##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto
 Commission
File Number: 0-13599
 OMEGA FINANCIAL CORPORATION
  Pennsylvania
    
    25-1420888(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 366 Walker Drive, State College, PA 16801
 (814) 231-7680
  þ o
  o þ o
  o þ




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www.OmegaFinancial.com
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
  March 31,
    
    December 31,2006
    
    2005AssetsCash and due from banks
    
    $
    52,781
    
    
    $
    56,194Interest bearing deposits with other banks
    
    
    10,194
    
    
    
    8,908Federal funds sold
    
    
    6,275
    
    
    
    Trading securities
    
    
    42
    
    
    
    468Investment securities available for sale
    
    
    335,425
    
    
    
    347,300Other investments
    
    
    4,884
    
    
    
    6,055Investment in unconsolidated subsidiary
    
    
    1,625
    
    
    
    1,625Loans held for sale
    
    
    146
    
    
    
    264Total portfolio loans
    
    
    1,200,255
    
    
    
    1,214,591Less: Allowance for loan losses
    
    
    (15,210
    )
    
    
    (15,482
    )Net portfolio loans
    
    
    1,185,045
    
    
    
    1,199,109Premises and equipment, net
    
    
    37,824
    
    
    
    38,391Other real estate owned
    
    
    1,264
    
    
    
    956Bank-owned life insurance
    
    
    75,751
    
    
    
    75,144Investment in limited partnerships
    
    
    6,388
    
    
    
    6,612Core deposit intangibles
    
    
    6,534
    
    
    
    6,729Other intangibles
    
    
    2,462
    
    
    
    2,529Goodwill
    
    
    160,997
    
    
    
    161,004Other assets
    
    
    31,355
    
    
    
    28,691TOTAL ASSETS
    
    $
    1,918,992
    
    
    $
    1,939,979Liabilities and Shareholders EquityDeposits:Non-interest bearing
    
    $
    233,311
    
    
    $
    236,683Interest bearing
    
    
    1,190,716
    
    
    
    1,185,847Total deposits
    
    
    1,424,027
    
    
    
    1,422,530Short-term borrowings
    
    
    76,367
    
    
    
    90,153ESOP debt
    
    
    1,755
    
    
    
    1,845Junior subordinated debentures
    
    
    56,567
    
    
    
    56,692Long-term debt
    
    
    28,901
    
    
    
    36,322Other interest bearing liabilities
    
    
    812
    
    
    
    882Other liabilities
    
    
    11,663
    
    
    
    13,065TOTAL LIABILITIES
    
    
    1,600,092
    
    
    
    1,621,489Shareholders EquityPreferred stock, par value $5.00 per share:Authorized - 5,000,000 shares, non issuedCommon stock, par value $5.00 per share:Authorized - 25,000,000 shares;Issued - 12,745,729 shares at March 31, 2006;
12,670,323 shares at December 31, 2005;Outstanding - 12,591,314 shares at March 31, 2006;
12,599,508 shares at December 31, 2005;
    
    
    63,745
    
    
    
    63,368Capital surplus
    
    
    101,428
    
    
    
    99,874Retained earnings
    
    
    160,998
    
    
    
    159,583Accumulated other comprehensive income
    
    
    (1,579
    )
    
    
    (1,226
    )Unearned compensation related to ESOP debt
    
    
    (1,060
    )
    
    
    (1,125
    )Cost of common stock in treasury:154,415 shares at March 31, 200670,815 shares at December 31, 2005
    
    
    (4,632
    )
    
    
    (1,984
    )TOTAL SHAREHOLDERS EQUITY
    
    
    318,900
    
    
    
    318,490TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,918,992
    
    
    $
    1,939,979
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 Three Months EndedMarch 31,2006
    
    2005Interest Income:Interest and fees on loans
    
    $
    19,837
    
    
    $
    19,347Interest and dividends on investment securities
    
    
    3,104
    
    
    
    2,367Other interest income
    
    
    101
    
    
    
    358TOTAL INTEREST INCOME
    
    
    23,042
    
    
    
    22,072Interest Expense:Interest on deposits
    
    
    5,895
    
    
    
    4,692Interest on short-term borrowings
    
    
    771
    
    
    
    490Interest on long-term debt and
other interest bearing liabilities
    
    
    1,264
    
    
    
    1,648TOTAL INTEREST EXPENSE
    
    
    7,930
    
    
    
    6,830NET INTEREST INCOME
    
    
    15,112
    
    
    
    15,242Provision for loan losses
    
    
    120
    
    
    
    142INCOME FROM CREDIT ACTIVITIES
    
    
    14,992
    
    
    
    15,100Other Income:Service fees on deposit accounts
    
    
    2,354
    
    
    
