##### 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 June 30, 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.)
 (Address of principal executive offices)
  (Registrants telephone number, including area code)
 þ o
 þ o




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TABLE OF CONTENTS  PART I. Financial InformationItem 1. Financial StatementsItem 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 4. CONTROLS AND PROCEDURESPART II. Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsCHIEF EXECUTIVE OFFICER'S RULE 13a-14/15d-14(a)CHIEF FINANCIAL OFFICER'S RULE 13a-14/15d-14(a)SECTION 1350 (SECTION 906) CERTIFICATION BY CEOSECTION 1350 (SECTION 906) CERTIFICATION BY CFO    Table of Contents  
  
  OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 June 30,
    
    December 31,2005
    
    2004AssetsCash and due from banks
    
    $
    54,152
    
    
    $
    47,877Interest bearing deposits with other banks
    
    
    25,153
    
    
    
    31,122Federal funds sold
    
    
    30,325
    
    
    
    36,350Trading securities
    
    
    469
    
    
    
    Investment securities available for sale
    
    
    322,018
    
    
    
    327,979Investment in unconsolidated subsidiary
    
    
    1,625
    
    
    
    1,625Loans held for sale
    
    
    306
    
    
    
    22,515Total portfolio loans
    
    
    1,253,546
    
    
    
    1,305,735Less: Allowance for loan losses
    
    
    (15,304
    )
    
    
    (15,644
    )Net portfolio loans
    
    
    1,238,242
    
    
    
    1,290,091Premises and equipment, net
    
    
    37,145
    
    
    
    35,509Other real estate owned
    
    
    905
    
    
    
    3,082Bank-owned life insurance
    
    
    73,993
    
    
    
    72,845Investment in limited partnerships
    
    
    7,089
    
    
    
    8,605Core deposit intangibles
    
    
    7,142
    
    
    
    13,927Other intangibles
    
    
    2,664
    
    
    
    2,799Goodwill
    
    
    161,135
    
    
    
    156,959Other assets
    
    
    31,382
    
    
    
    31,286TOTAL ASSETS
    
    $
    1,993,745
    
    
    $
    2,082,571Liabilities and Shareholders EquityDeposits:Non-interest bearing
    
    $
    235,599
    
    
    $
    228,408Interest bearing
    
    
    1,275,735
    
    
    
    1,273,674Total deposits
    
    
    1,511,334
    
    
    
    1,502,082Short-term borrowings
    
    
    55,664
    
    
    
    90,259ESOP debt
    
    
    2,021
    
    
    
    2,192Junior subordinated debentures
    
    
    56,941
    
    
    
    57,190Long-term debt
    
    
    32,000
    
    
    
    99,579Other interest bearing liabilities
    
    
    842
    
    
    
    854Other liabilities
    
    
    16,614
    
    
    
    14,676TOTAL LIABILITIES
    
    
    1,675,416
    
    
    
    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 12,621,720 shares at June 30, 2005;
12,593,524 shares at December 31, 2004Outstanding12,609,174 shares at June 30, 2005;
12,593,524 shares at December 31, 2004
    
    
    63,125
    
    
    
    62,968Capital surplus
    
    
    98,982
    
    
    
    98,370Retained earnings
    
    
    156,410
    
    
    
    152,249Accumulated other comprehensive income
    
    
    1,444
    
    
    
    3,526Unearned compensation related to ESOP debt
    
    
    (1,252
    )
    
    
    (1,374
    )Cost of common stock in treasury: 12,546 shares at June 30, 2005
    
    
    (380
    )
    
    
    TOTAL SHAREHOLDERS EQUITY
    
    
    318,329
    
    
    
    315,739TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,993,745
    
    
    $
    2,082,571
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Interest Income:Interest and fees on loans
    
    $
    19,612
    
    
    $
    10,995
    
    
    $
    38,959
    
    
    $
    22,192Interest and dividends on investment securities
    
    
    2,689
    
    
    
    1,759
    
    
    
    5,056
    
    
    
    3,612Other interest income
    
    
    338
    
    
    
    91
    
    
    
    696
    
    
    
    147TOTAL INTEREST INCOME
    
    
    22,639
    
    
    
    12,845
    
    
    
    44,711
    
    
    
    25,951Interest Expense:Interest on deposits
    
    
    5,559
    
    
    
    2,643
    
    
    
    10,251
    
    
    
    5,335Interest on short-term borrowings
    
    
    438
    
    
    
    72
    
    
    
    928
    
    
    
    148Interest on long-term debt and
other interest bearing liabilities
    
    
    1,292
    
    
    
    244
    
    
    
    2,940
    
    
    
    492TOTAL INTEREST EXPENSE
    
    
    7,289
    
    
    
    2,959
    
    
    
    14,119
    
    
    
    5,975NET INTEREST INCOME
    
    
    15,350
    
    
    
    9,886
    
    
    
