##### 



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, 2006
 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
    
    (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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##### 



OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2006
    
    
    2005AssetsCash and due from banks
    
    $
    55,460
    
    
    $
    56,194Interest bearing deposits with other banks
    
    
    10,164
    
    
    
    8,908Federal funds sold
    
    
    16,275
    
    
    
    Trading securities
    
    
    40
    
    
    
    468Investment securities available for sale
    
    
    313,549
    
    
    
    347,300Other investments
    
    
    12,013
    
    
    
    6,055Investment in unconsolidated subsidiary
    
    
    1,625
    
    
    
    1,625Loans held for sale
    
    
    292
    
    
    
    264Total portfolio loans
    
    
    1,165,346
    
    
    
    1,214,591Less: Allowance for loan losses
    
    
    (14,625
    )
    
    
    (15,482
    )Net portfolio loans
    
    
    1,150,721
    
    
    
    1,199,109Premises and equipment, net
    
    
    31,743
    
    
    
    35,997Other real estate owned
    
    
    1,425
    
    
    
    956Bank-owned life insurance
    
    
    76,304
    
    
    
    75,144Investment in limited partnerships
    
    
    6,165
    
    
    
    6,612Core deposit intangibles
    
    
    6,009
    
    
    
    6,729Other intangibles
    
    
    1,139
    
    
    
    1,193Goodwill
    
    
    159,184
    
    
    
    159,191Assets held for sale
    
    
    31,749
    
    
    
    Assets of discontinued operations
    
    
    5,260
    
    
    
    4,599Other assets
    
    
    29,284
    
    
    
    29,635TOTAL ASSETS
    
    $
    1,908,401
    
    
    $
    1,939,979Liabilities and Shareholders EquityDeposits:Non-interest bearing
    
    $
    238,406
    
    
    $
    236,683Interest bearing
    
    
    1,145,457
    
    
    
    1,185,847Total deposits
    
    
    1,383,863
    
    
    
    1,422,530Short-term borrowings
    
    
    68,934
    
    
    
    90,153ESOP debt
    
    
    1,665
    
    
    
    1,845Junior subordinated debentures
    
    
    56,443
    
    
    
    56,692Long-term debt
    
    
    28,565
    
    
    
    36,322Other interest bearing liabilities
    
    
    825
    
    
    
    882Liabilities held for sale
    
    
    36,762
    
    
    
    Liabilities of discontinued operations
    
    
    329
    
    
    
    156Other liabilities
    
    
    12,196
    
    
    
    12,909TOTAL LIABILITIES
    
    
    1,589,582
    
    
    
    1,621,489Shareholders 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 - 12,753,258 shares at June 30, 2006;
12,670,323 shares at December 31, 2005;
    
    
    63,782
    
    
    
    63,368Outstanding - 12,548,843 shares at June 30, 2006;
12,599,508 shares at December 31, 2005;Capital surplus
    
    
    101,605
    
    
    
    99,874Retained earnings
    
    
    162,638
    
    
    
    159,583Accumulated other comprehensive income
    
    
    (2,034
    )
    
    
    (1,226
    )Unearned compensation related to ESOP debt
    
    
    (994
    )
    
    
    (1,125
    )Cost of common stock in treasury:204,415 shares at June 30, 200670,815 shares at December 31, 2005
    
    
    (6,178
    )
    
    
    (1,984
    )TOTAL SHAREHOLDERS EQUITY
    
    
    318,819
    
    
    
    318,490TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,908,401
    
    
    $
    1,939,979




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##### 



OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest Income:Interest and fees on loans
    
    $
    20,372
    
    
    $
    19,612
    
    
    $
    40,209
    
    
    $
    38,959Interest and dividends on investment securities
    
    
    3,077
    
    
    
    2,689
    
    
    
    6,181
    
    
    
    5,056Other interest income
    
    
    241
    
    
    
    338
    
    
    
    342
    
    
    
    696TOTAL INTEREST INCOME.
    
    
    23,690
    
    
    
    22,639
    
    
    
    46,732
    
    
    
    44,711Interest Expense:Interest on deposits
    
    
    6,409
    
    
    
    5,559
    
    
    
    12,304
    
    
    
    10,251Interest on short-term borrowings
    
    
    663
    
    
    
    438
    
    
    
    1,434
    
    
    
    928Interest on long-term debt and
other interest bearing liabilities
    
    
    1,248
    
    
    
    1,292
    
    
    
    2,512
    
    
    
    2,940TOTAL INTEREST EXPENSE
    
    
    8,320
    
    
    
    7,289
    
    
    
    16,250
    
    
    
    14,119NET INTEREST INCOME
    
    
    15,370
    
    
    
    15,350
    
    
    
    30,482
    
    
    
    30,592Provision for loan losses
    
    
    100
    
    
    
    180
    
    
    
    220
    
    
    
    322INCOME FROM CREDIT ACTIVITIES
    
    
    15,270
    
    
    
    15,170
    
    
    
    30,262
    
    
    
    30,270Other Income:Service fees on deposit accounts
    
    
    2,598
    
    
    
    2,308
    
    
    
    4,952
    
    
    
    4,448Service fees on loans
    
    
    443
    
    
    
    315
    
    
    
    825
    
    
    
    627Earnings on bank-owned life insurance
    
    
    552
    
    
    
    574
    
    
    
    1,159
    
    
    
    1,149Trust fees
    
    
    1,025
    
    
    
    1,079
    
    
    
    2,145
    
    
    
    2,171Investment and insurance product sales
    
    
    618
    
    
    
    757
    
    
    
    1,542
    
    
    
    1,810Gain on the early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,043Gain (loss) on sale of loans and other assets
    
    
    64
    
    
    
    (39
    )
    
    
    121
    
    
    
    (378
    )Net gains on the sale of investment securities
    
    
    176
    
    
    
    549
    
    
    
    238
    
    
    
    1,537Other
    
    
    1,215
    
    
    
    1,149
    
    
    
    2,381
    
    
    
    2,178TOTAL OTHER INCOME
    
    
    6,691
    
    
    
    6,692
    
    
    
    13,363
    
    
    
    14,585Other Expense:Salaries and employee benefits
    
    
    7,308
    
    
    
    7,324
    
    
    
    14,793
    
    
    
    14,519Net occupancy expense
    
    
    1,083
    
    
    
    1,029
    
    
    
    2,188
    
    
    
    2,102Equipment expense
    
    
    1,143
    
    
    
    1,019
    
    
    
    2,271
    
    
    
    2,097Data processing service
    
    
    673
    
    
    
    621
    
    
    
    1,318
    
    
    
    1,247Pennsylvania shares tax
    
    
    728
    
    
    
    549
    
    
    
    1,440
    
    
    
    1,168Amortization of intangible assets
    
    
    222
    
    
    
    234
    
    
    
    443
    
    
    
    357Other
    
    
    3,870
    
    
    
    4,309
    
    
    
    7,449
    
    
    
    7,970TOTAL OTHER EXPENSE
    
    
    15,027
    
    
    
    15,085
    
    
    
    29,902
    
    
    
    29,460Income before income taxes and discontinued operations
    
    
    6,934
    
    
    
    6,777
    
    
    
    13,723
    
    
    
    15,395Income tax expense
    
    
    1,568
    
    
    
    1,343
    
    
    
    3,051
    
    
    
    3,383Income from continuing operations
    
    
    5,366
    
    
    
    5,434
    
    
    
    10,672
    
    
    
    12,012Discontinued operations:Income (Loss) from discontinued operations, net of tax
    
    
    125
    
    
    
    (53
    )
    
    
    162
    
    
    
    (54
    )Loss on disposal of discontinued operations, net of tax
    
    
    (146
    )
    
    
    
    
    
    
    (146
    )
    
    
    (Loss) income from discontinued operations
    
    
    (21
    )
    
    
    (53
    )
    
    
    16
    
    
    
    (54
    )NET INCOME
    
    $
    5,345
    
    
    $
    5,381
    
    
    $
    10,688
    
    
    $
    11,958Net income per common share:Basic
    
    $
    0.43
    
    
    $
    0.43
    
    
    $
    0.85
    
    
    $
    0.95Diluted
    
    $
    0.42
    
    
    $
    0.43
    
    
    $
    0.85
    
    
    $
    0.95Net income per common share from continuing operations:Basic
    
    $
    0.43
    
    
    $
    0.43
    
    
    $
    0.85
    
    
    $
    0.95Diluted
    
    $
    0.43
    
    
    $
    0.43
    
    
    $
    0.85
    
    
    $
    0.95Net income per common share from discontinued operations:Basic
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00Diluted
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00Weighted average shares and equivalents:Basic
    
