    22,592
    
    
    $
    5,871
    
    
    $
    16,721
 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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006NumeratorIncome from continuing operations
    
    $
    5,846
    
    
    $
    5,466
    
    
    $
    16,392
    
    
    $
    16,138Income (loss) from discontinued operations
    
    
    
    
    
    
    (109
    )
    
    
    
    
    
    
    (93
    )Net Income
    
    $
    5,846
    
    
    $
    5,357
    
    
    $
    16,392
    
    
    $
    16,045DenominatorBasic weighted-average shares outstanding
    
    
    12,625
    
    
    
    12,560
    
    
    
    12,628
    
    
    
    12,573Dilutive potential shares from stock-basked compensation
    
    
    9
    
    
    
    28
    
    
    
    12
    
    
    
    38Potential Shares required for contract settlement
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Dilutive weighted-average shares outstanding
    
    
    12,638
    
    
    
    12,592
    
    
    
    12,644
    
    
    
    12,615Earnings per share  BasicIncome from continuing operations
    
    $
    0.46
    
    
    $
    0.44
    
    
    $
    1.30
    
    
    $
    1.28Income (loss) from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Net Income (1)
    
    $
    0.46
    
    
    $
    0.43
    
    
    $
    1.30
    
    
    $
    1.28Earnings per share  DilutedIncome from continuing operations
    
    $
    0.46
    
    
    $
    0.43
    
    
    $
    1.30
    
    
    $
    1.28Income (loss) from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Net Income (1)
    
    $
    0.46
    
    
    $
    0.43
    
    
    $
    1.30
    
    
    $
    1.27
 
 (1)
    
    Totals may not sum due to rounding Page 17




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##### Table of Contents



K.
    
    Goodwill and Other Intangible AssetsThe recorded goodwill balance at September 30, 2007 was $159.6 million. A summary of
intangible assets at September 30, 2007 and December 31, 2006 follows (in thousands):
 September 30,
    
    December 31,2007
    
    2006Core deposit intangible:Gross carrying amount
    
    $
    7,480
    
    
    $
    7,480Less: accumulated amortization
    
    
    2,391
    
    
    
    1,839Net carrying amount
    
    
    5,089
    
    
    
    5,641Customer relationship intangibles:Gross carrying amount
    
    
    1,200
    
    
    
    1,200Less: accumulated amortization
    
    
    327
    
    
    
    245Net carrying amount
    
    
    873
    
    
    
    955Total finite-lived intangibles:Gross carrying amount
    
    
    8,680
    
    
    
    8,680Less: accumulated amortization
    
    
    2,718
    
    
    
    2,084Net carrying amount
    
    
    5,962
    
    
    
    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. EITF No. 06-4 is effective 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 Statement of Financial Accounting Standards (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 is currently completing its 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




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##### Table of Contents



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 $30,000 through a charge to
retained earnings, and increased the carrying value of uncertain tax positions resulting
from prior acquisitions by $20,000 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 $370,000
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 September 30, 2007. If the Companys positions are sustained by the taxing authority
in favor of the Company, approximately $330,000 would be treated as a reduction of goodwill,
and the balance of $40,000 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 $40,000 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 by state taxing authorities for all state income taxes through 2000. For
the nine months ended September 30, 2007, there were no material changes to the liability
for uncertain tax positions.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.
 N.
    
    Subsequent Event
 A.
    
    The $1.2 million ESOP debt guaranteed by the Corporation was paid off on November 1, 2007.
This debt had a maturity date of 2011, however the Trustees of the Omega Financial
Corporation ESOP approved an early payoff because current interest rates are lower than the
5.90% fixed rate on the loan.B.
    