    30,592
    
    
    
    19,976Provision for loan losses
    
    
    180
    
    
    
    
    
    
    
    322
    
    
    
    INCOME FROM CREDIT ACTIVITIES
    
    
    15,170
    
    
    
    9,886
    
    
    
    30,270
    
    
    
    19,976Other Income:Service fees on deposit accounts
    
    
    2,308
    
    
    
    1,577
    
    
    
    4,448
    
    
    
    2,916Service fees on loans
    
    
    345
    
    
    
    366
    
    
    
    657
    
    
    
    647Earnings on bank-owned life insurance
    
    
    574
    
    
    
    330
    
    
    
    1,149
    
    
    
    684Trust fees
    
    
    1,476
    
    
    
    884
    
    
    
    3,142
    
    
    
    1,799Investment and insurance product sales
    
    
    779
    
    
    
    353
    
    
    
    1,851
    
    
    
    655Gain on the early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,043
    
    
    
    (Loss) Gain on sale of loans and other assets
    
    
    (39
    )
    
    
    2
    
    
    
    (378
    )
    
    
    1Net gains on the sale of investment securities
    
    
    549
    
    
    
    203
    
    
    
    1,537
    
    
    
    211Other
    
    
    1,149
    
    
    
    569
    
    
    
    2,178
    
    
    
    1,109TOTAL OTHER INCOME
    
    
    7,141
    
    
    
    4,284
    
    
    
    15,627
    
    
    
    8,022Other Expense:Salaries and employee benefits
    
    
    7,721
    
    
    
    4,802
    
    
    
    15,272
    
    
    
    9,757Net occupancy expense
    
    
    1,064
    
    
    
    559
    
    
    
    2,175
    
    
    
    1,186Equipment expense
    
    
    1,031
    
    
    
    729
    
    
    
    2,120
    
    
    
    1,431Data processing service
    
    
    621
    
    
    
    430
    
    
    
    1,247
    
    
    
    853Pennsylvania shares tax
    
    
    549
    
    
    
    379
    
    
    
    1,168
    
    
    
    763Amortization of intangible assets
    
    
    274
    
    
    
    2
    
    
    
    437
    
    
    
    5Other
    
    
    4,403
    
    
    
    2,143
    
    
    
    8,213
    
    
    
    4,282TOTAL OTHER EXPENSE
    
    
    15,663
    
    
    
    9,044
    
    
    
    30,632
    
    
    
    18,277Income before taxes
    
    
    6,648
    
    
    
    5,126
    
    
    
    15,265
    
    
    
    9,721Income tax expense
    
    
    1,267
    
    
    
    1,195
    
    
    
    3,307
    
    
    
    2,186NET INCOME
    
    $
    5,381
    
    
    $
    3,931
    
    
    $
    11,958
    
    
    $
    7,535Net income per common share:Basic
    
    $
    .43
    
    
    $
    .46
    
    
    $
    0.95
    
    
    $
    0.89Diluted
    
    $
    .43
    
    
    $
    .46
    
    
    $
    0.95
    
    
    $
    0.88Weighted average shares and equivalents:Basic
    
    
    12,607
    
    
    
    8,469
    
    
    
    12,601
    
    
    
    8,740Diluted
    
    
    12,660
    
    
    
    8,533
    
    
    
    12,659
    
    
    
    8,546Dividends declared per share:Common
    
    $
    .31
    
    
    $
    .30
    
    
    $
    .62
    
    
    $
    .60
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2005
    
    2004Cash flows from operating activities:Net income
    
    $
    11,958
    
    
    $
    7,535Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,147
    
    
    
    2,076Provision for loan losses and off-balance sheet reserve
    
    
    312
    
    
    
    Gain on sale of investment securities
    
    
    (1,537
    )
    
    
    (211
    )Gain on early extinguishment of debt
    
    
    (1,043
    )
    
    
    Gain on sale of fixed assets and other property owned
    
    
    (3
    )
    
    
    (1
    )Loss on sale of loans and leases
    
    
    381
    
    
    
    2Non-monetary gift
    
    
    45
    
    
    
    Provision for deferred income tax
    
    
    2,912
    
    
    
    66Increase in cash surrender value of bank owned life insurance
    
    
    (1,148
    )
    
    
    (684
    )Decrease (increase) in interest receivable and other assets
    
    
    462
    
    
    
    (1,210
    )Decrease in interest payable
    
    
    (101
    )
    
    
    (20
    )Increase in taxes payable
    
    
    411
    
    
    
    197Amortization of deferred net loan fees
    
    
    (153
    )
    
    
    (185
    )Deferral of net loan fees
    
    
    110
    
    
    
    148Decrease in accounts payable and accrued expenses
    
    
    (2,390
    )
    
    
    (658
    )Total adjustments
    
    
    405
    
    
    
    (480
    )Net cash provided by operating activities
    
    
    12,363
    
    
    