    
    12,572
    
    
    
    12,607
    
    
    
    12,579
    
    
    
    12,601Diluted
    
    
    12,616
    
    
    
    12,660
    
    
    
    12,624
    
    
    
    12,659Dividends declared per share:Common
    
    
    0.31
    
    
    
    0.31
    
    
    
    0.62
    
    
    
    0.62




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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    10,688
    
    
    $
    11,958Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,516
    
    
    
    2,147Provision for loan losses and off-balance sheet reserve
    
    
    232
    
    
    
    312Gain on sale of investment securities
    
    
    (238
    )
    
    
    (1,537
    )Gain on early extinguishment of debt
    
    
    
    
    
    
    (1,043
    )Non-monetary gift
    
    
    
    
    
    
    45Gain on sale of fixed assets and other property owned
    
    
    (81
    )
    
    
    (3
    )Loss on sale of loans and leases
    
    
    
    
    
    
    381Provision for deferred income tax
    
    
    1,065
    
    
    
    2,912Increase in cash surrender value of bank owned life insurance
    
    
    (1,160
    )
    
    
    (1,148
    )(Increase) decrease in interest receivable and other assets
    
    
    (802
    )
    
    
    462Increase (decrease) in interest payable
    
    
    138
    
    
    
    (101
    )Increase in taxes payable
    
    
    150
    
    
    
    411Amortization of deferred net loan (fees) costs
    
    
    172
    
    
    
    (153
    )Deferral of net loan fees
    
    
    (245
    )
    
    
    110Decrease in accounts payable and accrued expenses
    
    
    (1,165
    )
    
    
    (2,390
    )Total adjustments
    
    
    582
    
    
    
    405Net cash provided by operating activities
    
    
    11,270
    
    
    
    12,363Cash flows from investing activities:Investment securities available for sale:Proceeds from sales
    
    
    18,615
    
    
    
    55,536Proceeds from maturities
    
    
    30,309
    
    
    
    30,787Cash used for purchases
    
    
    (22,562
    )
    
    
    (79,532
    )Proceeds from sale of Trading Account
    
    
    435
    
    
    
    (Increase) decrease in interest bearing deposits with other banks
    
    
    (1,256
    )
    
    
    5,969Decrease in loans and leases
    
    
    18,175
    
    
    
    48,688Gross proceeds from sale of loans and leases
    
    
    2,312
    
    
    
    24,978Return of capital (investment) in limited partnership
    
    
    32
    
    
    
    (69
    )Sale of investment in limited partnership
    
    
    
    
    
    
    1,088Capital expenditures
    
    
    (1,150
    )
    
    
    (3,419
    )Sale of fixed assets and other property owned
    
    
    195
    
    
    
    2,273(Increase) decrease in federal funds sold
    
    
    (16,275
    )
    
    
    6,025Net cash provided by investing activities
    
    
    28,830
    
    
    
    92,324Cash flows from financing activities:Net change in demand deposits, checking with interest and savings
    
    
    (19,402
    )
    
    
    19,654Net Change in time deposits
    
    
    18,027
    
    
    
    (9,536
    )Decrease in short-term borrowings, net
    
    
    (29,819
    )
    
    
    (34,595
    )Issuance of long term debt
    
    
    1,500
    
    
    
    Principal payment on long term debt
    
    
    (667
    )
    
    
    (66,615
    )Net change in other interest bearing liabilities
    
    
    (57
    )
    
    
    (12
    )Dividends paid
    
    
    (7,830
    )
    
    
    (7,817
    )Issuance of common stock
    
    
    2,145
    
    
    
    769Acquisition of treasury stock
    
    
    (4,194
    )
    
    
    (260
    )Net cash used in financing activities
    
    
    (40,297
    )
    
    
    (98,412
    )Net increase (decrease) in cash and cash equivalents
    
    $
    (197
    )
    
    $
    6,275Cash and cash equivalents at beginning of period
    
    $
    56,194
    
    
    $
    47,877Cash and cash equivalents at end of period
    
    
    55,997
    
    
    
    54,152Net increase (decrease) in cash and cash equivalents
    
    $
    (197
    )
    
    $
    6,275




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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Interest paid
    
    $
    16,121
    
    
    $
    14,220Income taxes paid
    
    $
    2,094
    
    
    
    Supplemental schedule of noncash investing and financing activities:Noncash activity:Transfers of loans to other real estate owned
    
    $
    531
    
    
    $
    73Cash and cash equivalentsCash equivalents consist of non-interest bearing deposits with other banks
and is classified as follows:Cash and due from banks
    
    $
    55,460Cash included in Assets Held for Sale
    
    
    537Total cash
    
    $
    55,997




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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 and six months ended June 30, 2006 are not necessarily indicative of
the results that may be experienced for the fiscal 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 fiscal
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 June 30, 2006; therefore, there is
no related expense recognized in the first six months 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 and six months ended June 30, 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.
 Page 7




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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 ended
    
    Six Months endedJune 30, 2005
    
    June 30, 2005Net income
    
    As reported
    
    $
    5,381
    
    
    $
    11,958Pro forma
    
    
    5,379
    
    
    
    11,950Compensation expense, net of tax
    
    
    
    
    2
    
    
    
    8Basic earnings per share
    
    As reported
    
    $
    0.43
    
    
    $
    0.95Pro forma
    
    
    0.43
    
    
    
    0.95Diluted earnings per share
    
    As reported
    
    $
    0.43
    
    
    $
    0.95Pro forma
    
    
    0.43
    
    
    
    0.95
 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 the Companys 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 six months 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 the
SOPs is 1,125,000 shares. ESPP options outstanding at June 30, 2006 have a current
weighted-average exercise price of $31.90 and a weighted average remaining contractual life
of 2.60 years. There are 140,243 options outstanding as of June 30, 2006 and all of these
options are exercisable.The 1986 Plan, the 1996 Plan and the 2006 Plan (collectively, the SOPs) provide for
options to purchase common stock of Omega to officers and key employees. Options under the
2006 Plan can also be granted to Omegas directors. No additional grants will be made under
the 1986 Plan and 1996 Plan because future grants will be made only under the 2006 Plan.
The aggregate number of shares that may be issued upon the exercise of options under these
Plans are 1,841,738 shares. The SOPs options outstanding at June 30, 2006 a have weighted
average exercise price of $32.43 and a weighted average remaining contractual life of 4.77
years. As of June 30, 2006, there are 527,528 options outstanding under these plans and all
are exercisable.The 1994 Plan and the 2004 Plan (collectively, the Director Plans) provide for options to
purchase common stock of Omega to directors. No additional awards will be granted under the
Director Plans as future options to directors will be granted under the 2006 Plan. Director
Plans options outstanding at June 30, 2006 have a weighted average exercise price of $32.27
As of June 30, 2006, 33,864 of these options are outstanding and exercisable.
 Page 8




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##### 



A summary of the status of Omegas stock-based compensation plans as of June 30, 2006 is
presented below:
 Employee Stock
    
    
    Employee Stock
    
    
    Director StockPurchase Plan
    
    
    Option Plan
    
    
    Option PlanWeighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    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
    
    
    (9,718
    )
    
    
    27.93
    
    
    
    (72,071
    )
    
    
    25.60
    
    
    
    (1,146
    )
    
    
    24.63Forfeited
    
    
    (6,298
    )
    
    
    31.55
    
    
    
    (1,861
    )
    
    
    36.99
    
    
    
    (1,200
    )
    
    
    21.33Outstanding, June 30, 2006
    
    
    140,243
    
    
    
    31.90
    
    
    
    527,528
    
    
    
    32.43
    
    
    
    33,864
    
    
    
    32.27Exercisable at June 30, 2006
    
    
    140,243
    
    
    
    
    
    
    
    527,528
    
    
    
    
    
    
    
    33,864
 ReclassificationCertain amounts in 2005 financial statements have been reclassified to segregate balances
and results associated with discontinued operations and to conform to the 2006 presentation.
The reclassification had no impact on net income.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.
 Page 9




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##### 



In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being recognized in
the financial statements. In addition, FIN 48 provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 also requires expanded disclosures, including a
rollforward of unrecognized tax benefits as well as specific detail related to tax
uncertaintainties for which it is reasonably possible the amount of unrecognized tax benefit
will significantly change within 12 months. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company is currently evaluating the
impact of adopting this statement on our consolidated financial
condition, results of operations and cash
flows.B.
    
