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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  Washington D.C. 20549
 FORM 10-Q (Mark One)[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  OR [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 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(Address of principal executive offices)
(Zip Code)
 (814) 231-7680
(Registrants telephone number, including area code)
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
[X]        No[   ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: The number of shares outstanding of each of the issuers classes of common stock as of November 4, 2004:
12,550,775 shares of Common Stock, $5.00 par value Page 1




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TABLE OF CONTENTS  PART I. Financial InformationItem 1. Financial StatementsCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSItem 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 4. CONTROLS AND PROCEDURESPART II. Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESCHIEF EXECUTIVE OFFICE'S CERTIFICATIONCHIEF FINANCIAL OFFICER'S CERTIFICATIONSECTION 906 CERTIFICATION BY CHIEF EXECUTIVE OFFICERSECTION 906 CERTIFICATION BY CHIEF FINANCIAL OFFICER    Table of Contents  
 PART I. Financial Information 
 Item 1. Financial Statements 
 OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Unaudited September 30,
    
    December 31,2004
    
    2003AssetsCash and due from banks
    
    $
    31,822
    
    
    $
    32,420Funds held in escrow
    
    
    35,979
    
    
    
    Interest bearing deposits with other banks
    
    
    23,338
    
    
    
    10,682Federal funds sold
    
    
    10,100
    
    
    
    17,850Investment securities available for sale
    
    
    255,705
    
    
    
    240,539Investment in unconsolidated subsidiary
    
    
    1,114
    
    
    
    Total loans
    
    
    772,403
    
    
    
    788,144Less: Allowance for loan losses
    
    
    (9,707
    )
    
    
    (10,569
    )Net loans
    
    
    762,696
    
    
    
    777,575Premises and equipment, net
    
    
    13,858
    
    
    
    14,348Bank-owned life insurance
    
    
    38,137
    
    
    
    37,134Other assets
    
    
    12,349
    
    
    
    9,618TOTAL ASSETS
    
    $
    1,185,098
    
    
    $
    1,140,166Liabilities and Shareholders EquityDeposits:Non-interest bearing
    
    $
    163,023
    
    
    $
    155,702Interest bearing
    
    
    752,038
    
    
    
    751,878Total deposits
    
    
    915,061
    
    
    
    907,580Short-term borrowings
    
    
    28,796
    
    
    
    33,263ESOP debt
    
    
    2,277
    
    
    
    2,521Junior subordinated debentures
    
    
    37,114
    
    
    
    Long-term debt
    
    
    25,700
    
    
    
    21,600Other interest bearing liabilities
    
    
    823
    
    
    
    813Other liabilities
    
    
    6,308
    
    
    
    6,950TOTAL LIABILITIES
    
    
    1,016,079
    
    
    
    972,727Shareholders EquityPreferred stock, par value $5.00 per share:Authorized - 5,000,000 shares, none issuedUnearned compensation related to ESOP debt
    
    
    (1,439
    )
    
    
    (1,624
    )Common stock, par value $5.00 per share:Authorized - 25,000,000 shares;Issued -10,104,486 shares at September 30, 2004;10,048,368 shares at December 31, 2003
    
    
    50,522
    
    
    
    50,242Outstanding -8,444,941 shares at September 30, 2004;8,458,823 shares at December 31, 2003Capital surplus
    
    
    17,015
    
    
    
    15,711Retained earnings
    
    
    150,027
    
    
    
    146,430Accumulated other comprehensive income
    
    
    3,890
    
    
    
    5,209Cost of common stock in treasury:1,659,545 shares at September 30, 2004;1,589,545 shares at December 31, 2003
    
    
    (50,996
    )
    
    
    (48,529
    )TOTAL SHAREHOLDERS EQUITY
    
    
    169,019
    
    
    
    167,439TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,185,098
    
    
    $
    1,140,166
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##### Table of Contents



OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Unaudited Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest Income:Interest and fees on loans
    
    $
    10,987
    
    
    $
    11,716
    
    
    $
    33,179
    
    
    $
    36,238Interest and dividends on investment securities
    
    
    1,774
    
    
    