    2,140Service fees on loans
    
    
    382
    
    
    
    312Earnings on bank-owned life insurance
    
    
    607
    
    
    
    575Trust fees
    
    
    1,583
    
    
    
    1,666Investment and insurance product sales
    
    
    946
    
    
    
    1,072Gain on the early extinguishment of debt
    
    
    
    
    
    
    1,043Gain (Loss) on sale of loans and other assets
    
    
    57
    
    
    
    (339
    )Net gains on the sale of investment securities
    
    
    62
    
    
    
    988Other
    
    
    1,166
    
    
    
    1,029TOTAL OTHER INCOME
    
    
    7,157
    
    
    
    8,486Other Expense:Salaries and employee benefits
    
    
    7,754
    
    
    
    7,551Net occupancy expense
    
    
    1,110
    
    
    
    1,111Equipment expense
    
    
    1,139
    
    
    
    1,089Data processing service
    
    
    645
    
    
    
    626Pennsylvania shares tax
    
    
    733
    
    
    
    619Amortization of intangible assets
    
    
    261
    
    
    
    163Other
    
    
    3,659
    
    
    
    3,810TOTAL OTHER EXPENSE
    
    
    15,301
    
    
    
    14,969Income before taxes
    
    
    6,848
    
    
    
    8,617Income tax expense
    
    
    1,505
    
    
    
    2,040NET INCOME
    
    $
    5,343
    
    
    $
    6,577Net income per common share:Basic
    
    $
    .42
    
    
    $
    .52Diluted
    
    $
    .42
    
    
    $
    .52Weighted average shares and equivalents:Basic
    
    
    12,586
    
    
    
    12,596Diluted
    
    
    12,634
    
    
    
    12,660Dividends declared per share:Common
    
    $
    .31
    
    
    $
    .31
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    5,343
    
    
    $
    6,577Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    1,319
    
    
    
    969Provision for loan losses and off-balance sheet reserve
    
    
    139
    
    
    
    142Gain on sale of investment securities
    
    
    (62
    )
    
    
    (988
    )Gain on early extinguishment of debt
    
    
    
    
    
    
    (1,043
    )Non-monetary gift
    
    
    
    
    
    
    45Gain on sale of fixed assets and other property owned
    
    
    (34
    )
    
    
    (42
    )Loss on sale of loans and leases
    
    
    
    
    
    
    381Provision for deferred income tax
    
    
    1,427
    
    
    
    1,494Increase in cash surrender value of bank owned life insurance
    
    
    (607
    )
    
    
    (575
    )Increase in interest receivable and other assets
    
    
    (3,698
    )
    
    
    (772
    )Decrease in interest payable
    
    
    (1,688
    )
    
    
    (657
    )Increase in taxes payable
    
    
    51
    
    
    
    546Amortization of deferred net loan (fees) costs
    
    
    (80
    )
    
    
    (78
    )Deferral of net loan fees
    
    
    53
    
    
    
    79Decrease in accounts payable and accrued expenses
    
    
    (35
    )
    
    
    (2,065
    )Total adjustments
    
    
    (3,215
    )
    
    
    (2,564
    )Net cash provided by operating activities
    
    
    2,128
    
    
    
    4,013Cash flows from investing activities:Investment securities available for sale:Proceeds from sales
    
    
    1,770
    
    
    
    51,403Proceeds from maturities
    
    
    11,205
    
    
    
    14,340Cash used for purchases
    
    
    (679
    )
    
    
    (51,842
    )Proceeds from sale of Trading Account
    
    
    435
    
    
    
    Net change in interest bearing deposits with other banks
    
    
    (1,286
    )
    
    
    1,223Decrease in loans and leases
    
    
    11,433
    
    
    
    23,626Gross proceeds from sale of loans and leases
    
    
    2,312
    
    
    
    23,189Investment in limited partnership
    
    
    32
    
    
    
    (69
    )Sale of investment in limited partnership
    
    
    
    
    
    
    1,088Capital expenditures
    
    
    (409
    )
    
    
    (2,416
    )Sale of fixed assets and other property owned
    
    
    96
    
    
    
    524Net change in federal funds sold
    
    
    (6,275
    )
    
    
    19,350Net cash provided by investing activities
    
    
    18,634
    
    
    
    80,416Cash flows from financing activities:Net change in demand deposits, checking with interest and savings
    
    
    (6,730
    )
    
    
    (5,645
    )Net Change in time deposits
    
    
    8,495
    
    
    
    (7,042
    )Decrease in short-term borrowings, net
    
    
    (22,386
    )
    
    
    (12,008
    )Issuance of long term debt
    
    
    1,500
    
    
    
    Principal payment on long term debt
    
    
    (331
    )
    
    
    (54,727
    )Net change in other interest bearing liabilities
    
    
    (70
    )
    