    Discontinued OperationsOn June 19, 2006, the Corporation entered into an agreement to sell Sentry Trust Company.
The transaction is expected to close in the third quarter of 2006. Settlement of this
transaction is dependent on several conditions, including, but not limited to, obtaining
necessary regulatory approval, completion within a required timeframe, as well as minimum
performance levels for the Company. The results of Sentry are reflected as discontinued
operations in the consolidated statements of income and the related assets and liabilities
of Sentry Trust have been segregated as such on the consolidated balance sheets.The following is a summary of the assets and liabilities of discontinued operations related
to the sale of Sentry Trust (in thousands).
 June 30,
    
    
    December 31,2006
    
    
    2005Assets:Premise and equipment
    
    $
    2,343
    
    
    $
    2,394Goodwill
    
    
    1,813
    
    
    
    1,813Other intangible
    
    
    1,261
    
    
    
    1,336Other assets
    
    
    (157
    )
    
    
    (944
    )Total assets
    
    $
    5,260
    
    
    $
    4,599Liabilities:Other liabilities
    
    $
    329
    
    
    $
    156Total liabilities
    
    $
    329
    
    
    $
    156
 Page 10




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##### 



The results of Sentry Trust are presented as discontinued operations in a separate
category on the consolidated statements of income. The following is a summary of the income
from discontinued operations for the three and six months ended June 30, 2006 and 2005 (in
thousands).
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Other Income:Trust fees
    
    
    509
    
    
    
    397
    
    
    
    972
    
    
    
    971Investment and insurance product sales
    
    
    14
    
    
    
    22
    
    
    
    36
    
    
    
    41Other
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    30Total other Income
    
    
    523
    
    
    
    449
    
    
    
    1,008
    
    
    
    1,042Other expense:Salaries and employee benefits
    
    
    170
    
    
    
    397
    
    
    
    439
    
    
    
    753Net occupancy expense
    
    
    3
    
    
    
    35
    
    
    
    8
    
    
    
    73Equipment expense
    
    
    10
    
    
    
    12
    
    
    
    21
    
    
    
    23Pennsylvania shares tax
    
    
    20
    
    
    
    
    
    
    
    41
    
    
    
    Amortization of intangible assets
    
    
    34
    
    
    
    40
    
    
    
    74
    
    
    
    80Other
    
    
    96
    
    
    
    94
    
    
    
    176
    
    
    
    243Total other expense
    
    
    333
    
    
    
    578
    
    
    
    759
    
    
    
    1,172Income from discontinued operations before taxes and disposal
    
    
    190
    
    
    
    (129
    )
    
    
    249
    
    
    
    (130
    )Income tax expense
    
    
    65
    
    
    
    (76
    )
    
    
    87
    
    
    
    (76
    )Income from discontinued operations before loss on disposal
    
    
    125
    
    
    
    (53
    )
    
    
    162
    
    
    
    (54
    )Gain on disposal of discontinued operations
    
    
    425
    
    
    
    
    
    
    
    425
    
    
    
    Income Tax Expense
    
    
    571
    
    
    
    0
    
    
    
    571
    
    
    
    0(Loss) income from disposal of discontinued operations
    
    
    (146
    )
    
    
    0
    
    
    
    (146
    )
    
    
    0(Loss) income from discontinued operations
    
    
    (21
    )
    
    
    (53
    )
    
    
    16
    
    
    
    (54
    )
 The following is a summary of the cash flows from discontinued operations for the six
months ended June 30, 2006 and 2005 (in thousands).
 June 30,2006
    
    2005Net cash provided by (used in) operating activities
    
    $
    36
    
    
    $
    (430
    )Net cash provided by (used in) investing activities
    
    
    (342
    )
    
    
    627Net cash provided by (used in) financing activities
    
    
    
    
    
    
    600Net increase (decrease) in cash and cash
equivalents of discontinued operations
    
    $
    (306
    )
    
    $
    797
 C.
    
    Assets and Liabilities Held for SaleOn July 31, 2006, the Corporation entered into agreements to sell three branch locations of
Omega Bank, including the Steelton, Middletown and Mechanicsburg offices. The decision to
sell the branches was a result of the Corporations efforts to refine its retail network in
the wake of the 2004 merger with Sun Bancorp, Inc.. The branch sales are expected to close
before December 31, 2006 and result in a total pre-tax gain of approximately $2.3 million.
The assets and liabilities of these branches are classified as held for sale on the June 30,
2006 consolidated balance sheet. Amounts required at settlement for this transaction are
expected to come from funds invested in federal funds sold at Omega Bank.
 Page 11




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##### 



The following is a summary of the assets and liabilities held for sale related to the sale
of the branches as of June 30, 2006 (in thousands).
 June 30,2006Assets Held for SaleCash
    
    $
    537Loans
    
    
    27,469Less: Allowance for loan losses
    
    
    (231
    )Net loans
    
    
    27,238Premise and equipment
    
    
    3,480Core deposit intangible
    
    
    331Other assets
    
    
    163Total assets held for sale
    
    $
    31,749Liabilities Held for SaleDeposits:Non-interest bearing
    
    $
    2,995Interest bearing
    
    
    33,794Total deposits
    
    
    36,789Other liabilities
    
    
    (27
    )Liabilities held for sale
    
    $
    36,762
 D.
    
    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, 2006, standby letters of credit issued and outstanding amounted to $25,510,000 as
compared to $26,462,000 on December 31, 2005. The fair market value of the standby letters
of credit at June 30, 2006 and December 31, 2005 was $151,000 and $139,000, respectively.
The fair market value of standby letters of credit is recorded as a liability in accordance
with FIN 45.At June 30, 2006, the bank had $299,155,000 outstanding in loan commitments and other unused
lines of credit extended to its customers. Of this amount, $216,859,000, or 72.5%, were
commercial commitments. The remaining amounts of $82,296,000 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, 2006, the balance of the ESOP debt was $1,665,000 as
compared to $1,845,000 at December 31, 2005.
 Page 12




---



##### 



E.
    
    Investment Securities:The following schedule details characteristics of the investment portfolio as of June 30,
2006 and December 31, 2005 (in thousands).
 Securities Classified as Available for SaleGross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketJune 30, 2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    214,215
    
    
    $
    5
    
    
    $
    (3,224
    )
    
    $
    210,996Obligations of state and political subdivisions
    
    
    28,905
    
    
    
    
    
    
    
    (598
    )
    
    
    28,307Corporate and other securities
    
    
    3,342
    
    
    
    7
    
    
    
    (50
    )
    
    
    3,299Mortgage-backed securities
    
    
    64,318
    
    
    
    44
    
    
    
    (2,414
    )
    
    
    61,948Common Stock
    
    
    5,898
    
    
    
    3,118
    
    
    
    (17
    )
    
    
    8,999Total
    
    $
    316,678
    
    
    $
    3,174
    
    
    $
    (6,303
    )
    
    $
    313,549
 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
  Less Than 12 Months
    
    
    12 Months or LongerFair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedJune 30, 2006
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    75,220
    
    
    $
    979
    
    
    $
    132,934
    
    
    $
    2,245Obligations of state and political subdivisions
    
    
    8,170
    
    
    
    140
    
    
    
    19,841
    
    
    
    458Corporate and other securities
    
    
    1,105
    
    
    
    11
    
    
    
    1,110
    
    
    
    40Mortgage-backed securities
    
    
    31,809
    
    
    
    1,161
    
    
    
    28,377
    
    
    
    1,253Debt securities
    
    
    116,304
    
    
    
    2,291
    
    
    
    182,262
    
    
    
    3,996Common stock
    
    
    147
    
    
    
    16
    
    
    
    
    
    
    
    Total temporarily impaired securities
    
    $
    116,451
    
    
    $
    2,307
    
    
    $
    182,262
    
    
    $
    3,996
 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
    
    
    
    
    
    
    
    Total temporarily impaired securities
    
    $
    151,130
    
    
    $
    2,080
    
    
    $
    160,999
    
    
    $
    3,447
 Page 13




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##### 



The unrealized losses at June 30, 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, management believes the payment of contractual
cash flows, including principal repayment, is not at risk. Management has the intent and
ability to hold these investments until market recovery or maturity. Debt securities with
unrealized losses for a period of less than 12 months include 23 investments in U.S.
Government agency debt securities, 14 investments in mortgage-backed securities, 7
investments in corporate securities and 22 investments in obligations of state and municipal
subdivisions. Debt securities with unrealized losses for a period of 12 months or longer
include 72 investments in U.S. Government agency debt securities, 8 investments in corporate
securities, 48 investments in obligations of state and municipal subdivisions and 22
investments in mortgage-backed securities. Debt securities included in the above table have
maturity or pre-refund dates ranging from July 2006 to May 2027. The unrealized loss
position for each security ranges from .01% to 5.96% of the securities amortized cost as of
June 30, 2006. 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, 2006 consist 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 six months ended June 30, 2006 was
$3,000.Other investments primarily include Federal Reserve Bank and Federal Home Loan Bank stock.F.
    