    On November 8, 2007, Omega Financial Corporation (the Company) entered into an Agreement and
Plan of Merger (the Merger Agreement) with F.N.B. Corporation, a Florida corporation (FNB);
pursuant to which the Company will merge with and into FNB (the Merger), with FNB continuing as
the surviving corporation.Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of
common stock, $5.00 par value, of the Company, other than Treasury Shares, will be canceled and
will be converted automatically into the right to receive 2.022 shares of common stock, $.01 par
value, of FNB. For purposes hereof, Treasury Shares means shares of the Companys common stock
held by the Company or any of its subsidiaries or by FNB or any of its subsidiaries, other than in
a fiduciary, including custodial or agency, capacity or as a result of debts previously contracted
in good faith.The Merger is expected to be completed early in the second quarter of 2008, subject to the approval
of the shareholders of each of Omega and FNB, customary regulatory approvals as well as the
satisfaction of other customary closing conditions.
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##### Table of Contents



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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##### Table of Contents



1.
    
    Operations Overview
 A.
    
    Three Months Ended September 30, 2007 and 2006
    B.
    
    Nine Months Ended September 30, 2007 and 2006
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Return on average assets*
    
    
    1.30
    %
    
    
    1.13
    %
    
    
    1.21
    %
    
    
    1.12
    %Return on average tangible assets*
    
    
    1.43
    
    
    
    1.24
    
    
    
    1.34
    
    
    
    1.23Return on average stated equity*
    
    
    7.06
    
    
    
    6.64
    
    
    
    6.62
    
    
    
    6.64Return on average tangible equity*
    
    
    14.13
    
    
    
    13.94
    
    
    
    13.29
    
    
    
    14.04Dividend payout ratio
    
    
    66.99
    
    
    
    72.74
    
    
    
    71.67
    
    
    
    72.86Average equity to average assets (stated)
    
    
    18.39
    
    
    
    16.97
    
    
    
    18.34
    
    
    
    16.86Average equity to average assets (tangible)
    
    
    10.12
    
    
    
    8.87
    
    
    
    10.05
    
    
    
    8.76
 
 *
    
    annualized Page 21




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##### Table of Contents



Net Interest Income
  A.
    
    Three Months Ended September 30, 2007 and 2006
    B.
    
    Nine Months Ended September 30, 2007 and 2006
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Yield on average earning assets
    
    
    6.49
    %
    
    
    6.22
    %
    
    
    6.44
    %
    
    
    6.07
    %Cost to fund earning assets
    
    
    2.38
    
    
    
    2.25
    
    
    
    2.35
    
    
    
    2.15Net interest margin
    
    
    4.11
    
    
    
    3.97
    
    
    
    4.09
    
    
    
    3.92Net interest margin  tax equivalent
    
    
    4.20
    
    
    
    4.08
    
    
    
    4.18
    
    
    
    4.05
 Page 22




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##### Table of Contents



Effects of Interest Rate Changes on Net Interest Income
  September 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
    
    
    
    
    
    2,214
    
    
    
    3.5
    %
    
    
    200
    
    
    
    2,133
    
    
    
    3.6
    %100
    
    
    
    
    
    1,104
    
    
    
    1.7
    %
    
    
    100
    
    
    
    1,068
    
    
    
    1.8
    %0
    
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0(100
    )
    
    
    
    
    (1,120
    )
    
    
    (1.8
    )%
    
    
    (100
    )
    
    
    (1,023
    )
    
    
    (1.7
    )%(200
    )
    
    
    
    
    (2,271
    )
    
    
    (3.6
    )%
    
    
    (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 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 which was previously reserved for, as a result of the
bankruptcy reorganization process for the large commercial borrower discussed earlier(
charged-off in the second quarter); and
    
    a $1.0 million increase in the amount of non-accrual loans since December 31, 2006.
 Page 23




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##### Table of Contents



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




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##### Table of Contents



Income Taxes
 Nine months ended September 30, 2007 and year ended December 31, 2006
  2.
    
    Consolidated Balance Sheet Review
 Overview
  
    
    a $16.9 million decline in the investment portfolio, due to scheduled maturities
of investment securities which were not reinvested as proceeds were used to fund the
decline in deposits;
    
    a decrease in the loan portfolio of $20.9 million, due in part to approximately
$15.5 million in watch credit loans that were intentionally allowed to pay down as
well as continued runoff in lending segments in which the Corporation no longer
portfolios new loans, such as mortgage loans and indirect loans.
 A.
    
    Investment and Other Securities
      B.
    