    
    (6
    )Dividends paid
    
    
    (3,936
    )
    
    
    (3,907
    )Proceeds from exercise of stock options
    
    
    1,931
    
    
    
    453Acquisition of treasury stock
    
    
    (2,648
    )
    
    
    Net cash used in financing activities
    
    
    (24,175
    )
    
    
    (82,882
    )Net increase (decrease) in cash and cash equivalents
    
    $
    (3,413
    )
    
    $
    1,547Cash and cash equivalents at beginning of period
    
    $
    56,194
    
    
    $
    47,877Cash and cash equivalents at end of period
    
    
    52,781
    
    
    
    49,424Net increase (decrease) in cash and cash equivalents
    
    $
    (3,413
    )
    
    $
    1,547Interest paid
    
    $
    9,618
    
    
    $
    7,487Income taxes paid
    
    
    26
    
    
    
    Supplemental schedule of noncash investing and financing activities:Noncash activity:Transfers of loans to other real estate owned
    
    
    355
    
    
    
    27Cash and cash equivalentsCash equivalents consist of non-interest bearing deposits with other banks
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
   A.
    
    Basis of Presentation:The 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 financial
statements. In the opinion of management, all adjustments, including normal recurring
accruals, considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2006 are not necessarily indicative of the
results that may be experienced for the year ending December 31, 2006 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, 2005.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, 2005):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.Stock-based compensationIn December 2004, the Financial Accounting Standard Board (FASB) issued SFAS 123 (revised
2004), Share Based Payments (SFAS 123R), an amendment to SFAS 123, Accounting for
StockBased Compensation. SFAS 123R establishes accounting requirements for share-based
compensation to employees and carries forward prior guidance on accounting for awards to
non-employees. The provisions of this statement became effective January 1, 2006 for all
equity awards granted after the effective date and for vesting or modifications of
previously issued awards. SFAS 123R requires an entity to recognize compensation expense
based on an estimate of the number of awards expected to vest, exclusive of awards expected
to be forfeited. The Corporation adopted SFAS 123R on January 1, 2006, on a modified
prospective basis. At December 31, 2005, all awards previously granted by Omega were fully
vested and no additional grants have been awarded as of March 31, 2006, therefore; there is
no related expense recognized in the first quarter of 2006. Future expense will depend on
the type, amount, timing and vesting provisions of the share-based compensation granted.Previous to January 1, 2006, Omega accounted for stock-based compensation using the
intrinsic value method in accordance with Accounting Principles Board (APB) Opinion 25,
Accounting for Stock Issued to Employees, and had adopted the disclosure provisions of
FASB No. 148, Accounting for Stock-Based Compensation. The following pro forma information
for the three months ended March 31, 2005, regarding net income and earnings per share
assumes the adoption of Statement No. 123 for stock options granted subsequent to December
31, 1994. The estimated fair value of the options were amortized to expense over the vesting
period.
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The fair value was estimated at the date of grant using a Black-Scholes option-pricing model
utilizing various assumptions. Compensation expense, net of related tax, is included in the
pro forma net income reported below (in thousands, except per share data.
 Three Months EndedMarch 31, 2005Net income
    
    As reported
    
    $
    6,577Pro forma
    
    
    6,571Compensation expense, net of tax
    
    
    
    
    
    
    6Basic earnings per share
    
    As reported
    
    $
    0.52Pro forma
    
    
    0.52Diluted earnings per share
    
    As reported
    
    $
    0.52Pro forma
    
    
    0.52
 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.
 Omega has six stock-based compensation plans, which provide for the granting of qualified and
non-qualified stock options to both employees and directors. The plans include the Employee Stock
Purchase Plan, the Stock Option Plan (1986) (the 1986 Plan), the 1996 Employee Stock Option Plan
(the 1996 Plan), the 2006 Equity Incentive Plan (the 2006 Plan), the Non-Employee Director
Stock Option Plan (1994) (the 1994 Plan) and the 2004 Stock Option Plan for Non-Employee
Directors (the 2004 Plan).No options have been issued under any of these plans in 2006 and all options previously issued were
vested prior to January 1, 2006. Therefore no compensation expense has been recognized in the first
quarter of 2006.The Employee Stock Purchase Plan (ESPP) provides for options to purchase common stock of Omega to
all employees of Omega and its subsidiaries who meet certain service requirements. The aggregate
number of shares which may be issued upon the exercise of options under this plan is 1,125,000
shares. ESPP options outstanding at March 31, 2006 have a current weighted-average exercise price
of $31.91 and a weighted average remaining contractual life of 2.84 years. There are 146,181
options outstanding as of March 31, 2006 and all of these options are exercisable.The 1986 Plan, the 1996 Plan and the 2006 Plan (collectively, the SOPs) provides for options to
purchase common stock of Omega to officers and key employees. The aggregate number of shares that
may be issued upon the exercise of options under these Plans are 1,061,115 shares. The SOPs options
outstanding at March 31, 2006 a have weighted average exercise price of $32.42 and a weighted
average remaining contractual life of 5.01 years. As of March 31, 2006 there are 531,366 options
outstanding under these plans and all are exercisable.The 1994 Plan and the 2004 Plan (collectively the Director Plans) provides for options to
purchase common stock of Omega to directors. No additional shares will be granted under this plan
as future options to directors will be granted under the 2006 Equity Incentive Plan. Director Plans
options outstanding at March 31, 2006 have a weighted average exercise price of $31.78. As of March
31, 2006, 36,810 of these options are outstanding and exercisable.A summary of the status of Omegas stock-based compensation plans as of March 31, 2006 is presented
below:
 Employee Stock Purchase Plan
    