    7,055Cash flows from investing activities:Investment securities available for sale:Proceeds from sales
    
    
    55,536
    
    
    
    4,689Proceeds from maturities
    
    
    30,787
    
    
    
    65,307Cash used for purchases
    
    
    (79,532
    )
    
    
    (69,092
    )Net change in interest bearing deposits with other banks
    
    
    5,969
    
    
    
    (8,968
    )Decrease in loans and leases
    
    
    48,688
    
    
    
    14,009Gross proceeds from sale of loans and leases
    
    
    24,978
    
    
    
    (2
    )Investment in limited partnerships
    
    
    (69
    )
    
    
    Sale of investment in limited partnership
    
    
    1,088
    
    
    
    Capital expenditures
    
    
    (3,419
    )
    
    
    (740
    )Sale of fixed assets and other property owned
    
    
    2,273
    
    
    
    12Net change in federal funds sold
    
    
    6,025
    
    
    
    (10,350
    )Net cash provided by (used in) investing activities
    
    
    92,324
    
    
    
    (5,135
    )Cash flows from financing activities:Net change in deposits
    
    
    10,118
    
    
    
    9,078Decrease in short-term borrowings, net
    
    
    (34,595
    )
    
    
    (5,274
    )Principal payment on long term debt
    
    
    (66,615
    )
    
    
    (595
    )Net change in other interest bearing liabilities
    
    
    (12
    )
    
    
    27Dividends paid
    
    
    (7,817
    )
    
    
    (5,077
    )Issuance of common stock
    
    
    769
    
    
    
    1,462Acquisition of treasury stock
    
    
    (260
    )
    
    
    (2,467
    )Net cash used in financing activities
    
    
    (98,412
    )
    
    
    (2,846
    )Net increase (decrease) in cash and cash equivalents
    
    $
    6,275
    
    
    $
    (926
    )Cash and cash equivalents at beginning of period
    
    $
    47,877
    
    
    $
    32,420Cash and cash equivalents at end of period
    
    
    54,152
    
    
    
    31,494Net increase (decrease) in cash and cash equivalents
    
    $
    6,275
    
    
    $
    (926
    )Interest paid
    
    $
    14,220
    
    
    $
    5,975Income taxes paid
    
    
    
    
    
    
    1,916Supplemental schedule of noncash investing and financing activities:Transfers of loans to other real estate owned
    
    
    73
    
    
    
    27
 
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
   A.
    
    Basis of Presentation:The accompanying Consolidated Financial Statements include Omega Financial Corporation
(Omega or the Corporation), a bank 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 financial statements. In
the opinion of management, all adjustments, including normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the three and
six months ended June 30, 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 lossesFor financial reporting purposes, the provision for loan losses charged to current operating
income is based on managements estimates, and actual losses may vary from estimates. These
estimates are reviewed and adjusted at least quarterly and are reported in earnings in the
periods in which they become known. In determining the adequacy of the allowance for loan
losses, management makes specific allocations to watch list loans and pools of non-watch
list loans for various credit risk factors, including the composition and growth of the loan
portfolio, overall portfolio quality, levels of delinquent loans, specific problem loans,
prior loan loss experience and current economic conditions that may affect a borrowers
ability to pay. The loan loss provision for federal income tax purposes is based on current
income tax regulations, which allow for deductions equal to net charge-offs. 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 compensationOmega accounts for stock-based compensation using the intrinsic value method in accordance
with Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to
Employees, and has adopted the disclosure provisions of FASB No. 148, Accounting for
Stock-Based Compensation. The following pro forma information regarding net income and
earnings per share assumes the adoption of Statement No. 123 for stock options granted
subsequent to December 31, 1994. The estimated fair value of the options is amortized to
expense over the vesting period.The fair value was estimated at the date of grant using a Black-Scholes option-pricing model
utilizing various assumptions. Compensation expense, net of related tax, is included in the
pro forma net income reported below (in thousands, except per share data).
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Three Months ended
    
    Six Months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net incomeAs reported
    
    $
    5,381
    
    
    $
    3,931
    
    
    $
    11,958
    
    
    $
    7,535Pro forma
    
    
    5,379
    
    
    
    3,827
    
    
    
    11,950
    
    
    
    7,328Compensation expense, net of tax
    
    
    2
    
    
    
    104
    
    
    
    8
    
    
    
    207Basic earnings per shareAs reported
    
    $
    0.43
    
    
    $
    0.46
    
    
    $
    0.95
    
    
    $
    0.89Pro forma
    
    
    0.43
    
    
    
    0.45
    
    
    
    0.95
    
    
    
    0.87Diluted earnings per shareAs reported
    
    $
    0.43
    
    
    $
    0.46
    
    
    $
    0.95
    
    
    $
    0.88Pro forma
    
    
    0.43
    
    
    
    0.45
    
    
    