    Income Taxes:The effective tax rate for the three months ended June 30, 2006 was 29.2%, as a result of a
22.6% effective rate on income from continuing operations, 34.2% effective rate on income of
discontinued operations and 134.4% effective rate on the disposal of discontinued
operations. The second quarter of 2005 had an effective rate of 19.1%, a result of a 19.8%
effective rate on income from continuing operations and 58.9% rate on income from
discontinued operations. The increase in effective tax rate on income from continuing
operations from 19.8% in 2005 to 22.6% in 2006 is the result of favorable tax treatment from
the charitable contribution of real estate in 2005. The high effective rate on the income
from disposal of discontinued operations is a result of permanent differences in the book
and tax basis of those assets.The effective tax rate for the six months ended June 30, 2006 was 25.8%, as a result of a
22.2% effective rate on income from continuing operations, 34.9% rate on income of
discontinued operations and 103.4% rate on the disposal of discontinued operations. In
2005, the effective tax rate was 21.7% as a result of a 22.0% rate on income from continuing
operations and a 58.5% on income from discontinued operations. For the year ended December
31, 2005, the effective tax rate was 21.3%, as a result of a 21.4% effective rate on income
from continuing operations and 38.3% effective rate on income from discontinued operations.G.
    
    Long-term Debt:The following schedule shows the change in composition of long-term debt since December 31,
2005 (in thousands.)
 June 30, 2006
    
    
    December 31, 2005Notes payable to Federal Home Loan Bank, with fixed rates
between 3.07% and 6.80%
    
    $
    28,565
    
    
    $
    32,732Notes payable to another financial institution with a fixed interest
rate of 2.84%
    
    
    
    
    
    
    3,590Total Long-term Debt
    
    $
    28,565
    
    
    $
    36,322ESOP Debt Guarantee
    
    $
    1,665
    
    
    $
    1,845
 Page 14




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##### 



H.
    
    Comprehensive Income:Components of other comprehensive income consist of the following (in thousands):
 Three Months Ended June 30, 2006
    
    
    Three Months Ended June 30, 2005Tax
    
    
    
    
    
    
    
    
    
    
    TaxBefore
    
    
    Expense
    
    
    
    
    
    
    Before
    
    
    ExpenseTax
    
    
    Or
    
    
    Net-of-Tax
    
    
    Tax
    
    
    Or
    
    
    Net-of-TaxAmount
    
    
    (Benefit)
    
    
    Amount
    
    
    Amount
    
    
    (Benefit)
    
    
    AmountNet Income from continuing operations
    
    $
    6,934
    
    
    $
    1,568
    
    
    $
    5,366
    
    
    $
    6,777
    
    
    $
    1,343
    
    
    $
    5,434Net Income (loss) from discontinued operations
    
    
    615
    
    
    
    636
    
    
    
    (21
    )
    
    
    (129
    )
    
    
    (76
    )
    
    
    (53
    )Net income
    
    
    7,549
    
    
    
    2,204
    
    
    
    5,345
    
    
    
    6,648
    
    
    
    1,267
    
    
    
    5,381Other comprehensive income:Unrealized gains (losses) on available for
sale securities:Unrealized holding gains (losses)
arising during the period
    
    
    (524
    )
    
    
    (183
    )
    
    
    (341
    )
    
    
    1,192
    
    
    
    417
    
    
    
    775Less reclassification adjustment for
gains included in net income
    
    
    (176
    )
    
    
    (62
    )
    
    
    (114
    )
    
    
    (549
    )
    
    
    (192
    )
    
    
    (357
    )Other comprehensive income (loss)
    
    
    (700
    )
    
    
    (245
    )
    
    
    (455
    )
    
    
    643
    
    
    
    225
    
    
    
    418Total comprehensive income
    
    $
    6,849
    
    
    $
    1,959
    
    
    $
    4,890
    
    
    $
    7,291
    
    
    $
    1,492
    
    
    $
    5,799
 Six Months Ended June 30, 2006
    
    
    Six Months Ended June 30, 2005Before
    
    
    Tax Expense
    
    
    
    
    
    
    Before
    
    
    Tax ExpenseTax
    
    
    or
    
    
    Net-of-Tax
    
    
    Tax
    
    
    or
    
    
    Net-of-TaxAmount
    
    
    (Benefit)
    
    
    Amount
    
    
    Amount
    
    
    (Benefit)
    
    
    AmountNet Income from continuing operations
    
    $
    13,723
    
    
    $
    3,051
    
    
    $
    10,672
    
    
    $
    15,395
    
    
    $
    3,383
    
    
    $
    12,012Net Income (loss) from discontinued operations
    
    
    674
    
    
    
    658
    
    
    
    16
    
    
    
    (130
    )
    
    
    (76
    )
    
    
    (54
    )Net income
    
    
    14,397
    
    
    
    3,709
    
    
    
    10,688
    
    
    
    15,265
    
    
    
    3,307
    
    
    
    11,958Other comprehensive income:Unrealized gains (losses) on available for
sale securities:Unrealized holding gains (losses)
arising during the period
    
    
    (1,005
    )
    
    
    (352
    )
    
    
    (653
    )
    
    
    (1,666
    )
    
    
    (583
    )
    
    
    (1,083
    )Less reclassification adjustment for
gains included in net income
    
    
    (238
    )
    
    
    (83
    )
    
    
    (155
    )
    
    
    (1,537
    )
    
    
    (538
    )
    
    
    (999
    )Other comprehensive income (loss)
    
    
    (1,243
    )
    
    
    (435
    )
    
    
    (808
    )
    
    
    (3,203
    )
    
    
    (1,121
    )
    
    
    (2,082
    )Total comprehensive income
    
    $
    13,154
    
    
    $
    3,274
    
    
    $
    9,880
    
    
    $
    12,062
    
    
    $
    2,186
    
    
    $
    9,876
 Page 15




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##### 



I.
    
    Earnings Per ShareBasic earnings per share are computed by dividing income available to common stockholders by
the weighted average number of shares outstanding for the period. On a diluted basis, both
earnings and shares outstanding are adjusted to assume the conversion of all potentially
dilutive securities into common stock. (in thousands, except per share amounts)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005NumeratorIncome from continuing operations
    
    $
    5,366
    
    
    $
    5,434
    
    
    $
    10,672
    
    
    $
    12,012Income (loss) from discontinued operations
    
    
    (21
    )
    
    
    (53
    )
    
    
    16
    
    
    
    (54
    )Net Income
    
    $
    5,345
    
    
    $
    5,381
    
    
    $
    10,688
    
    
    $
    11,958DenominatorBasic weighted-average shares outstanding
    
    
    12,572
    
    
    
    12,607
    
    
    
    12,579
    
    
    
    12,601Dilutive potential shares from stock-basked compensation
    
    
    40
    
    
    
    49
    
    
    
    41
    
    
    
    54Potential Shares required for contract settlement
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Dilutive weighted-average shares outstanding
    
    
    12,616
    
    
    
    12,660
    
    
    
    12,624
    
    
    
    12,659Earnings per share  BasicIncome from continuing operations
    
    $
    0.43
    
    
    $
    0.43
    
    
    $
    0.85
    
    
    $
    0.95Income (loss) from discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net Income
    
    $
    0.43
    
    
    $
    0.43
    
    
    $
    0.85
    
    
    $
    0.95Earnings per share  DilutedIncome from continuing operations
    
    $
    0.43
    
    
    $
    0.43
    
    
    $
    0.85
    
    
    $
    0.95Income (loss) from discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Net Income (1)
    
    $
    0.42
    
    
    $
    0.43
    
    
    $
    0.85
    
    
    $
    0.95
 
 (1)
    
    Totals may not sum due to rounding Page 16




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##### 



J.
    