    
    Employee Stock Option Plans
    
    
    Director Stock Option PlansWeighted-Average
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Weighted-AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstanding, December 31, 2005
    
    
    156,259
    
    
    $
    31.82
    
    
    
    601,460
    
    
    $
    31.63
    
    
    
    36,210
    
    
    $
    32.20GrantedAcquired optionsExercised
    
    
    (6,040
    )
    
    
    28.26
    
    
    
    (68,766
    )
    
    
    25.38
    
    
    
    600
    
    
    
    24.79Forfeited
    
    
    (4,038
    )
    
    
    31.32
    
    
    
    (1,328
    )
    
    
    39.73
    
    
    
    
    
    
    
    Outstanding, March 31, 2006
    
    
    146,181
    
    
    
    31.91
    
    
    
    531,366
    
    
    
    32.42
    
    
    
    36,810
    
    
    
    31.78Options exercisable at March 31, 2005
    
    
    146,181
    
    
    
    
    
    
    
    531,366
    
    
    
    
    
    
    
    36,810
 New Accounting PronouncementsIn March 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 156,
Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140. SFAS
No. 156 requires an entity to recognize a servicing asset or servicing liability each time
it undertakes an obligation to service a financial asset by entering into a servicing
contract in specific situations. Additionally, the servicing asset or liability shall be
initially measured at fair value; however, an entity may elect the amortization method or
fair value method for subsequent balance sheet reporting periods. SFAS No. 156 is
effective as of an entitys first fiscal year beginning after September 15, 2006. Early
adoption is permitted as of the beginning of an entitys fiscal year, provided the entity
has not yet issued financial statements, including interim financial statements, for any
period of that fiscal year. The Company does not expect the adoption of this statement to
have a material impact on our consolidated financial condition, results of operations or
cash flows.In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1, The Meaning of
Other-than-Temporary Impairment and Its Application to Certain Investments. This FSP
provides additional guidance on when an investment in a debt or equity security should be
considered impaired and when that impairment should be considered Other-than-Temporary, even
if the decision to sell has not been made. This FSP also requires certain disclosures about
unrealized losses that have not been recognized as Other-than-Temporary impairments. Omega
adopted this guidance during 2005 in performing its evaluation of unrealized losses on
investment securities at December 31, 2005.In June 2005, the FASB ratified the consensus reached by the EITF on Issue No. 04-5,
Determining Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. EITF
04-5 provides guidance in assessing when a general partner should consolidate its investment
in a limited partnership or similar entity. The provisions of EITF 04-5 were required to be
applied beginning June 30, 2005 by general partners of all newly formed limited partnerships
and for existing limited partnerships for which the partnership agreements are modified and
is effective for general partners in all other limited partnerships beginning January 1,
2006. The adoption of EITF 04-5 did not have a material impact on our consolidated
financial condition or results of operations.
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B.
    
    Commitments, Contingent Liabilities and Guarantees:In the ordinary course of business, Omega makes commitments to extend credit to its
customers through letters of credit and lines of credit.Standby letters of credit are instruments issued by the Corporations bank subsidiary that
guarantee the beneficiary payment by the bank in the event of default by the banks customer
in the non-performance of an obligation or service. Most standby letters of credit are
extended for one-year periods. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers. The bank
holds collateral supporting those commitments for which collateral is deemed necessary. At
March 31, 2006, standby letters of credit issued and outstanding amounted to $25,365,000 as
compared to $26,462,000 on December 31, 2005. The fair market value of the standby letters
of credit at March 31, 2006 and December 31, 2005 was $144,000 and $139,000, respectively.
The fair market value of standby letters of credit is recorded as a liability in accordance
with FIN 45.At March 31, 2006, the bank had $298,842,000 outstanding in loan commitments and other
unused lines of credit extended to its customers. Of this amount, $218,934,000, or 73.3%,
were commercial commitments. The remaining amounts of $79,908,000, or 26.7% were commitments
to consumers for mortgage and home equity loans and personal lines of credit.Omegas Employee Stock Ownership Plan (ESOP) incurred debt in 1990 of $5,000,000, which is
collateralized by a mortgage on the Corporations administrative center and the
Corporations guarantee. As of March 31, 2006, the balance of the ESOP debt was $1,755,000
as compared to $1,845,000 at December 31, 2005.C.
    