    2,269
    
    
    
    5,386
    
    
    
    6,725Other interest income
    
    
    158
    
    
    
    42
    
    
    
    305
    
    
    
    264TOTAL INTEREST INCOME
    
    
    12,919
    
    
    
    14,027
    
    
    
    38,870
    
    
    
    43,227Interest Expense:Interest on deposits
    
    
    2,738
    
    
    
    2,897
    
    
    
    8,073
    
    
    
    9,536Interest on short-term borrowings
    
    
    151
    
    
    
    68
    
    
    
    299
    
    
    
    265Interest on long-term debt and
other interest bearing liabilities
    
    
    257
    
    
    
    273
    
    
    
    749
    
    
    
    768TOTAL INTEREST EXPENSE
    
    
    3,146
    
    
    
    3,238
    
    
    
    9,121
    
    
    
    10,569NET INTEREST INCOME
    
    
    9,773
    
    
    
    10,789
    
    
    
    29,749
    
    
    
    32,658Provision for loan losses
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    350INCOME FROM CREDIT ACTIVITIES
    
    
    9,773
    
    
    
    10,689
    
    
    
    29,749
    
    
    
    32,308Other Income:Service fees on deposit accounts
    
    
    1,652
    
    
    
    1,452
    
    
    
    4,568
    
    
    
    4,318Service fees on loans
    
    
    232
    
    
    
    350
    
    
    
    879
    
    
    
    1,131Earnings on bank-owned life insurance
    
    
    319
    
    
    
    330
    
    
    
    1,003
    
    
    
    1,103Trust fees
    
    
    790
    
    
    
    934
    
    
    
    2,589
    
    
    
    2,738Gain on sale of loans and other assets
    
    
    12
    
    
    
    2
    
    
    
    13
    
    
    
    281Net gains on investment securities
    
    
    60
    
    
    
    257
    
    
    
    271
    
    
    
    987Other
    
    
    853
    
    
    
    829
    
    
    
    2,617
    
    
    
    2,477TOTAL OTHER INCOME
    
    
    3,918
    
    
    
    4,154
    
    
    
    11,940
    
    
    
    13,035Other Expense:Salaries and employee benefits
    
    
    4,938
    
    
    
    5,132
    
    
    
    14,695
    
    
    
    15,160Net occupancy expense
    
    
    547
    
    
    
    587
    
    
    
    1,733
    
    
    
    1,773Equipment expense
    
    
    706
    
    
    
    696
    
    
    
    2,137
    
    
    
    2,092Data processing service
    
    
    439
    
    
    
    431
    
    
    
    1,292
    
    
    
    1,271Other
    
    
    2,415
    
    
    
    2,248
    
    
    
    7,465
    
    
    
    8,206TOTAL OTHER EXPENSE
    
    
    9,045
    
    
    
    9,094
    
    
    
    27,322
    
    
    
    28,502Income before taxes
    
    
    4,646
    
    
    
    5,749
    
    
    
    14,367
    
    
    
    16,841Income tax expense
    
    
    1,094
    
    
    
    1,409
    
    
    
    3,280
    
    
    
    4,047NET INCOME
    
    $
    3,552
    
    
    $
    4,340
    
    
    $
    11,087
    
    
    $
    12,794Net income per common share:Basic
    
    $
    0.42
    
    
    $
    0.52
    
    
    $
    1.31
    
    
    $
    1.54Diluted
    
    $
    0.42
    
    
    $
    0.51
    
    
    $
    1.30
    
    
    $
    1.49Weighted average shares and equivalents:Basic
    
    
    8,443,429
    
    

    
    8,086,052
    
    
    
    8,461,174
    
    
    
    8,096,768Diluted
    
    
    8,500,451
    
    
    
    8,517,424
    
    
    
    8,530,007
    
    
    
    8,529,741Dividends declared per share:Common
    
    $
    .30
    
    
    $
    .29
    
    
    $
    .90
    
    
    $
    .87Preferred
    
    