    0.95
    
    
    
    0.86
 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.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 No. 123R
no later than the beginning of the first fiscal year beginning after June 15, 2005. Omega
will adopt Statement No.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.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
issued for one-year periods. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers. The bank
holds collateral supporting those commitments for which collateral is deemed necessary. At
June 30, 2005, standby letters of credit issued and outstanding amounted to $26,810,000 as
compared to $24,064,000 on December 31, 2004. The fair market value of the standby letters
of credit at June 30, 2005 and December 31, 2004 was $123,000 and $138,000, respectively.
The fair market value of standby letters of credit is recorded as a liability in accordance
with FIN 45.At June 30, 2005, the bank had $279,564,000 outstanding in loan commitments and other unused
lines of credit extended to its customers. Of this amount, $198,127,000, or 70.9%, were
commercial commitments. The remaining amounts of $81,437,000 were commitments to consumers
for mortgage and home equity loans and personal lines of credit.Omegas Employee Stock Ownership Plan (ESOP) incurred debt in 1990 of $5,000,000, which is
collateralized by a mortgage on the Corporations administrative center and the
Corporations guarantee. As of June 30, 2005, the balance of the ESOP debt was $2,021,000 as
compared to $2,192,000 at December 31, 2004.
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C.
    
    Investment Securities:The following schedule details characteristics of the investment portfolio as of June 30,
2005 and December 31, 2004 (in thousands).
 Securities Classified as Available for SaleGross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketCost
    
    Gains
    
    Losses
    
    ValueJune 30, 2005U.S. Treasury securities and
obligations of other U.S. Government agencies and corporations
    
    $
    191,141
    
    
    $
    203
    
    
    
    ($2,029
    )
    
    $
    189,315Obligations of state and
political subdivisions
    
    
    68,805
    
    
    
    267
    
    
    
    (474
    )
    
    
    68,598Corporate securities
    
    
    3,980
    
    
    
    15
    
    
    
    (25
    )
    
    
    3,970Mortgage backed securities
    
    
    44,582
    
    
    
    161
    
    
    
    (228
    )
    
    
    44,515Equity securities
    
    
    11,288
    
    
    
    4,343
    
    
    
    (11
    )
    
    
    15,620Total
    
    $
    319,796
    
    
    $
    4,989
    
    
    
    ($2,767
    )
    
    $
    322,018
 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
 The following table shows gross unrealized losses and fair value, aggregated by
category and length of time that individual investment securities have been in a continuous
unrealized loss position, at June 30, 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
    
    $
    102,020
    
    
    $
    1,013
    
    
    $
    44,034
    
    
    $
    1,016Obligations of state and political subdivisions
    
    
    14,973
    
    
    
    161
    
    
    
    15,517
    
    
    
    313Corporate and other securities
    
    
    
    
    
    
    
    
    
    
    1,528
    
    
    
    22Mortgage-backed securities
    
    
    24,014
    
    
    
    201
    
    
    
    1,717
    
    
    
    27Subtotal, debt securities
    
    
    141,007
    
    
    
    1,375
    
    
    
    62,796
    
    
    
    1,378Common stock
    
    
    358
    
    
    
    11
    
    
    
    
    
    
    
    Total temporarily impaired securities
    
    $
    141,365
    
    
    $
    1,386
    
    
    $
    62,796
    
    
    $
    1,378
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##### Table of Contents



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 52 investments in U.S. Government agency
debt securities, 18 investments in mortgage-backed securities, two investments in corporate
securities and 42 investments in obligations of state and municipal subdivisions. Debt
securities with unrealized losses for a period of 12 months or longer includes 27
investments in U.S. Government agency debt securities, 10 investments in corporate
securities, 38 investments in obligations of state and municipal subdivisions and two
investments in mortgage-backed securities. Debt securities included in the above table have
maturity or pre-refund dates ranging from July 2005 to May 2021. The unrealized loss
position for each security ranges from .02% to 6.58% of the securities amortized cost as of
June 30, 2005. Unrealized losses for a period of less than 12 months on common stock are due
to two equity investments.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.Trading securities at June 30, 2005 consist of assets held in Rabbi Trusts, including US
Treasury Notes, mutual funds and cash equivalents. The change in the market value of the
trading securities during the three months ended June 30, 2005 was not material.D.
    
    Income Taxes:The effective tax rate for the six months ended June 30, 2005 was 21.7%, compared to 22.5%
for the same period in 2004. For the second quarter of 2005, the effective tax rate was
19.1% compared to 23.3% in the second quarter of 2004. For the year ended December 31, 2004,
the effective tax rate was 23.8%. The reduction in the effective tax rate in 2005 was
primarily due to the benefit received from the second quarter bargain sale of property owned
by the Corporation and the increase in tax credits received from its investments in
low-income housing projects.E.
    