    Investment Securities:The following schedule details characteristics of the investment portfolio as of March 31,
2006 and December 31, 2005 (in thousands).
 Securities Classified as Available for SaleGross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketMarch 31, 2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and obligations of other
U.S.Government agencies and corporations
    
    $
    213,302
    
    
    $
    
    
    
    $
    (3,440
    )
    
    $
    209,862Obligations of state and political subdivisions
    
    
    47,791
    
    
    
    17
    
    
    
    (626
    )
    
    
    47,182Corporate and other securities
    
    
    3,334
    
    
    
    7
    
    
    
    (46
    )
    
    
    3,295Mortgage-backed securities
    
    
    67,432
    
    
    
    58
    
    
    
    (1,821
    )
    
    
    65,669Common Stock
    
    
    5,994
    
    
    
    3,445
    
    
    
    (22
    )
    
    
    9,417Total
    
    $
    337,853
    
    
    $
    3,527
    
    
    $
    (5,955
    )
    
    $
    335,425
 Securities Classified as Available for SaleGross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketDecember 31, 2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and obligations of other
U.S.Government agencies and corporations
    
    $
    213,566
    
    
    $
    
    
    
    $
    (3,443
    )
    
    $
    210,123Obligations of state and political subdivisions
    
    
    56,290
    
    
    
    57
    
    
    
    (608
    )
    
    
    55,739Corporate and other securities
    
    
    3,420
    
    
    
    8
    
    
    
    (40
    )
    
    
    3,388Mortgage-backed securities
    
    
    69,992
    
    
    
    70
    
    
    
    (1,420
    )
    
    
    68,642Common Stock
    
    
    5,917
    
    
    
    3,507
    
    
    
    (16
    )
    
    
    9,408Total
    
    $
    349,185
    
    
    $
    3,642
    
    
    $
    (5,527
    )
    
    $
    347,300
 Page 8




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##### 



The following tables show gross unrealized losses and fair value, aggregated by
category and length of time that individual investment securities have been in a continuous
unrealized loss position, at March 31, 2006 and December 31, 2005 (in thousands):
 Less Than 12 Months
    
    
    12 Months or LongerFair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedMarch 31, 2006
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    72,599
    
    
    $
    928
    
    
    $
    137,263
    
    
    $
    2,512Obligations of state and political subdivisions
    
    
    14,808
    
    
    
    172
    
    
    
    18,800
    
    
    
    454Corporate and other securities
    
    
    752
    
    
    
    15
    
    
    
    1,319
    
    
    
    31Mortgage-backed securities
    
    
    38,118
    
    
    
    972
    
    
    
    25,669
    
    
    
    849Debt securities
    
    
    126,277
    
    
    
    2,087
    
    
    
    183,051
    
    
    
    3,846Common stock
    
    
    614
    
    
    
    22
    
    
    
    0
    
    
    
    0Total temporarily impaired securities
    
    $
    126,891
    
    
    $
    2,109
    
    
    $
    183,051
    
    
    $
    3,846
 Less Than 12 Months
    
    
    12 Months or LongerFair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDecember 31, 2005
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Treasury securities and obligations of other
U.S. Government agencies and
corporations
    
    
    88,226
    
    
    
    894
    
    
    
    121,897
    
    
    
    2,549Obligations of state and political
subdivisions
    
    
    13,923
    
    
    
    148
    
    
    
    19,300
    
    
    
    460Corporate and other
securities
    
    
    969
    
    
    
    10
    
    
    
    1,320
    
    
    
    30Mortgage-backed
securities
    
    
    47,865
    
    
    
    1,012
    
    
    
    18,482
    
    
    
    408Debt securities
    
    
    150,983
    
    
    
    2,064
    
    
    
    160,999
    
    
    
    3,447Common
stock
    
    
    147
    
    
    
    16
    
    
    
    0
    
    
    