    Goodwill and Other Intangible Assets:As a result of the acquisition of Sun Bancorp, Inc. in the fourth quarter of 2004, Omega
recorded core deposit intangible assets and goodwill of $7,728,000 and $161,173,000,
respectively. The recorded goodwill balance at June 30, 2006 was $160,997,000. Managements
current analysis indicates that as of June 30, 2006, a decline in Omegas market
capitalization in excess of 18.9% would trigger further analysis of the carrying value of
goodwill, which could result in an adjustment to its value. The weighted average life of
all finite-lived intangible assets is 8.50 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, 2006 and December 31, 2005
follows (in thousands):
 June 30,
    
    December 31,2006
    
    2005Core deposit intangibleGross carrying amount
    
    $
    7,885
    
    
    $
    7,885Less: accumulated amortization
    
    
    1,545
    
    
    
    1,156Net carrying amount
    
    
    6,340
    
    
    
    6,729Customer relationship intangiblesGross carrying amount
    
    
    2,700
    
    
    
    2,700Less: accumulated amortization
    
    
    430
    
    
    
    307Net carrying amount
    
    
    2,270
    
    
    
    2,393Trade name intangible with finte lifeGross carrying amount
    
    
    36
    
    
    
    36Less: accumulated amortization
    
    
    36
    
    
    
    30Net carrying amount
    
    
    
    
    
    
    6Total finite-lived intangiblesGross carrying amount
    
    
    10,621
    
    
    
    10,621Less: accumulated amortization
    
    
    2,011
    
    
    
    1,493Net carrying amount
    
    
    8,610
    
    
    
    9,128Trade name intangible with infinite lifeGross carrying amount
    
    $
    130
    
    
    $
    130
 The net carrying amount of the core deposit intangible above includes $331,000 related
to the three branch locations being sold and is classified on the balance sheet in assets
held for sale. The customer
relationship intangible includes $1,261,000 related to Sentry Trust and is classified on the
balance sheet
as assets of discontinued operations. Goodwill of $1,813,000 has been allocated to
the Sentry Trust
business and is classified on the balance sheet as assets of discontinued operations.K.
    
    Subsequent Event:On July 31, 2006, Omega entered into agreements to sell three branch locations of Omega
Bank. An agreement was reached with Mid Penn Bancorp, Inc. for sale of the Steelton and
Middletown offices, while Orrstown Financial Services, Inc will acquire the Mechanicsburg
Office. All three branches were acquired by Omega as part of the Sun Bancorp, Inc.
acquisition in 2004 and are being sold as part of the Companys continuing efforts to refine
its retail network after the Sun merger. Both transactions are expected to close before
December 31, 2006 and result in a total pre-tax gain of approximately $2.3 million. As of
June 30, 2006, outstanding loans in the three branches totaled $27,469,000 and deposits
totaled $36,789,000. The assets and liabilities of these branches are classified as held
for sale on the June 30, 2006 consolidated balance sheet.
 Page 17




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##### 



OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
   In analyzing whether to make, or to continue to make, an investment in Omega, investors
should consider among other factors, certain investment considerations more particularly
described in Item 1A. Risk Factors in this report and in the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2005.
  The Corporations consolidated financial statements are prepared based upon the application
of U.S. generally accepted accounting principles, the most significant of which are
described in Note A to consolidated financial statements included in this Form 10-Q.
Certain of these policies require numerous estimates and economic assumptions, based upon
information available as of the date of the financial statements. As such, over time, they
may prove inaccurate or vary and may significantly affect the Corporations reported results
and financial position for the period or in future periods. The accounting policy for
establishing the allowance for loan losses has a greater reliance on the use of estimates,
and as such has a greater possibility of producing results that could be different than
originally reported. Changes in underlying factors, assumptions or estimates in the
allowance for loan losses could have a material impact on the Corporations future financial
condition and results of operations.The allowance for loan losses is maintained at a level believed adequate by management to
absorb probable losses in the loan portfolio. Managements determination of the adequacy of
the allowance for loan losses is based upon an evaluation of individual credits in the loan
portfolio, historical loan loss experience, current economic conditions, and other relevant
factors. This determination is inherently subjective, as it requires material estimates
including the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change. The allowance for loan losses related
to loans considered to be impaired is generally evaluated based on the discounted cash flows
using the impaired loans initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans.Omegas accounting policy for the determination of goodwill and other intangibles also has a
significant reliance on the use of estimates. Goodwill represents the excess of the cost of
an acquisition over the fair value of the net assets acquired. Other intangible assets
represent purchased assets that also lack physical substance but can be separately
distinguished from goodwill because of contractual or other legal rights or because the
asset is capable of being sold or exchanged either on its own or in combination with a
related contract, asset or liability. It is Omegas policy that goodwill be tested at least
annually for impairment. Managements current analysis indicates that as of June 30, 2006,
an 18.9% decline in Omegas market capitalization would trigger further analysis of the
carrying value of goodwill, which could result in an adjustment to its value.Intangible assets with finite lives include core deposits, customer relationships and trade
names. Intangible assets are subject to impairment testing whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Core deposit,
customer relationship and certain trade name intangibles are amortized over a period of time
that represents their expected life using method of amortization that reflects the pattern
of economic benefit. Management estimates that consecutive annual declines of more than 10%
of the acquired customer base subsequent to June 30, 2006 could result in an impairment of
the core deposit intangible and affect Omegas operating results in future years.
 Page 18




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##### 



1.
    
    Comparison of the Three and Six Months Ended June 30, 2006 and 2005
 Operations Overview
 A.
    
    Three Months Ended June 30, 2006 and 2005
 Income from continuing operations before income taxes for the second quarter of 2006,
increased $157,000, or 2.3%, when compared to the same period in 2005. Income from credit
activities increased $100,000 from $15,170,000 in the second quarter of 2005 to $15,270,000
in the second quarter of 2006. Other income decreased only $1,000 for the three month
period, despite the fact that gains on the sale of loans, investments and other assets
contributed $270,000 less in revenue in the second quarter of 2006 than in the second
quarter of 2005. Other expense decreased by $58,000, or .4% when comparing the second
quarter of 2006 to the same period in 2005.Income taxes from continuing operations for the second quarter of 2006, increased $225,000,
or 16.8%, due primarily to the favorable tax treatment related to the charitable
contribution of real estate in 2005. The effective tax rate for the second quarter of 2006
was 22.6%, as compared to 19.8% in the second quarter of 2005. Income from continuing
operations, net of taxes decreased $68,000 or 1.3%.In the second quarter of 2006, income, net of tax, from discontinued operations, which
reflect the results of Sentry Trust, increased $32,000 when compared to the same period in
2005. Actual operating results, net of tax, of discontinued operations increased $178,000
for the second quarter of 2006. This gain was offset by a loss on disposal, net of tax, of
$146,000, which was recognized in the second quarter of 2006.Net income for the second quarter of 2006 was $5,345,000, or 0.7%, lower than the second
quarter of 2005. The effective tax rate for the second quarter of 2006 was 29.2%, as a
result of a 22.6% effective tax rate on income from continuing operations, 34.2% on income
from discontinued operations and 134.4% from the loss on disposal of discontinued
operations. The second quarter of 2005 had an effective rate of 19.1%, as a result of a
19.8% effective tax rate on income from continuing operations and 58.9% from discontinued
operations.The following are selected key ratios for the periods:
 Three Months Ended
    
    Six Months EndedJune 30,
    
    March 31,
    
    June 30,2006
    
    2005
    
    2006
    
    2006
    
    2005Return on average assets (annualized)
    
    
    1.12
    %
    
    
    1.07
    %
    
    
    1.11
    %
    
    
    1.12
    %
    
    
    1.18
    %Return on average tangible assets (annualized)
    
    
    1.23
    
    
    
    1.17
    
    
    
    1.22
    
    
    
    1.23
    
    
    
    1.29Return on average stated equity (annualized)
    
    
    6.64
    
    
    
    6.73
    
    
    
    6.65
    
    
    
    6.65
    
    
    
    7.49Return on average tangible equity (annualized)
    
    
    14.06
    
    
    
    14.47
    
    
    
    14.12
    
    
    
    14.09
    
    
    
    16.28Dividend payout ratio
    
    
    72.78
    
    
    
    72.66
    
    
    
    73.05
    
    
    
    72.80
    
    
    
    65.37Average equity to average assets (stated)
    
    
    16.86
    
    
    
    15.97
    
    
    
    16.76
    
    
    
    16.81
    
    
    
    15.76Average equity to average assets (tangible)
    
    
    8.74
    
    
    
    8.12
    
    
    
    8.66
    
    
    
    8.70
    
    
    