    Long term Debt:On October 1, 2004, Omega acquired Sun Bancorp, Inc. (Sun). In the first quarter of 2005,
Omega repaid certain indebtedness to the Federal Home Loan Bank, completing its systematic
program of reducing the indebtedness on 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).
 June 30, 2005
    
    December 31, 2004Long-Term Debt:Notes
payable to Federal Home Loan Bank, with fixed rates between 2.65% and 6.80%
    
    $
    24,879
    
    
    $
    25,373Notes payable to Federal Home Loan Bank, with variable rates
between 4.63% and 5.15%
    
    
    
    
    
    
    55,153Note payable to another financial institution with a variable interest
rate payable at three month LIBOR plus 125 basis points
    
    
    
    
    
    
    12,000Notes payable to another financial institution with fixed interest
rates of 2.47% and 2.90%
    
    
    7,121
    
    
    
    7,053Total Long Term Debt
    
    $
    32,000
    
    
    $
    99,579ESOP Debt Guarantee
    
    $
    2,021
    
    
    $
    2,192
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F.
    
    Comprehensive Income:Components of other comprehensive income consist of the following (in thousands):
 Three Months June 30, 2005
    
    Three Months June 30, 2004Before
    
    Tax Expense
    
    
    
    
    
    Before
    
    Tax ExpenseTax
    
    or
    
    Net-of-Tax
    
    Tax
    
    or
    
    Net-of-TaxAmount
    
    (Benefit)
    
    Amount
    
    Amount
    
    (Benefit)
    
    AmountNet income
    
    $
    6,648
    
    
    $
    1,267
    
    
    $
    5,381
    
    
    $
    5,126
    
    
    $
    1,195
    
    
    $
    3,931Other comprehensive income:Unrealized gains (losses) on available for sale
securities:Unrealized holding gains (losses)
arising during the period
    
    
    1,192
    
    
    
    417
    
    
    
    775
    
    
    
    (4,283
    )
    
    
    (1,499
    )
    
    
    (2,784
    )Less reclassification adjustment for
gains included in net income
    
    
    (549
    )
    
    
    (192
    )
    
    
    (357
    )
    
    
    (203
    )
    
    
    (71
    )
    
    
    (132
    )Other comprehensive income (loss)
    
    
    643
    
    
    
    225
    
    
    
    418
    
    
    
    (4,486
    )
    
    
    (1,570
    )
    
    
    (2,916
    )Total comprehensive income
    
    $
    7,291
    
    
    $
    1,492
    
    
    $
    5,799
    
    
    $
    640
    
    
    $
    (375
    )
    
    $
    1,015
 Six Months June 30, 2005
    
    Six Months June 30, 2004Before
    
    Tax Expense
    
    
    
    
    
    Before
    
    Tax ExpenseTax
    
    or
    
    Net-of-Tax
    
    Tax
    
    or
    
    Net-of-TaxAmount
    
    (Benefit)
    
    Amount
    
    Amount
    
    (Benefit)
    
    AmountNet income
    
    $
    15,265
    
    
    $
    3,307
    
    
    $
    11,958
    
    
    $
    9,721
    
    
    $
    2,186
    
    
    $
    7,535Other comprehensive income:Unrealized gains on available for sale securities:Unrealized holding losses arising
during the period
    
    
    (1,666
    )
    
    
    (583
    )
    
    
    (1,083
    )
    
    
    (3,737
    )
    
    
    (1,308
    )
    
    
    (2,429
    )Less reclassification adjustment for
gains included in net income
    
    
    (1,537
    )
    
    
    (538
    )
    
    
    (999
    )
    
    
    (211
    )
    
    
    (74
    )
    
    
    (137
    )Other comprehensive income (loss)
    
    
    (3,203
    )
    
    
    (1,121
    )
    
    
    (2,082
    )
    
    
    (3,948
    )
    
    
    (1,382
    )
    
    
    (2,566
    )Total comprehensive income
    
    $
    12,062
    
    
    $
    2,186
    
    
    $
    9,876
    
    
    $
    5,773
    
    
    $
    804
    
    
    $
    4,969
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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.
 
 Three Months Ended June 30, 2005
    
    Three Months Ended June 30, 2004Income
    
    Shares
    
    Per-Share
    
    Income
    
    Shares
    
    Per-ShareNumerator
    
    Denominator
    
    Amount
    
    Numerator
    
    Denominator
    
    AmountBasic EPSIncome available to common
shareholders
    
    
    5,381
    
    
    
    12,607
    
    
    $
    0.43
    
    
    
    3,931
    
    
    
    8,469
    
    
    $
    0.46Effect of Dilutive SecuritiesImpact of :Assumed exercises of outstanding
options
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    63Potential shares required for contract
settlement
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPSIncome available to common
shareholders plus assumed
conversions
    
    $
    5,381
    
    
    
    12,660
    
    
    $
    0.43
    
    
    $
    3,931
    
    
    