    0Total temporarily impaired
securities
    
    $
    151,130
    
    
    $
    2,080
    
    
    $
    160,999
    
    
    $
    3,447
 The unrealized losses at March 31, 2006 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, 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 23 investments in U.S. Government agency debt
securities, 20 investments in mortgage-backed securities, six investments in corporate
securities and 33 investments in obligations of state and municipal subdivisions. These
securities have maturity or pre-refund dates ranging from April 2006 to February 2028 and a
weighted average life to maturity of 1.7 years. The unrealized loss position for each
security ranges from .01% to 5.32% of the securities amortized cost as of March 31, 2006.
Debt securities with unrealized losses for a period of 12 months or longer includes 75
investments in U.S. Government agency debt securities, eight investments in corporate
securities, 45 investments in obligations of state and municipal subdivisions and 17
investments in mortgage-backed securities. These securities have maturity or pre-refund
dates ranging from May 2006 to September 2022 and a
weighted average life to maturity of 1.2
years. The unrealized loss position for each security ranges from .27% to 5.28% of the
securities amortized cost as of March 31, 2006. Unrealized losses for a period of less than
12 months on common stock include five equity investments.
 Page 9




---



##### 



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.There were no available for sale securities sold at a loss in the first quarter of 2006.Trading securities at March 31, 2006 consists of assets held in Rabbi Trusts, including
mutual funds and cash equivalents. During the first quarter of 2006, investments with a
market value of $435,000 were liquidated and paid out of the trust. The increase in the
market value of the remaining trading securities during the three months ended March 31,
2006 was $5,000.Other investments primarily include stock held in the Federal Reserve Bank and Federal Home
Loan Bank.D.
    
    Income Taxes:The effective tax rate for the three months ended March 31, 2006 was 22.0%, compared to the
same period in 2005 when the effective tax rate was 23.7%. For the year ended December 31,
2005, the effective tax rate was 21.3%.E.
    
    Long term Debt:Following is a schedule showing the change in composition of long-term debt since December
31, 2005 (in thousands of dollars).
 Long-Term Debt:
    
    March 31, 2006
    
    
    December 31, 2006Notes payable to Federal Home Loan Bank, with fixed rates
between 3.07% and 6.80%
    
    $
    28,901
    
    
    $
    32,732Note payable to another financial institution with fixed interest
rate of 2.84%
    
    
    
    
    
    
    3,590Total Long Term Debt
    
    $
    28,901
    
    
    $
    36,322ESOP Debt Guarantee
    
    $
    1,755
    
    
    $
    1,845
 Page 10




---



##### 



F.
    
    Comprehensive Income:Components of other comprehensive income consist of the following (in thousands):
 Three Months Ended March 31, 2006
    
    
    Three Months Ended March 31, 2005Before
    
    
    Tax Expense
    
    
    
    
    
    
    Before
    
    
    Tax ExpenseTax
    
    
    or
    
    
    Net-of-Tax
    
    
    Tax
    
    
    or
    
    
    Net-of-TaxAmount
    
    
    (Benefit)
    
    
    Amount
    
    
    Amount
    
    
    (Benefit)
    
    
    AmountNet income
    
    $
    6,848
    
    
    $
    1,505
    
    
    $
    5,343
    
    
    $
    8,617
    
    
    $
    2,040
    
    
    $
    6,577Other comprehensive income:Unrealized gains on available for sale securities :Unrealized holding gains (losses) arising during
the period
    
    
    (481
    )
    
    
    (168
    )
    
    
    (313
    )
    
    
    (2,858
    )
    
    
    (1,000
    )
    
    
    (1,858
    )Less reclassification adjustment for
gains included in net income
    
    
    (62
    )
    
    
    (22
    )
    
    
    (40
    )
    
    
    (988
    )
    
    
    (346
    )
    
    
    (642
    )Other comprehensive income (loss)
    
    
    (543
    )
    
    
    (190
    )
    
    
    (353
    )
    
    
    (3,846
    )
    
    
    (1,346
    )
    
    
    (2,500
    )Total comprehensive income
    
    $
    6,305
    
    
    $
    1,315
    
    
    $
    4,990
    
    
    $
    4,771
    
    
    $
    694
    
    
    $
    4,077
 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.
 
 Quarter Ended March 31, 2006
    
    
    Quarter Ended March 31, 2005Income
    
    
    Shares
    
    
    Per-Share
    
    
    Income
    
    
    Shares
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    Amount
    
    
    Numerator
    
    
    Denominator
    
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    5,343
    
    
    
    12,586
    
    
    $
    0.42
    
    
    $
    6,577
    
    
    
    12,596
    
    
    $
    0.52Effect of Dilutive SecuritiesImpact of:Assumed exercises of outstanding options
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    64Potential shares required for contract
settlement
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPSIncome available to common shareholders
plus assumed conversions
    
    $
    5,343
    
    
    
    12,634
    
    
    $
    0.42
    
    
    $
    6,577
    
    
    
    12,660
    
    
    $
    0.52
 Page 11




---



##### 



H.
    