    7.93
 B.
    
    Six months ended June 30, 2006 and 2005
 For the first six months of 2006, income from continuing operations before income taxes
decreased by $1,672,000, or 10.9%, compared to the same period in 2005. Income from credit
activities decreased $8,000 while non-interest income decreased by $1,222,000, or 8.4%. The
primary reason for this decline is the gain on early extinguishment of debt of $1,043,000
that occurred in 2005. Non-interest expense increased by $442,000, or 1.5%, compared to the
same period in 2005.The tax provision on continuing operations, for the first six months of 2006 decreased by
$332,000, or 9.8%, when compared to the first six months of 2005. The effective tax rate on
income from continuing operations, for this period increased from 22.0% in 2005 to 22.2% for
the corresponding period in 2006.
 Page 19




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##### 



Income from discontinued operations increased $70,000 in the first six months of 2006 when
compared to the same period in 2005. Actual operating results, net of tax, of discontinued
operations increased $216,000 for the six month period. This gain was offset by a loss on
disposal, net of tax, of $146,000, which was recognized in the second quarter of 2006.Net income for the six months ended June 30, 2006 was $1,270,000, or 10.6%, lower than the
same period in 2005. The effective tax rate for the six months ended June 30, 2006 was
25.8%, as a result of a 22.2% effective tax rate on income from continuing operations, 34.9%
on income from discontinued operations and 103.4% from the loss on disposal of discontinued
operations. The six month period ended June 30, 2005 had an effective rate of 21.9%, as a
result of a 22.0% effective tax rate on income from continuing operations and 58.5% from
discontinued operations.
 Net Interest Income
 A.
    
    Three Months Ended June 30, 2006 and 2005
 Net interest income for the second quarter of 2006 was $15,370,000, an increase of $20,000
or 0.1%, compared to net interest income of $15,350,000 in the second quarter of 2005. The
taxable equivalent net interest margin, at 4.09% for the second quarter of 2006, was 19
basis point higher than the second quarter of 2005. Compared to the second quarter of 2005,
average earning assets decreased $82,322,000 or 5.0% in the second quarter of 2006. This
change resulted in a decrease in interest income of $1,167,000 but was more than offset by a
$2,218,000 increase in interest income due to rate changes. The yield on average earning
assets in the second quarter of 2006 increased by 57 basis points when compared to the
second quarter of 2005 while cost of funding increased by 36 basis points.
 B.
    
    Six months ended June 30, 2006 and 2005
 Net interest income for the six months ended June 30, 2006 was $30,482,000, a decrease of
$110,000, or 0.4%, compared to net interest income of $30,592,000 in the same period in
2005. The taxable equivalent net interest margin, at 4.04% for the first six months of 2006,
was 19 basis points higher than the first six months of 2005. Average earning assets
decreased $99,685,000, or 6.0%, in the first six months of 2006 compared to the first six
months of 2005. This change resulted in a $2,933,000 decrease in interest income, but was
more than offset by an increase of $4,954,000 due to rate changes. Yields on average earning
assets in the first six months of 2006 increased by 61 basis points when compared to 2005s
first six months, while cost of funding increased by 39 basis points. The increased cost of
funding sources resulted in additional interest expense of $3,228,000, but was partially
offset by a decrease in interest expense of $1,097,000 due to balance decreases.The following are key net interest margin ratios (annualized):
 Three Months Ended
    
    Six Months EndedJune 30,
    
    March 31,
    
    June 30,2006
    
    2005
    
    2006
    
    2006
    
    2005Yield on average earning assets
    
    
    6.10
    %
    
    
    5.53
    %
    
    
    5.92
    %
    
    
    6.01
    %
    
    
    5.40
    %Cost to fund earning assets
    
    
    2.14
    
    
    
    1.78
    
    
    
    2.05
    
    
    
    2.10
    
    
    
    1.71Net interest margin
    
    
    3.96
    
    
    
    3.75
    
    
    
    3.87
    
    
    
    3.91
    
    
    
    3.68Net interest margin  tax equivalent
    
    
    4.09
    
    
    
    3.90
    
    
    
    4.01
    
    
    
    4.04
    
    
    
    3.85
 At June 30, 2006, Omega had $750,774,000 of earning assets scheduled to reprice over the
next twelve months as compared to $816,798,000 in interest-sensitive liabilities, resulting
in a negative gap of $66,024,000, or 3.5%, of assets. In order to predict net interest
income at risk over the next twelve months based on hypothetical rate movements, a rate
shock simulation was performed on the balance sheet, assuming that interest rates would
increase and decrease by 100 and 200 basis points. These simulations assume no volume or mix
changes in the balance sheet. As the table below indicates, Omega is exposed to a possible
loss of income over the next twelve months if interest rates fall. There have been no
material changes in reported interest rate risk since December 31, 2005. For example, net
interest income at risk for an immediate 100 basis point decrease in rates as of June 30,
2006 was $1,991,000, or
 Page 20




---



##### 



3.0%, of net interest income, compared to $1,777,000, or 2.7%, of net interest income at risk on December 31, 2005. Conversely, the results suggest that an
immediate 100 basis point increase in interest rates would increase net interest income by
approximately $1,955,000, or 2.9%, over a 12-month period. There is no guarantee however,
that the changes in net interest income shown in this table will occur as predicted in the
event of changes in interest rates.
 
 June 30, 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
    
    
    
    3,996
    
    
    
    6.0
    %
    
    
    200
    
    
    
    3,500
    
    
    
    5.4
    %100
    
    
    
    1,955
    
    
    
    2.9
    %
    
    
    100
    
    
    
    1,785
    
    
    
    2.7
    %0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0(100
    )
    
    
    (1,991
    )
    
    
    (3.0
    )%
    
    
    (100
    )
    
    
    (1,777
    )
    
    
    (2.7
    )%(200
    )
    
    
    (4,087
    )
    
    
    (6.2
    )%
    
    
    (200
    )
    
    
    (3,540
    )
    
    
    (5.4
    )%
 Loan Loss Provision
 During the first six months of 2006, a loan loss provision of $220,000 was recorded
($120,000 and $100,000 in the first and second quarters, respectively) while in the first
six months of 2005 a loan loss provision of $322,000 was recorded ($142,000 and $180,000 in
the first and second quarters, respectively.) The loan loss provision is reflective of
changes in credit quality, including movement in non-performing loans in each quarter, as
compared to the previous quarter and an analysis of the adequacy of the allowance for loan
loss reserve. Non-performing loans decreased by $1,616,000 from March 31, 2006 to June 30,
2006. Managements analysis of the loan loss reserve indicated the need for a provision of
$100,000 to adequately provide for probable losses inherent in the total loan portfolio.
 Other Income and Expense
 A.
    
    Three months ended June 30, 2006 and 2005
 Total other income from continuing operations decreased only $1,000 in the second quarter of
2006 as compared to the same period in 2005, despite the fact that gains on the sale of
loans, investments and other assets contributed $270,000 less in revenue in the second
quarter of 2006 than in the second quarter of 2005. Service fee income on deposit accounts
increased by $290,000, or 12.6%, due primarily to increased deposit service charges that
were effective in the fourth quarter of 2005. Service fees on loans increased by $128,000,
or 40.6%, when compared to the second quarter of 2005, as a result of increased secondary
mortgage market fees as well as increased loan prepayment fees collected. Earnings on bank
owned life insurance (BOLI), decreased $22,000, or 3.8%, in the second quarter. Trust fees
from continuing operations decreased in the second quarter of 2006 by $54,000, or 5.0%, when
compared to the same time period in 2005, while trust fees collected from discontinued
operations increased $112,000, or 28.2%, for the same period. Insurance and investment
product sales from continuing operations generated $139,000 less in revenues in the second
quarter of 2006 as compared to the second quarter of 2005 due to decreased annuity sales.
Insurance and investment sales from discontinued operations decreased $8,000 in the second
quarter 2006 compared to the same period in 2005. Other non-interest income from continuing
operations increased a total of $66,000, or 5.7%, in the second quarter of 2006 compared to
the second quarter of 2005. Contributing to this increase is increased debit card revenue
resulting from increased customer usage. Gains recognized from continuing operations
related to the sale of investment securities, loans and other assets were $270,000, or
52.9%, lower in the second quarter of 2006 than in the second quarter of 2005.As a percentage of average assets, annualized other income net of gains on securities, and
loans was 1.35 % for the second quarter of 2006 and 1.23% for the same period in 2005.
 Page 21