    Loans
  Page 25




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##### Table of Contents



September 30, 2007
    
    December 31, 2006Amount
    
    % of Total
    
    Amount
    
    % of TotalCommercial, financial and agricultural
    
    $
    224,644
    
    
    
    19.9
    %
    
    $
    250,906
    
    
    
    21.8
    %Real estate  commercial
    
    
    431,565
    
    
    
    38.3
    %
    
    
    432,062
    
    
    
    37.5
    %Real estate  construction
    
    
    32,658
    
    
    
    2.9
    %
    
    
    21,562
    
    
    
    1.9
    %Real estate  mortgage
    
    
    200,056
    
    
    
    17.8
    %
    
    
    218,104
    
    
    
    18.9
    %Home equity
    
    
    171,147
    
    
    
    15.2
    %
    
    
    164,800
    
    
    
    14.3
    %Personal
    
    
    41,773
    
    
    
    3.7
    %
    
    
    45,602
    
    
    
    4.0
    %Lease financing
    
    
    30,019
    
    
    
    2.7
    %
    
    
    23,143
    
    
    
    2.0
    %Unearned interest
    
    
    (4,888
    )
    
    
    -0.4
    %
    
    
    (3,787
    )
    
    
    -0.3
    %Total loans
    
    $
    1,126,974
    
    
    
    100.0
    %
    
    $
    1,152,392
    
    
    
    100.0
    %Nonaccrual loans
    
    $
    22,019
    
    
    
    2.0
    %
    
    $
    21,001
    
    
    
    1.8
    %
 C.
    
    The Allowance for Loan Losses
    September 302007
    
    
    2006Balance of allowance  beginning of period
    
    $
    17,344
    
    
    $
    15,482Transfer to off balance sheet credit exposure
    
    
    (184
    )
    
    
    Loans charged off:Commercial, financial and agricultural
    
    
    4,786
    
    
    
    777Real estate  commercial
    
    
    915
    
    
    
    Real estate  mortgage
    
    
    158
    
    
    
    96Personal and lease financing loans
    
    
    205
    
    
    
    261Total charge-offs
    
    
    6,064
    
    
    
    1,134Recoveries of loans previously charged off:Commercial, financial and agricultural
    
    
    4
    
    
    
    303Real estate  commercial
    
    
    
    
    
    
    Real estate  mortgage
    
    
    49
    
    
    
    16Personal and lease financing loans
    
    
    96
    
    
    
    136Total recoveries
    
    
    149
    
    
    
    455Net charge-offs
    
    
    5,915
    
    
    
    679Provision for loan losses
    
    
    1,560
    
    
    
    1,120Balance of allowance  end of period.
    
    $
    12,805
    
    
    $
    15,923Less Balance, held for sale
    
    
    
    
    
    
    (196
    )Balance of allowance  end of period
    
    $
    12,805
    
    
    $
    15,727
 Page 26




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##### Table of Contents



September 30, 2007
    
    December 31, 2006Impaired loans:Recorded investment at period end
    
    $
    21,521
    
    
    $
    20,272Impaired loan balance for which there is a related allowance
    
    
    20,564
    
    
    
    20,272Amount of allowance for impaired loans
    
    
    2,623
    
    
    
    6,678Impaired loan balance for which there is no related allowance
    
    
    957
    
    
    
    Average recorded investment
    
    
    20,600
    
    
    
    21,867Interest income recognized (on a cash basis)
    
    $
    561
    
    
    $
    1,189
    Non-performing Loans(Dollars in thousands)September 30,
    
    
    December 31,2007
    
    
    2006Non-accrual loans
    
    $
    22,019
    
    
    $
    21,001Accruing loans past due 90 days or more
    
    
    2,494
    
    
    
    2,327Total non-performing loans
    
    $
    24,513
    
    
    $
    23,328Non-performing loans as percent of allowance
    
    
    191.4
    %
    
    
    134.5
    %
  Page 27




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##### Table of Contents




    
    A provision for loan losses in the amount of $1.6 million was recorded (see
preceding discussion on provision for loan losses);
    
    Loan charge-offs of $6.0 million were recorded during the first nine months of 2007,
partially offset by recoveries of $0.1 million;
    
    Of the $6.0 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 increased to $24.5 million at September
30, 2007 compared to $23.3 million at December 31, 2006.
    D.
    