    Goodwill and Other Intangible Assets:
  March 31
    
    
    December 31,2006
    
    
    2005Core deposit intangible:Gross carrying amount
    
    $
    7,885
    
    
    $
    7,885Less: accumulated amortization
    
    
    1,351
    
    
    
    1,156Net carrying amount
    
    
    6,534
    
    
    
    6,729Customer relationship intangibles:Gross carrying amount
    
    
    2,700
    
    
    
    2,700Less: accumulated amortization
    
    
    368
    
    
    
    307Net carrying amount
    
    
    2,332
    
    
    
    2,393Trade name intangible with finte life:Gross carrying amount
    
    
    36
    
    
    
    36Less: accumulated amortization
    
    
    36
    
    
    
    30Net carrying amount
    
    
    
    
    
    
    6Total finite-lived intangibles:Gross carrying amount
    
    
    10,621
    
    
    
    10,621Less: accumulated amortization
    
    
    1,755
    
    
    
    1,493Net carrying amount
    
    
    8,866
    
    
    
    9,128Trade name intangible with infinite life:Gross carrying amount
    
    $
    130
    
    
    $
    130
 Page 12




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##### 



Page 13




---



##### 



1.
    
    Comparison of the Three Months Ended March 31, 2006 and 2005
 Operations Overview
    TwelveThree Months Ended
    
    Months EndedMarch 31,
    
    December 31,2006
    
    2005
    
    2005Return on average assets (annualized)
    
    
    1.11
    %
    
    
    1.28
    %
    
    
    1.15
    %Return on average tangible assets (annualized)
    
    
    1.22
    
    
    
    1.40
    
    
    
    1.25Return on average stated equity (annualized)
    
    
    6.65
    
    
    
    8.26
    
    
    
    7.13Return on average tangible equity (annualized)
    
    
    14.12
    
    
    
    14.44
    
    
    
    15.33Dividend payout  common
    
    
    73.05
    
    
    
    59.43
    
    
    
    68.30Average equity to average assets (stated)
    
    
    16.76
    
    
    
    15.56
    
    
    
    16.06Average equity to average assets (tangible)
    
    
    8.66
    
    
    
    7.74
    
    
    
    8.17
 Net Interest Income
   TwelveThree Months Ended
    
    Months EndedMarch 31,
    
    December 31,2006
    
    2005
    
    2005Yield on average earning assets
    
    
    5.92
    %
    
    
    5.28
    %
    
    
    5.57
    %Cost to fund earning assets
    
    
    2.05
    
    
    
    1.64
    
    
    
    1.80Net interest margin
    
    
    3.87
    
    
    
    3.64
    
    
    
    3.77Net interest margin-tax equivalent
    
    
    4.01
    
    
    
    3.81
    
    
    
    3.92
 Page 14




---



##### 



March 31, 2006
    
    December 31, 2005Change in
    
    Change in Net
    
    
    
    
    
    Change in
    
    Change in NetInterest Rates
    
    Interest
    
    Percent
    
    Interest Rates
    
    Interest
    
    Percent(Basis points)
    
    Income $
    
    Change
    
    (Basis points)
    
    Income $
    
    Change200
    
    
    3,752
    
    
    
    5.8
    %
    
    
    200
    
    
    
    3,500
    
    
    
    5.4
    %100
    
    
    1,902
    
    
    
    2.9
    %
    
    
    100
    
    
    
    1,785
    
    
    
    2.7
    %0
    
    
    
    
    
    
    
    
    
    
    0(100)
    
    
    (1,936
    )
    
    
    (3.0
    )%
    
    
    (100
    )
    
    
    (1,777
    )
    
    
    (2.7
    )%(200)
    
    
    (3,913
    )
    
    
    (6.1
    )%
    
    
    (200
    )
    
    
    (3,540
    )
    
    
    (5.4
    )%
 Loan Loss Provision
  Other Income and Expense
  Page 15




---



##### 



Federal Income Tax
  2.
    
    Investment Securities
     Page 16




---



##### 



3.
    
    Loans
   March 31,
    
    
    December 31,2006
    
    
    2005Commercial, financial and agricultural
    
    $
    267,605
    
    
    $
    271,162Real estate-commercial
    
    
    460,747
    
    
    
    465,724Real estate-construction
    
    
    21,457
    
    
    
    22,000Real estate-mortgage
    
    
    239,336
    
    
    
    242,606Home equity
    
    
    139,828
    
    
    
    137,496Personal
    
    
    58,153
    
    
    
    63,687Lease financing
    
    
    15,521
    
    
    
    14,045Unearned interest
    
    
    (2,246
    )
    