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##### 



Total other expenses from continuing operations decreased $58,000, or .4%, in the second
quarter of 2006 as compared to the same period in 2005. Salaries and employee benefits from
continuing operations decreased $16,000, or .2%, in 2006 as compared to the same period in
2005, while salaries and employee benefits from discontinued operations decreased $227,000,
or 57.2%, for the same period. This decrease can be attributed to reduced staffing and a
revised executive bonus plan. Occupancy and equipment expense from continuing operations for
the second quarter of 2006 increased by $178,000, or 8.7%, when compared to the second
quarter of 2005. The primary reason for this change includes increased depreciation expense
resulting from a new branch location as well as increased technology investments made over
the past year. Occupancy and equipment expense from discontinued operations decreased
$34,000 in the second quarter of 2006 as compared to the same period in 2005. Data
processing service charges from continuing operations increased by $52,000, or 8.4%, and
Pennsylvania shares tax expense increased by $179,000, or 32.6%, due to the increase in
capital base when comparing the second quarter results of 2006 and 2005. Amortization of
intangible assets from continuing operations, at $222,000 for the second quarter of 2006
represented a decrease of $12,000 when compared to the second quarter of 2005. The
amortization of intangibles from discontinued operations decreased $6,000 in the second
quarter of 2006 when compared to same period in 2005. Other non-interest expenses from
continuing operations for the second quarter of 2006 decreased by $439,000, or 10.2%,
compared to the same period in 2005. Declines in supplies, liability insurance,
correspondent bank fees and advertising all contributed to this decrease.As a percentage of average assets, annualized expenses from continuing operations were 3.15%
for both the quarter ended June 30, 2006 and the same period in 2005.
 B.
    
    Six months ended June 30, 2006 and 2005
 Total other income from continuing operations decreased $1,222,000, or 8.4%, in the first
six months of 2006 as compared to the same period in 2005. Service fee income on deposit
accounts increased by $504,000, or 11.3%. Although loans decreased by approximately $61
million since June 30, 2005, service fees on loans increased by $198,000, or 31.6%, due
partially to increased secondary mortgage market fees. BOLI earnings increased by $10,000,
or 0.9%. Trust fees from continuing operations decreased in the first six months of 2006 by
$26,000, or 1.2%, when compared to the same time period in 2005, while trust fees from
discontinued operations were basically unchanged with a $1,000 increase from 2005. Other
non-interest income from continuing operations increased by $203,000, or 9.3%, due primarily
to increased ATM and debit card usage. Fee income from commissions received from investment
services and insurance sales from continuing operations decreased by $268,000, or 14.8%, in
the first six months of 2006 versus the same time period in 2005. Gains from continuing
operations related to the early extinguishment of debt and the sale of investment
securities, loans and other assets were $1,843,000 less in the first six months of 2006 than
in the first six months of 2005 due primarily to the balance sheet restructuring effort in
2005.As a percentage of average assets, annualized other income from continuing operations net of
gains on securities, loans and other assets and early extinguishment of debt was 1.35% for
the first six months of 2006 and 1.33% for the same period in 2005.Total other expenses from continuing operations increased $442,000, or 1.5%, in the first
six months of 2006 as compared to the same period in 2005 while other expenses from
discontinued operations decreased $413,000. Salaries and employee benefits from continuing
operations increased $274,000, or 1.9%, in the first six months of 2006 as compared to the
same period in 2005. For that same period, salary and benefit expense from discontinued
operations decreased $314,000, or 41.7% due to a reduction in staff and a revised executive
bonus plan. Occupancy and equipment expense from continuing operations increased $260,000,
or 6.2%, and data processing service fees increased 5.7%. Pennsylvania shares tax expense
related to continuing operations increased $272,000, or 23.2%, while the same expense for
discontinued operations increased $41,000. Amortization of intangible assets related to
continuing operations was $443,000 for the first six months of 2006 versus $357,000 in the
first six months of 2005, while the amount from discontinued operations was $74,000 in 2006
and $80,000 in 2005. Other non-interest expense from continuing operations decreased by
$521,000, or 6.5%, primarily due to decreases in correspondent bank fees, supply expense,
liability insurance costs and advertising expense.As a percentage of average assets, annualized expenses from continuing operations for the
year-to-date through June 30, 2006 were 3.2% and were 2.90% for the same period in 2005.
 Page 22




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##### 



Federal Income Tax
 The effective tax rate for the three months ended June 30, 2006 was 29.2%, as a result of a
22.6% effective rate on income from continuing operations, 34.2% effective rate on income of
discontinued operations and 134.4% effective rate on the disposal of discontinued
operations. The second quarter of 2005 had an effective rate of 19.1%, a result of a 19.8%
effective rate on income from continuing operations and 58.9% rate on income from
discontinued operations. The increase in effective tax rate on income from continuing
operations from 19.8% in 2005 to 22.6% in 2006 is the result of favorable tax treatment from
the charitable contribution of real estate in 2005. The high effective rate on the income
from disposal of discontinued operations is a result of permanent differences in the book
and tax basis of those assets.The effective tax rate for the six months ended June 30, 2006 was 25.8%, as a result of a
22.2% effective rate on income from continuing operations, 34.9% rate on income of
discontinued operations and 103.4% rate on the disposal of discontinued operations. In
2005, the effective tax rate was 21.7% as a result of a 22.0% rate on income from continuing
operations and a 58.5% on income from discontinued operations. For the year ended December
31, 2005, the effective tax rate was 21.3%, as a result of a 21.4% effective rate on income
from continuing operations and 38.3% effective rate on income from discontinued operations.2.
    
    Investment SecuritiesManagement of the investment portfolio entails evaluation and realignment of the size and
mix of the portfolio in order to balance various characteristics of the balance sheet,
including asset quality, liquidity, yield relationships, maturity and tax planning.During the first quarter of 2005, management continued its restructuring of the fixed income
investment portfolio acquired from Sun. Investment securities with a total amortized cost of
$47,286,000 were liquidated, providing a gain of $374,000. The average remaining maturity
of the securities sold was 12.50 years, which exceeds the two to five-year maturity period
that Omega considers acceptable for its current interest rate risk position. Proceeds from
the sale of the securities helped fund the early liquidation of $55,032,000 in long-term
debt acquired from Sun. In addition, as a result of favorable market conditions, $509,000 in
equity securities were sold in the first quarter of 2005, providing a gain of $614,000. In
the second quarter of 2005, other securities, principally equity securities were sold,
generating net gains of $549,000.During 2005, a trading account was established to record assets held in Rabbi Trusts,
including US Treasury Notes, mutual funds and cash equivalents. During the first quarter of
2006, $435,000 of the investments were liquidated and paid out of the trust. The increase in
the market value of the remaining trading securities during the six months ended June 30,
2006 was $3,000.Other investments primarily include Federal Reserve Bank and Federal Home Loan Bank stock.Total investment securities as a percentage of total assets at June 30, 2006 and December
31, 2005 were 17.1% and 18.3%, respectively. Amortized cost of securities maturing or
repricing in one year or less comprised 48.01% of the total amortized cost of investment
securities of $328,691,000 as of June 30, 2006, as compared to 34.05% of total investment
securities of $355,708,000 as of December 31, 2005. There was $710,000 in investments in
instruments of foreign countries on June 30, 2006 and December 31, 2005.
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3.
    
    LoansNet loans, including loans held for sale, in the first six months of 2006 decreased by
$21,748,000, or 1.8% from the balance at December 31, 2005, bringing the total to
$1,193,107,000 at June 30, 2006. The following table shows the composition of the loan
portfolio (in thousands).
 June 30,
    
    
    December 31,2006
    
    
    2005Commercial, financial and agricultural
    
    $
    260,698
    
    
    $
    271,162Real estate  commercial
    
    
    455,888
    
    
    
    465,724Real estate  construction
    
    
    22,708
    
    
    
    22,000Real estate  mortgage
    
    
    232,547
    
    
    
    242,606Home equity
    
    
    153,402
    
    
    
    137,496Personal
    
    
    52,646
    
    
    
    63,687Lease financing
    
    
    17,979
    
    
    
    14,045Unearned interest
    
    
    (2,761
    )
    
    
    (1,865
    )Total loans
    
    
    1,193,107
    
    
    
    1,214,855Less loans held for sale
    
    
    292
    
    
    
    Less loans included in assets held for sale
    
    
    27,469
    
    
    
    Total portfolio loans
    
    $
    1,165,346
    
    
    $
    1,214,855Nonaccrual loans
    
    $
    22,922
    
    
    $
    6,562
   Six Months EndedJune 30,2006
    
    
    2005Balance of allowance  beginning of period
    
    $
    15,482
    
    
    $
    15,644Loans charged off:Commercial, financial and agricultural
    
    
    667
    
    
    
    163Real estate  commercial
    
    
    
    
    
    
    Real estate  mortgage
    
    
    81
    
    
    
    219Personal and lease financing loans
    
    
    190
    
    
    
    478Total charge-offs
    
    
    938
    
    
    
    860Recoveries of loans previously charged off:Commercial, financial and agricultural
    
    
    14
    
    
    
    31Real estate  commercial
    
    
    
    
    
    
    8Real estate  mortgage
    
    
    1
    
    
    
    33Personal and lease financing loans
    
    
    77
    
    
    
    126Total recoveries
    
    
    92
    
    
    
    198Net charge-offs
    
    
    846
    
    
    
    662Provision for loan losses
    
    
    220
    
    
    
    322Balance of allowance  end of period.
    