    
    
    
    $
    .45
    
    
    
    
    
    
    $
    1.35
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited Nine Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    11,087
    
    
    $
    12,794Adjustments to reconcile net income to
net cash provided by operating activities:Depreciation and amortization
    
    
    3,051
    
    
    
    3,839Provision for loan losses
    
    
    
    
    
    
    350Gain on sale of investment securities
    
    
    (271
    )
    
    
    (987
    )Non-monetary gift
    
    
    
    
    
    
    48Gain on sale of fixed assets
and other property owned
    
    
    (9
    )
    
    
    (5
    )Gain on sale of loans
    
    
    (5
    )
    
    
    (276
    )Decrease (increase) in deferred tax asset
    
    
    110
    
    
    
    (384
    )Increase in cash surrender value of bank owned life insurance
    
    
    (1,003
    )
    
    
    (1,103
    )Increase in interest receivable and other assets
    
    
    (2,140
    )
    
    
    (507
    )Increase (decrease) in interest payable
    
    
    27
    
    
    
    (164
    )Increase in taxes payable
    
    
    460
    
    
    
    36Amortization of deferred net loan costs
    
    
    (273
    )
    
    
    (557
    )Deferral of net loan fees
    
    
    249
    
    
    
    623Decrease in accounts payable
and accrued expenses
    
    
    (1,129
    )
    
    
    (4,569
    )Total adjustments
    
    
    (933
    )
    
    
    (3,656
    )Net cash provided by operating activities
    
    
    10,154
    
    
    
    9,138Cash flows from investing activities:Investment securities available for sale:Proceeds from sales
    
    
    5,147
    
    
    
    1,509Proceeds from maturities
    
    
    88,435
    
    
    
    72,476Cash used for purchases
    
    
    (111,885
    )
    
    
    (95,844
    )Investment in unconsolidated subsidiary
    
    
    (1,114
    )
    
    
    Net change in interest bearing deposits with other banks
    
    
    (12,656
    )
    
    
    6,020Decrease (increase) in loans
    
    
    14,382
    
    
    
    (28,735
    )Gross proceeds from sale of loans
    
    
    526
    
    
    
    12,611Capital expenditures
    
    
    (1,235
    )
    
    
    (1,235
    )Sale of fixed assets and other property owned
    
    
    12
    
    
    
    23Net change in federal funds sold
    
    
    7,750
    
    
    
    33,900Net cash provided by investing activities
    
    
    (10,638
    )
    
    
    725Cash flows from financing activities:Increase (decrease) in deposits, net
    
    
    7,481
    
    
    
    (2,883
    )Net change in short-term borrowings
    
    
    (4,467
    )
    
    
    (8,240
    )Issuance of junior subordinated debt
    
    
    37,114
    
    
    
    Issuance of long-term debt
    
    
    5,000
    
    
    
    11,500Principal payment on long-term debt
    
    
    (900
    )
    
    
    (846
    )Net change in other interest bearing liabilities
    
    
    10
    
    
    
    14Dividends paid
    
    
    (7,611
    )
    
    
    (7,344
    )Tax benefit from preferred stock dividend
and stock option activity
    
    
    121
    
    
    
    94Issuance of common stock
    
    
    1,584
    
    
    
    1,492Acquisition of treasury stock
    
    
    (2,467
    )
    
    
    (2,712
    )Net cash provided by (used in) financing activities
    
    
    35,865
    
    
    
    (8,925
    )Net (decrease) increase in cash and cash equivalents
    
    $
    35,381
    
    
    $
    938Cash and cash equivalents at beginning of period
    
    $
    32,420
    
    
    $
    36,049Cash and cash equivalents at end of period
    
    
    67,801
    
    
    
    36,987Net (decrease) increase in cash and cash equivalents
    
    $
    35,381
    
    
    $
    938Interest paid
    
    $
    9,094
    
    
    $
    10,733Income taxes paid
    
    
    2,649
    
    
    
    4,970
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Supplemental schedule of noncash investing and financing
activities:
Non-cash investing activity consisted of transfers of loans in
liquidation to other real estate owned with a value of $31 and
$220 in the nine months ending September 30, 2004 and 2003,
respectively.Cash and cash equivalentsCash equivalents consist of non-interest bearing deposits with other banks
and funds held in escrow. OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003  A.
    