    Deposits and Other Sources of Funds
   September 30, 2007
    
    December 31, 2006Non-interest bearing demand
deposits
    
    $
    237,436
    
    
    
    18.4
    %
    
    $
    232,334
    
    
    
    17.6
    %Interest bearing demand deposits
    
    
    288,154
    
    
    
    22.3
    
    
    
    299,919
    
    
    
    22.6Savings and money market
    
    
    241,457
    
    
    
    18.7
    
    
    
    249,563
    
    
    
    18.8Time deposits less than $100,000
    
    
    436,120
    
    
    
    33.7
    
    
    
    450,882
    
    
    
    34.0Time deposits greater than $100,000
    
    
    89,327
    
    
    
    6.9
    
    
    
    93,065
    
    
    
    7.0Total Deposits
    
    $
    1,292,494
    
    
    
    100.0
    %
    
    $
    1,325,763
    
    
    
    100.0
    %
   Page 28




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##### Table of Contents



E.
    
    Liquidity and Capital Resources
 Omega derives liquidity through an increase in customer deposits, maturities in the
investment portfolio, loan repayments and income from earning assets. When deposits are not
adequate to fund customer loan demand, liquidity needs can be met in the short-term fund
market through arrangements with Omegas correspondent banks or through the purchase of
brokered certificates of deposit. Omega Bank is also a member of the Federal Home Loan Bank
of Pittsburgh, which provides another source of liquidity. The Company may from time to
time access capital markets and/or borrow funds from private investors to meet liquidity
needs. Omega actively manages its liquidity position through the Asset and Liability
Management
Committee. Monthly reviews by management and quarterly reviews by the committee under
prescribed policies and procedures are designed to ensure that we will maintain adequate
levels of available funds.Management believes that the Company has adequate liquidity available to respond to current
and anticipated demands and is unaware of any trends or demands, commitments, events or
uncertainties that will materially affect the ability to maintain liquidity at satisfactory
levels for the next twelve months.The Corporation paid a cash dividend of $.31 per share on January 1, April 1, July 1, and
October 1, 2007.
 3.
    
    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 September 30, 2007, Omega and Omega Bank, its banking subsidiary, each met the regulatory
definition of a well capitalized financial institution. A well-capitalized institution
maintains a leverage ratio exceeding 5%, Tier 1 capital exceeding 6% and total capital
exceeding 10%.4.
    
    Share Repurchase ProgramOn January 23, 2006, the Board of Directors of Omega approved a share repurchase program
authorizing the purchase of up to 10% of Omegas outstanding common stock in the open
market. At that time there were 12,604,477 shares of common stock outstanding with
1,260,447 shares eligible to be repurchased. The program will remain in effect until the
10% limit is reached; however, the Board of Directors may discontinue it at any time. There
were no shares of stock repurchased during the third quarter of 2007. As of September 30,
2007, 167,547 shares were repurchased in conjunction with this program, at an average cost
of $30.72 per share.
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Page 29




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##### Table of Contents



Item 4. Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Change in Internal Control Over Financial Reporting
   Page 30




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##### Table of Contents



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




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##### Table of Contents



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
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 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 32




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##### Table of Contents



SIGNATURES
  OMEGA FINANCIAL CORPORATION
                    (Registrant)November 9, 2007
    By:
    /s/ Donita R. KovalDate
    
    Donita R. KovalPresident and Chief Executive OfficerNovember 9, 2007
    By:
    /s/ Daniel L. WarfelDate
    
    Daniel L. WarfelExecutive Vice President and Chief Financial Officer Page 33




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##### Table of Contents



31.1
    
    Chief Executive Officers Rule 13a-14(a)/15d-14(a) (Section 302) Certification
    
    
    3531.2
    
    Chief Financial Officers Rule 13a-14(a)/15d-14(a) (Section 302) Certification
    
    
    3632.1
    
    Section 1350 (Section 906) Certification by Chief Executive Officer
    
    
    3732.2
    
    Section 1350 (Section 906) Certification by Chief Financial Officer
    
    
    38
 Page 34