    8,532
    
    
    $
    0.46
 Six Months Ended June 30, 2005
    
    Six Months Ended June 30, 2004Income
    
    Shares
    
    Per-Share
    
    Income
    
    Shares
    
    Per-ShareNumerator
    
    Denominator
    
    Amount
    
    Numerator
    
    Denominator
    
    AmountBasic EPSIncome available to common
shareholders
    
    
    11,958
    
    
    
    12,601
    
    
    $
    0.95
    
    
    
    7,535
    
    
    
    8,470
    
    
    $
    0.89Effect of Dilutive SecuritiesImpact of :Assumed exercises of outstanding
options
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    76Potential shares required for
contract settlement
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPSIncome available to common
shareholders plus assumed
conversions
    
    $
    11,958
    
    
    
    12,659
    
    
    $
    0.95
    
    
    $
    7,535
    
    
    
    8,546
    
    
    $
    0.88
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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 for 2004 presents the combined results of operations of Omega and Sun as if the
acquisition had occurred as of January 1, 2004, compared to actual results for 2005.
 (in thousands, except per share data)For the six months
    
    For the six monthsended June 30,
    
    ended June 30,2005
    
    2004Net interest income
    
    $
    30,592
    
    
    $
    35,068Provision for loan losses
    
    
    322
    
    
    
    885Net interest income after provision for loan losses
    
    
    30,270
    
    
    
    34,183Other income
    
    
    15,627
    
    
    
    15,899Other expense
    
    
    30,632
    
    
    
    32,650Income before taxes
    
    
    15,265
    
    
    
    17,432Income tax expense
    
    
    3,307
    
    
    
    3,920Net income
    
    $
    11,958
    
    
    $
    13,512Net income per common share:Basic
    
    $
    0.95
    
    
    $
    1.09Diluted
    
    
    0.95
    
    
    
    1.08Weighted average shares and equivalents:Basic
    
    
    12,601
    
    
    
    12,419Diluted
    
    
    12,659
    
    
    
    12,543
 (in thousands, except per share data)For the three
    
    For the threemonths ended
    
    months endedJune 30, 2005
    
    June 30, 2004Net interest income
    
    $
    15,350
    
    
    $
    17,296Provision for loan losses
    
    
    180
    
    
    
    450Net interest income after provision for loan losses
    
    
    15,170
    
    
    
    16,846Non-interest income
    
    
    7,141
    
    
    
    8,566Non-interest expense
    
    
    15,663
    
    
    
    16,594Income before income taxes
    
    
    6,648
    
    
    
    8,818Income tax expense
    
    
    1,267
    
    
    
    2,215Net income
    
    $
    5,381
    
    
    $
    6,603Net income per common share:Basic
    
    $
    0.43
    
    
    $
    0.53Diluted
    
    
    0.43
    
    
    
    0.53Weighted average shares and equivalents:Basic
    
    
    12,607
    
    
    
    12,419Diluted
    
    
    12,660
    
    
    
    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 acquisition had been completed as of
the beginning of 2004, nor are they necessarily indicative of future results.
 Page 11




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##### Table of Contents



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. Accordingly, the value of
goodwill was increased by $4,214,000 and the deferred tax asset acquired was increased by
$2,269,000. The recorded goodwill balance at June 30, 2005 was $161,135,000. The weighted
average life of ntangible assets that have a finite life 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 June
30, 2005 and December 31, 2004 follows (in thousands):
 June 30,
    
    December 31,2005
    
    2004Core deposit intangibleGross carrying amount
    
    $
    7,885
    
    
    $
    14,368Less: accumulated amortization
    
    
    743
    
    
    
    441Net carrying amount
    
    
    7,142
    
    
    
    13,927Customer relationship intangiblesGross carrying amount
    
    
    2,700
    
    
    
    2,700Less: accumulated amortization
    
    
    184
    
    
    
    61Net carrying amount
    
    
    2,516
    
    
    
    2,639Trade name intangible with finite lifeGross carrying amount
    
    
    36
    
    
    
    36Less: accumulated amortization
    
    
    18
    
    
    
    6Net carrying amount
    
    
    18
    
    
    
    30Total finite-lived intangiblesGross carrying amount
    
    
    10,621
    
    
    
    17,104Less: accumulated amortization
    
    
    945
    
    
    
    508Net carrying amount
    
    $
    9,676
    
    
    $
    16,596Trade name intangible with infinite lifeGross carrying amount
    
    
    130
    
    
    
    130
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
         Page 13




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Page 14




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Operations Overview
    Second Quarter
    
    First Quarter2005
    
    2005NET INTEREST INCOME
    
    $
    15,350
    
    
    $
    15,242Provision (credit) for loan losses
    
    
    180
    
    
    
    142INCOME FROM CREDIT ACTIVITIES
    
    
    15,170
    
    
    