    Basis of Presentation:The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments,
including normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the nine months
and three months ended September 30, 2004 are not necessarily indicative
of the results that may be experienced for the year ending December 31,
2004 or any other interim period. For further information, refer to the
Consolidated Financial Statements and Footnotes included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2003.The accompanying Consolidated Financial Statements include Omega Financial
Corporation (Omega), a bank holding company, and the combined results of
its wholly owned banking and non-banking subsidiaries.B.
    
    Commitments, Contingent Liabilities and Guarantees:In the ordinary course of business, Omega makes commitments to extend
credit to its customers through letters of credit and lines of credit.Standby letters of credit are instruments issued by the Corporations bank
subsidiary that guarantee the beneficiary payment by the bank in the event
of default by the banks customer in the non-performance of an obligation
or service. Most standby letters of credit are extended for one-year
periods. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The bank holds collateral supporting those commitments for
which collateral is deemed necessary. At September 30, 2004, standby
letters of credit issued and outstanding amounted to $14,264,000 as
compared to $13,118,000 on December 31, 2003. The fair market value of the
standby letters of credit at September 30, 2004 and December 31, 2003 was
$107,000 and $72,000, respectively. The fair market value of standby
letters of credit is recorded as a liability in accordance with FIN 45.At September 30, 2004, the bank had $165,346,000 outstanding in loan
commitments and other unused lines of credit extended to its customers. Of
this amount, $112,173,000, or 67.8%, were commercial commitments. The
remaining amounts of $53,173,000 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. Page 5




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As of September 30, 2004, the balance of the ESOP debt was $2,277,000 as
compared to $2,521,000 at December 31, 2003.C.
    
    Investment Securities:In accordance with the disclosure requirements of EITF 03-01, the
following table shows gross unrealized losses and fair value, aggregated
by category and length of time that individual investment securities have
been in a continuous unrealized loss position, at September 30, 2004 (in
thousands): Less Than 12 Months
    
    12 Months or LongerFair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Losses
    
    Value
    
    LossesDescription of SecuritiesU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    66,852
    
    
    $
    442
    
    
    $
    16,318
    
    
    $
    448Obligations of state and political subdivisions
    
    
    18,873
    
    
    
    46
    
    
    
    1,787
    
    
    
    13Corporate and other securities
    
    
    1,490
    
    
    
    10
    
    
    
    491
    
    
    
    9Mortgage-backed securities
    
    
    3,915
    
    
    
    24
    
    
    
    
    
    
    
    Subtotal, debt securities
    
    
    91,130
    
    
    
    522
    
    
    
    18,596
    
    
    
    470Common stock
    
    
    218
    
    
    
    11
    
    
    
    
    
    
    
    Total temporarily impaired securities
    
    $
    91,348
    
    
    $
    533
    
    
    $
    18,596
    
    
    $
    470
  The unrealized losses noted above are considered to be temporary
impairments, as the majority of the investments are debt securities whose
decline in value is due only to interest rate fluctuations. As a result,
the payment of contractual cash flows, including principal repayment, is
not at risk. Management has the intent and ability to hold these
investments until market recovery or maturity. Debt securities with
unrealized losses for a period of less than 12 months includes 37
investments in U.S. Government agency debt securities, three investments
in mortgage-backed securities, nine investments in corporate securities
and 43 investments in obligations of state and municipal subdivisions.
Debt securities with unrealized losses for a period of 12 months or longer
includes nine investments in U.S. Government agency debt securities, four
investments in corporate securities and five investments in obligations of
state and municipal subdivisions. Debt securities included in the above
table have maturity or pre-refund dates ranging from October 2004 to
December 2017. The unrealized loss position for each security ranges from
..01% to 3.44% of the securities amortized cost as of September 30, 2004.
Unrealized losses for a period of less than 12 months on common stock
include investment in two equity issues.Omegas policy requires quarterly reviews of impaired securities. This
review includes analyzing the length of the time and the extent to which
the market value has been less than cost; the financial condition and
near-term prospects of the issuer, including any specific events which may
influence the operations of the issuer and the intent and ability of the
Corporation to hold its investment for a period of time sufficient to
allow for any anticipated recovery in market value.D.
    