    
    (1,865
    )Total
    
    $
    1,200,401
    
    
    $
    1,214,855Nonaccrual loans
    
    $
    24,352
    
    
    $
    6,562
  Three Months EndedMarch 31,2006
    
    
    2005Balance of allowance-beginning of period
    
    $
    15,482
    
    
    $
    15,644Loans charged off:Commercial, financial and agricultural
    
    
    307
    
    
    
    63Real estate-commercial
    
    
    
    
    
    
    Real estate-mortgage
    
    
    25
    
    
    
    18Personal
    
    
    110
    
    
    
    326Lease financing receivables
    
    
    
    
    
    
    15Total charge-offs
    
    
    442
    
    
    
    422Recoveries of loans previously charged off:Commercial, financial and agricultural
    
    
    14
    
    
    
    25Real estate-commercial
    
    
    
    
    
    
    8Real estate-mortgage
    
    
    
    
    
    
    33Personal
    
    
    36
    
    
    
    57Lease financing receivables
    
    
    
    
    
    
    Total recoveries
    
    
    50
    
    
    
    123Net charge-offs
    
    
    392
    
    
    
    299Provision for loan losses
    
    
    120
    
    
    
    142Balance of allowance-end of period
    
    $
    15,210
    
    
    $
    15,487
  Page 17




---



##### 



March 31, 2006
    
    December 31, 2005Impaired loans:Recorded investment at period end
    
    $
    23,306,000
    
    
    $
    5,676,000Impaired loan balance for which there is a related allowance
    
    
    23,306,000
    
    
    
    5,676,000Amount of allowance for impaired loans
    
    
    3,134,000
    
    
    
    1,217,000Impaired loan balance for which there is no related allowance
    
    
    
    
    
    
    Average recorded investment
    
    
    14,491,000
    
    
    
    4,933,000
 Three months endedMarch 31, 2006
    
    March 31, 2005Interest income recognized (on a cash basis)
    
    $
    30,000
    
    
    $
    13,000
   Non-performing Loans
 March 31,
    
    
    December 31,2006
    
    
    2005Non-accrual loans
    
    $
    24,352
    
    
    $
    6,562Accruing loans past due 90 days or more
    
    
    2,955
    
    
    
    2,616Total non-performing loans
    
    $
    27,307
    
    
    $
    8,107Non-performing loans as percent of allowance
    
    
    179.5
    %
    
    
    52.4
    %
   4.
    
    Deposits and Other Sources of Funds
  Page 18




---



##### 



5.
    
    Regulatory Capital Compliance
   6.
    
    Share Repurchase




---



##### 



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.
  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.




---



##### 



(d) Maximum Number(c) Total Number
    
    
    (or Approximate(a) Total
    
    
    
    
    
    
    of Shares (or
    
    
    Dollar Value) ofNumber of
    
    
    (b) Average
    
    
    Units) Purchased
    
    
    Shares (or Units) thatShares (or
    
    
    Price Paid
    
    
    as Part of Publicly
    
    
    May Yet BeUnits)
    
    
    per Share (or
    
    
    Announced Plans
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    Unit)
    
    
    or Programs
    
    
    Plans or ProgramsJanuary 23,
2006 to January 31,
2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,260,447February 1, 2006 to
February 28, 2006
    
    
    58,600
    
    
    $
    31.10
    
    
    
    58,600
    
    
    
    1,201,847March 1, 2006 to
March 31, 2006
    
    
    25,000
    
    
    $
    33.05
    
    
    
    25,000
    
    
    
    1,176,847Total
    
    
    83,600
    
    
    $
    31.68
    
    
    
    83,600
    
    
    
    1,176,847
        ExhibitNumber
    
    Description10.1*
    
    Employment Agreement with Maureen Bufalino31.1
    
    Chief Executive Officers Rule 13a-14a/15d-14(a) (Section 302) Certification31.2
    
    Chief Financial Officers Rule 13a-14a/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
 
 *
    
    Incorporated by reference from Omegas Annual Report on Form 10-K for the year ended December
31, 2005.




---



##### 



SIGNATURES
  OMEGA FINANCIAL CORPORATION(Registrant)May 10, 2006
    
    By:
    
    /s/ Donita R. KovalDate
    
    
    
    Donita R. KovalPresident andChief Executive OfficerMay 10, 2006
    
    
    
    /s/ Daniel L. WarfelDate
    
    
    
    Daniel L. WarfelExecutive Vice President andChief Financial Officer




---



##### 



31.1
    
    Chief Executive Officers Rule 13a-14a/15d-14(a) (Section 302) Certification
    
    
    2531.2
    
    Chief Financial Officers Rule 13a-14a/15d-14(a) (Section 302) Certification
    
    
    2632.1
    
    Section 1350 (Section 906) Certification by Chief Executive Officer
    
    
    2732.2
    
    Section 1350 (Section 906) Certification by Chief Financial Officer
    
    
    28