    15,100Other Income:Service fees on deposit accounts
    
    
    2,308
    
    
    
    2,140Service fees on loans
    
    
    345
    
    
    
    312Earnings on bank-owned life insurance
    
    
    574
    
    
    
    575Trust fees
    
    
    1,476
    
    
    
    1,666Investment and insurance product sales
    
    
    779
    
    
    
    1,072Gain on the early extinguishment of debt
    
    
    
    
    
    
    1,043Loss on sale of loans and other assets
    
    
    (39
    )
    
    
    (339
    )Net gains on the sale of investment securities
    
    
    549
    
    
    
    988Other
    
    
    1,149
    
    
    
    1,029TOTAL OTHER INCOME
    
    
    7,141
    
    
    
    8,486Other Expense:Salaries and employee benefits
    
    
    7,721
    
    
    
    7,551Net occupancy expense
    
    
    1,064
    
    
    
    1,111Equipment expense
    
    
    1,031
    
    
    
    1,089Data processing service
    
    
    621
    
    
    
    626Pennsylvania shares tax
    
    
    549
    
    
    
    619Amortization of intangible assets
    
    
    274
    
    
    
    163Other
    
    
    4,403
    
    
    
    3,810TOTAL OTHER EXPENSE
    
    
    15,663
    
    
    
    14,969Income before taxes
    
    
    6,648
    
    
    
    8,617Income tax expense
    
    
    1,267
    
    
    
    2,040NET INCOME
    
    $
    5,381
    
    
    $
    6,577Net income per common share:Basic
    
    $
    0.43
    
    
    $
    0.52Diluted
    
    $
    0.43
    
    
    $
    0.52Weighted average shares and equivalents:Basic
    
    
    12,607
    
    
    
    12,596Diluted
    
    
    12,660
    
    
    
    12,659Dividends declared per share:Common
    
    $
    0.31
    
    
    $
    0.31
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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    March 31,
    
    June 30,2005
    
    2004
    
    2005
    
    2005Return on average stated assets (annualized)
    
    
    1.07
    %
    
    
    1.38
    %
    
    
    1.28
    %
    
    
    1.18
    %
    
    
    1.33
    %Return on average tangible assets (annualized)
    
    
    1.17
    
    
    
    1.38
    
    
    
    1.40
    
    
    
    1.29
    
    
    
    1.33Return on average stated equity (annualized)
    
    
    6.73
    
    
    
    9.19
    
    
    
    8.26
    
    
    
    7.49
    
    
    
    8.84Return on average tangible equity (annualized)
    
    
    14.47
    
    
    
    9.19
    
    
    
    18.14
    
    
    
    16.28
    
    
    
    8.84Dividend payout ratio
    
    
    72.66
    
    
    
    64.40
    
    
    
    59.40
    
    
    
    65.37
    
    
    
    67.38Average equity to average assets (stated)
    
    
    15.97
    
    
    
    15.00
    
    
    
    15.56
    
    
    
    15.76
    
    
    
    15.05Average equity to average assets (tangible)
    
    
    8.12
    
    
    
    15.00
    
    
    
    7.74
    
    
    
    7.93
    
    
    
    15.05
    Net Interest Income
     Page 16




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    March 31,
    
    June 30,2005
    
    2004
    
    2005
    
    2005
    
    2004Yield on average earning assets
    
    
    5.53
    %
    
    
    4.89
    %
    
    
    5.27
    %
    
    
    5.39
    %
    
    
    4.99
    %Cost to fund earning assets
    
    
    1.78
    
    
    
    1.13
    
    
    
    1.64
    
    
    
    1.71
    
    
    
    1.15Net interest margin
    
    
    3.75
    
    
    
    3.76
    
    
    
    3.63
    
    
    
    3.68
    
    
    
    3.84Net interest margin  tax equivalent
    
    
    3.90
    
    
    
    3.98
    
    
    
    3.81
    
    
    
    3.84
    
    
    
    4.06
  
 June 30, 2005
    
    December 31, 2004Possible
    
    
    
    
    
    PossibleChange in
    
    Change in net
    
    
    
    Change in
    
    Change in NetInterst Rates
    
    Interest Income
    
    
    
    Interest Rates
    
    Interest Income
    
    Percent(Basic Points)
    
    ($)
    
    Percent Change
    
    (Basis Points)
    
    ($)
    
    Change200
    
    5,143
    
    7.8%
    
    200
    
    5,422
    
    8.3%100
    
    2,577
    
    3.9%
    
    100
    
    2,743
    
    4.2%0
    
    
    
    
    
    0
    
    
    
    (100)
    
    (2,567)
    
    3.9%
    
    (100)
    
    (2,658)
    
    4.1%(200)
    
    (5,117)
    
    7.8%
    
    (200)
    
    (5,420)
    
    8.3%
 Page 17




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Loan Loss Provision
  Other Income and Expense
     Page 18