    Income Taxes:The effective tax rate for the nine months ended September 30, 2004 was
22.8%, compared to the same period in 2003 when the effective tax rate was
24.0%. For the third quarter of 2004, the effective tax rate was 23.5%
compared to 24.5% in the third quarter of 2003. These decreases in
effective tax rates from 2003 to 2004 are the effect of the Corporation
receiving increased tax deductions for dividends it paid on company stock
held by the Employee Stock Ownership Plan.E.
    
    Junior Subordinated Debt and Trust Preferred Securities:On September 20, 2004, Omega formed Omega Financial Capital Trust I. This
Trust was formed for the purpose of issuing $36.0 million in trust
preferred securities through a pooled trust preferred program. The Trust
Preferred Securities were issued and sold in private placement offerings.
The proceeds from the sale thereof were invested in Junior Subordinated
Deferrable Interest Debentures issued by Omega Page 6




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Financial Corporation. All proceeds from the sale of the Trust Preferred
Securities and the common securities issued by the Trust are invested in
Junior Subordinated Debentures, which are the sole assets of the Trust.
The Trust pays dividends on the Trust Preferred Securities at the same
rate as the distributions paid by Omega on the Junior Subordinated
Debentures held by the Trust. The Trust provides Omega with the option to
defer payment of interest on the debentures for an aggregate of 20
consecutive quarterly periods. If this option is used, Omega may not
declare or pay dividends on its common stock during any such period. The
Trust Preferred Securities are guaranteed by Omega pursuant to a guarantee
issued by Omega in favor of the Wilmington Trust as trustee for the trust.Omega accounts for the Trust under the provisions of FIN 46. The Trust is
a special purpose trust, formed for the issuance of trust preferred
securities to outside investors and Omega does not absorb a majority of
the expected losses or residual returns of the Trust. The Trust is not
consolidated and therefore the Trust Preferred Securities are not included
in the Corporations Consolidated Balance Sheet. The Junior Subordinated
Debt obligations to the special purpose trust are presented as a separate
category of long-term debt on the Consolidated Balance Sheet. The equity
investment in the common stock of the special purpose trust is recognized
as an investment in unconsolidated subsidiary on the Consolidated Balance
Sheet.The Federal Reserve Board currently allows bank holding companies to
include trust preferred securities, up to a certain limit, in Tier 1
Capital. The following table shows Omegas Trust subsidiary with
outstanding Trust Preferred Securities as of September 30, 2004
(Unaudited, in thousands): Junior
    
    
    
    
    
    OptionalTrust Preferred
    
    
    
    
    
    Subordinated
    
    Stated Maturity
    
    RedemptionSecurities
    
    Common Securities
    
    Debt
    
    Date
    
    DateOmega Financial Capital Trust I
    
    $
    36,000
    
    
    $
    1,114
    
    
    $
    37,114
    
    
    
    10/18/2034
    
    
    
    10/18/2009
  The Trust Preferred securities and the Junior Subordinated Debt carry a
fixed interest rate of 5.98% through October 18, 2009 and a variable rate
equal to LIBOR plus 2.19% thereafter. The securities are redeemable at par
at anytime after October 18, 2009. The interest expense incurred on the
trust preferred securities and junior subordinated debt for the three and
nine months ended September 30, 2004 was $61,000. Proceeds from the
issuance of the junior subordinated debt were placed in escrow on
September 30, 2004 to fund the Sun Bancorp acquisition on October 1, as
more fully disclosed in Note J.F.
    