    $
    14,856
    
    
    $
    15,304Less: Balance, held for sale
    
    
    (231
    )
    
    
    Balance of allowance, loan portfolio
    
    $
    14,625
    
    
    $
    15,304
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June 30, 2006
    
    
    December 31, 2005Impaired loans:Recorded investment at period end
    
    $
    21,428,000
    
    
    $
    5,676,000Impaired loan balance for which there is a related allowance
    
    
    21,428,000
    
    
    
    5,676,000Amount of allowance for impaired loans
    
    
    3,829,000
    
    
    
    1,217,000Impaired loan balance for which there is no related allowance
    
    
    
    
    
    
    Average recorded investment
    
    
    16,803,000
    
    
    
    4,933,000
 Three months endedJune 30, 2006
    
    
    June 30, 2005Interest income recognized (on a cash basis)
    
    $
    120,000
    
    
    $
    13,000
    Non-performing Loans
 June 30,
    
    
    December 31,2006
    
    
    2005Non-accrual loans
    
    $
    22,922
    
    
    $
    6,562Accruing loans past due 90 days or more
    
    
    2,769
    
    
    
    2,616Total non-performing loans
    
    $
    25,691
    
    
    $
    9,178Non-performing loans as percent of allowance
    
    
    172.9
    %
    
    
    59.3
    %
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4.
    
    Deposits and Other Sources of FundsDeposits provide the primary source of funding for loans and investment securities. As of
June 30, 2006, total deposits, including $36,789,000 in deposits classified as liabilities
held for sale, decreased by $1,878,000, or 0.1% as compared to December 31, 2005. As of June
30, 2006, non-interest bearing deposits, including $2,995,000 in deposits held for sale,
increased by $4,718,000, or 2.0% and interest bearing accounts, including $33,794,000
classified as liabilities held for sale, decreased by $6,596,000, or 0.6% when compared to
December 31, 2005.Borrowed funds are used as an additional source of funding for loans and investment
securities. As of June 30, 2006, Omega had short-term borrowings (maturities within one
year) in the amount of $68,934,000 as compared to $90,153,000 at December 31, 2005,
representing a decrease of $21,219,000, or 23.5%.The balance of junior subordinated debt was $56,443,000 and $56,692,000 at June 30, 2006 and
December 31, 2005, respectively.5.
    
    Regulatory Capital ComplianceBank regulatory authorities in the United States issue risk-based capital standards. These
capital standards relate a banking companys capital to the risk profile of its assets and
provide the basis by which all banking companies and banks are evaluated in terms of capital
adequacy. The risk-based capital standards require all banks to have Tier 1 capital of at
least 4% and total capital, including Tier 1 capital, of at least 8% of risk-adjusted
assets. Tier 1 capital includes common stockholders equity and qualifying perpetual
preferred stock together with related surpluses and retained earnings. Total capital is
comprised of Tier 1 capital, limited life preferred stock, qualifying debt instruments, and
the reserves for possible loan losses. Banking regulators have also issued leverage ratio
requirements. The leverage ratio requirement is measured as the ratio of Tier 1 capital to
adjusted average assets.At June 30, 2006, Omega and Omega Bank, its banking subsidiary, each met the regulatory
definition of a well capitalized financial institution, i.e., a leverage ratio exceeding
5%, Tier 1 capital exceeding 6% and total capital exceeding 10%.6.
    
    Share RepurchaseOn January 23, 2006, the Board of Directors of Omega approved a new share repurchase program
authorizing the buy back of up to 10% of Omegas outstanding common stock. At that time
there were 12,604,477 common shares outstanding with 1,260,447 shares eligible to be
repurchased. The program will remain in effect until the 10% limit is reached; however, the
Board of Directors may discontinue it at any time. As of June 30, 2006, 133,600 shares were
repurchased in conjunction with this program, at an average cost of $31.39 per share.7.
    
    Subsequent Event:On July 31, 2006, Omega entered into agreements to sell three branch locations of Omega
Bank. An agreement was reached with Mid Penn Bancorp, Inc. for sale of the Steelton and
Middletown offices, while Orrstown Financial Services, Inc will acquire the Mechanicsburg
Office. All three branches were acquired by Omega as part of the Sun Bancorp, Inc.
acquisition in 2004 and are being sold as part of the Companys continuing efforts to refine
its retail network after the Sun merger. Both transactions are expected to close before
December 31, 2006 and result in a total pre-tax gain of approximately $2.3 million. As of
June 30, 2006, outstanding loans in the three branches totaled $27,469,000 and deposits
totaled $36,789,000. The assets and liabilities of these branches are classified as held
for sale on the June 30, 2006 consolidated balance sheet.
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Page 27




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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.
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(d) MaximumNumber (or(c) Total Number
    
    
    Approximate Dollarof Shares (or
    
    
    Value) of SharesUnits) Purchased
    
    
    (or Units) that May(a) Total Number
    
    
    (b) Average Price
    
    
    as Part of Publicly
    
    
    Yet Be Purchasedof Shares (or
    
    
    Paid per Share (or
    
    
    Announced Plans or
    
    
    Under the Plans orPeriod
    
    Units) Purchased
    
    
    Unit)
    
    
    Programs
    
    
    ProgramsApril 1, 2006 to
April 30, 2006
    
    
    -0-
    
    
    $
    
    
    
    
    
    
    
    
    1,176,847May 1, 2006 to May
31, 2006
    
    
    40,000
    
    
    $
    31.15
    
    
    
    40,000
    
    
    
    1,136,847June 1, 2006 to
June 30, 2006
    
    
    10,000
    
    
    $
    29.95
    
    
    
    10,000
    
    
    
    1,126,847Total
    
    
    50,000
    
    
    $
    30.92
    
    
    
    50,000
    
    
    
    1,126,847
     WithholdName
    
    For
    
    
    AuthorityDavid B. Lee
    
    
    7,684,079
    
    
    
    338,804Dennis J. Van Benthuysen
    
    
    7,723,461
    
    
    
    299,423Donita R. Koval
    
    
    7,742,851
    
    
    
    280,033Jodi L. Green
    
    
    7,728,260
    
    
    
    294,624
 
     Page 29




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##### 



ExhibitNumber
    

Description3.2*
    
    Bylaws10.1*
    
    2006 Equity Incentive Plan31.1
    
    Chief Executive Officers Rule 13a-14/15d-14(a) (Section 302) Certification31.2
    
    Chief Financial Officers Rule 13a-14/15d-14(a) (Section 302) Certification32.1
    
    Section 1350 (Section 906) Certification by Chief Executive Officer32.2
    
    Section 1350 (Section 906) Certification by Chief Financial Officer
 
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##### 



SIGNATURES
  OMEGA FINANCIAL CORPORATION(Registrant)August 7, 2006
    
    
    
    By:
    
    /s/ Donita R. KovalDate
    
    
    
    
    
    Donita R. KovalPresident andChief Executive OfficerAugust 7, 2006
    
    
    
    
    
    /s/ Daniel L. WarfelDate
    
    
    
    
    
    Daniel L. WarfelExecutive Vice President andChief Financial Officer
 Page 31




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##### 



3.2
    
    
    Bylaws
    
    
    *10.1
    
    
    2006 Equity Incentive Plan
    
    
    *31.1
    
    
    Chief Executive Officers Rule 13a-14(a)/15d-14(a) (Section 302) Certification
    
    
    3331.2
    
    
    Chief Financial Officers Rule 13a-14(a)/15d-14(a) (Section 302) Certification
    
    
    3432.1
    
    
    Section 1350 (Section 906) Certification by Chief Executive Officer
    
    
    3532.2
    
    
    Section 1350 (Section 906) Certification by Chief Financial Officer
    
    
    36
 
  Page 32