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Page 19




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##### Table of Contents



Federal Income Tax
         June 30,
    
    December 31,2005
    
    2004Commercial, financial and agricultural
    
    $
    269,745
    
    
    $
    271,650Real estate  commercial
    
    
    490,476
    
    
    
    501,394Real estate  construction
    
    
    17,513
    
    
    
    25,301Real estate  mortgage
    
    
    255,237
    
    
    
    277,208Home equity
    
    
    132,136
    
    
    
    133,077Personal
    
    
    76,845
    
    
    
    107,859Lease financing
    
    
    13,622
    
    
    
    13,387Unearned interest
    
    
    (1,722
    )
    
    
    (1,626
    )Total
    
    $
    1,253,852
    
    
    $
    1,328,250Nonaccrual loans
    
    $
    5,144
    
    
    $
    5,220
 Page 20




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2005
    
    2004Balance of allowance  beginning of period
    
    $
    15,644
    
    
    $
    10,569Loans charged off:Commercial, financial and agricultural
    
    
    163
    
    
    
    62Real estate  commercial
    
    
    
    
    
    
    Real estate  mortgage
    
    
    219
    
    
    
    111Personal
    
    
    463
    
    
    
    236Lease financing receivables
    
    
    15
    
    
    
    Total charge-offs
    
    
    860
    
    
    
    409Recoveries of loans previously charged off:Commercial, financial and agricultural
    
    
    31
    
    
    
    6Real estate  commercial
    
    
    8
    
    
    
    1Real estate  mortgage
    
    
    33
    
    
    
    4Personal
    
    
    126
    
    
    
    55Lease financing receivables
    
    
    
    
    
    
    Total recoveries
    
    
    198
    
    
    
    66Net charge-offs
    
    
    662
    
    
    
    343Provision for loan losses
    
    
    322
    
    
    
    Balance of allowance  end of period.
    
    $
    15,304
    
    
    $
    10,226
  June 30, 2005
    
    December 31, 2004Impaired loans:Recorded investment at period end
    
    $
    4,175,000
    
    
    $
    2,475,000Impaired loan balance for which there is a related allowance
    
    
    4,175,000
    
    
    
    2,475,000Amount of allowance for impaired loans
    
    
    1,452,000
    
    
    
    755,000Impaired loan balance for which there is no related allowance
    
    
    
    
    
    
    Average recorded investment
    
    
    3,992,000
    
    
    
    1,597,000
 Six months endedJune 30, 2005
    
    June 30, 2004Interest income recognized (on a cash basis)
    
    $
    28,000
    
    
    $
    46,000
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##### Table of Contents



Non-performing Loans
 June 30,
    
    December 31,2005
    
    2004Non-accrual loans
    
    $
    5,144
    
    
    $
    5,220Accruing loans past due 90 days or more
    
    
    3,525
    
    
    
    2,667Restructured loans
    
    
    218
    
    
    
    220Total non-performing loans
    
    $
    8,887
    
    
    $
    8,107Non-performing loans as percent of allowance
    
    
    58.1
    %
    
    
    51.8
    %
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##### Table of Contents



Page 23




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##### Table of Contents



(d) Maximum(c) Total Number
    
    Number (or(a) Total Number
    
    (b) Average Price
    
    of Shares (or
    
    Approximate DollarPeriod
    
    of Shares (or
    
    Paid per Share (or
    
    Units) Purchased
    
    Value) of SharesUnits) Purchased
    
    Unit)
    
    as Part of Publicly
    
    (or Units) that MayAnnounced Plans
    
    Yet Be Purchasedor Programs
    
    Under the Plans orProgramsApril 1, 2005 to
    
    
    3,800
    
    
    $
    29.03
    
    
    
    3,800
    
    
    
    1,257,295April 30, 2005May 1, 2005 to
    
    
    5,000
    
    
    $
    30.05
    
    
    
    5,000
    
    
    
    1,252,295May 31, 2005June 1, 2005 to
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,252,295June 30, 2005Total
    
    
    8,800
    
    
    $
    29.61
    
    
    
    8,800
    
    
    
    1,252,295
 
   
   Name
    
    For
    
    
    WithholdAuthorityPhilip E. Gingerich
    
    
    8,566,133
    
    
    
    393,567D. Stephen Martz
    
    
    8,679,837
    
    
    
    279,864Maureen M. Bufalino
    
    
    8,704,393
    
    
    
    255,308
 
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##### Table of Contents



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
   OMEGA FINANCIAL CORPORATION(Registrant)
 August 2, 2005
    
    By:
    
    /s/ David B. LeeDate
    
    
    
    David B. LeeChairman andChief Executive OfficerAugust 2, 2005
    
    
    
    /s/ Daniel L. WarfelDate
    
    
    
    Daniel L. WarfelExecutive Vice President andChief Financial Officer
 Page 25