    Line of Credit:During the third quarter of 2004, Omega obtained a revolving credit and
term loan agreement to fund incremental costs associated with the
acquisition of Sun Bancorp, Inc. The revolving credit facility allows
borrowings up to $45,000,000 for a period not exceeding 120 days, after
which the loan will term out the outstanding principal not to exceed
$12,000,000 for a period of seven years. The interest rate is LIBOR plus
1.25%. As of September 30, 2004, no advances had been made on this credit
line, however, during October 2004, $4,900,000 has been drawn.G.
    
    Comprehensive Income:Components of other comprehensive income consist of the following (in
thousands): Three Months Ended September 30, 2004
    
    Three Months Ended September 30, 2003Before
    
    Tax Expense
    
    
    
    
    
    Before
    
    Tax ExpenseTax
    
    or
    
    Net-of-Tax
    
    Tax
    
    or
    
    Net-of-TaxAmount
    
    (Benefit)
    
    Amount
    
    Amount
    
    (Benefit)
    
    AmountNet income
    
    $
    4,646
    
    
    $
    1,094
    
    
    $
    3,552
    
    
    $
    5,749
    
    
    $
    1,409
    
    
    $
    4,340Other comprehensive income:Unrealized gains on available for sale securitiesUnrealized holding gains (losses) arising during
the period
    
    
    1,978
    
    
    
    692
    
    
    
    1,286
    
    
    
    (1,259
    )
    
    
    (441
    )
    
    
    (818
    )Less reclassification adjustment for
gains included in net income
    
    
    (60
    )
    
    
    (21
    )
    
    
    (39
    )
    
    
    (257
    )
    
    
    (90
    )
    
    
    (167
    )Other comprehensive income (loss)
    
    
    1,918
    
    
    
    671
    
    
    
    1,247
    
    
    
    (1,516
    )
    
    
    (531
    )
    
    
    (985
    )Total comprehensive income
    
    $
    6,564
    
    
    $
    1,765
    
    
    $
    4,799
    
    
    $
    4,233
    
    
    $
    878
    
    
    $
    3,355
 Page 7




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##### Table of Contents



Nine Months Ended September 30, 2004
    
    Nine Months Ended September 30, 2003Before
    
    Tax Expense
    
    
    
    
    
    Before
    
    Tax ExpenseTax
    
    or
    
    Net-of-Tax
    
    Tax
    
    or
    
    Net-of-TaxAmount
    
    (Benefit)
    
    Amount
    
    Amount
    
    (Benefit)
    
    AmountNet income
    
    $
    14,367
    
    
    $
    3,280
    
    
    $
    11,087
    
    
    $
    16,841
    
    
    $
    4,047
    
    
    $
    12,794Other comprehensive income:Unrealized gains on available for sale securitiesUnrealized holding losses arising during the
period
    
    
    (1,759
    )
    
    
    (616
    )
    
    
    (1,143
    )
    
    
    (1,370
    )
    
    
    (479
    )
    
    
    (891
    )Less reclassification adjustment for
gains included in net income
    
    
    (271
    )
    
    
    (95
    )
    
    
    (176
    )
    
    
    (987
    )
    
    
    (345
    )
    
    
    (642
    )Other comprehensive income (loss)
    
    
    (2,030
    )
    
    
    (711
    )
    
    
    (1,319
    )
    
    
    (2,357
    )
    
    
    (824
    )
    
    
    (1,533
    )Total comprehensive income
    
    $
    12,337
    
    
    $
    2,569
    
    
    $
    9,768
    
    
    $
    14,484
    
    
    $
    3,223
    
    
    $
    11,261
  H.
    
    Earnings Per Share Data:Basic earnings per share are computed by dividing income available to
common stockholders by the weighted average number of shares outstanding
for the period. On a diluted basis, both earnings and shares outstanding
are adjusted to assume the conversion of all potentially dilutive
securities into common stock. Page 8




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##### Table of Contents



Computations of Earnings per Share
(In thousands, except per share amounts)
(Unaudited)
(in thousands, except per share data) Three Months Ended September 30, 2004

    
    Three Months Ended September 30, 2003Income
    
    Shares
    
    Per-Share
    
    Income
    
    Shares
    
    Per-ShareNumerator
    
    Denominator
    
    Amount
    
    Numerator
    
    Denominator
    
    AmountNet income
    
    $
    3,552
    
    
    
    
    
    
    
    
    
    
    $
    4,340Less: Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99
    )Basic EPSIncome available to common
shareholders
    
    
    3,552
    
    
    
    8,443
    
    
    $
    0.42
    
    
    
    4,241
    
    
    
    8,086
    
    
    $
    0.52Effect of Dilutive SecuritiesImpact of:Assumed conversion of preferred
to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    346Assumed exercises of outstanding
options
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    85Preferred stock dividends
available to common
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99Elimination of tax benefit of
allocated preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22
    )Additional expense required to fund
ESOP debt, net of tax impact
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Diluted EPSIncome available to common
shareholders plus assumed
conversions
    
    $
    3,552
    
    
    
    8,500
    
    
    $
    0.42
    
    
    $
    4,319
    
    
    
    8,517
    
    
    $
    0.51
 Nine Months Ended September 30, 2004
    
    Nine Months Ended September 30, 2003Income
    
    Shares
    
    Per-Share
    
    Income
    
    Shares
    
    Per-ShareNumerator
    
    Denominator
    
    Amount
    
    Numerator
    
    Denominator
    
    AmountNet income
    
    $
    11,087
    
    
    
    
    
    
    
    
    
    
    $
    12,794Less: Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (297
    )Basic EPSIncome available to common
shareholders
    
    
    11,087
    
    
    
    8,461
    
    
    $
    1.31
    
    
    
    12,497
    
    
    
    8,097
    
    
    $
    1.54Effect of Dilutive SecuritiesImpact of:Assumed conversion of preferred
to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    346Assumed exercises of outstanding
options
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    87Preferred stock dividends
available to common
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    297Elimination of tax benefit of
allocated preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65
    )Additional expense required to fund
ESOP debt, net of tax impact
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Diluted EPSIncome available to common
shareholders plus assumed
conversions
    
    $
    11,087
    
    
    
    8,530
    
    
    $
    1.30
    
    
    $
    12,732
    
    
    
    8,530
    
    
    $
    1.49
 Page 9




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##### Table of Contents



I.
    
    Summary of Significant Accounting Policies:Stock-based compensationOmega accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion 25,
Accounting for Stock Issued to Employees, and has adopted the disclosure
provisions of FASB No. 148, Accounting for Stock-Based Compensation. The
following pro forma information regarding net income and earnings per
share assumes the adoption of Statement No. 123 for stock options granted
subsequent to December 31, 1994. The estimated fair value of the options
is amortized to expense over the vesting period.The fair value was estimated at the date of grant using a Black-Scholes
option-pricing model utilizing various assumptions. Compensation expense,
net of related tax, is included in the pro forma net income reported below
(in thousands, except per share data). Quarter ended September 30,
    
    Nine Months ended September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    As reported
    
    $
    3,552
    
    
    $
    4,340
    
    
    $
    11,087
    
    
    $
    12,794Pro forma
    
    
    3,447
    
    
    
    4,231
    
    
    
    10,775
    
    
    
    12,470Compensation expense, net of tax
    
    
    105
    
    
    
    109
    
    
    
    312
    
    
    
    324Basic earnings per share

    
    As reported
    
    $
    0.42
    
    
    $
    0.52
    
    
    $
    1.31
    
    
    $
    1.54Pro forma
    
    
    0.41
    
    
    
    0.51
    
    
    
    1.27
    
    
    
    1.50Diluted earnings per share
    
    As reported
    
    $
    0.42
    
    
    $
    0.51
    
    
    $
    1.30
    
    
    $
    1.49Pro forma
    
    
    0.41
    
    
    

    0.50
    
    
    
    1.26
    
    
    
    1.45
  The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because Omegas employee stock options
have characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in managements opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.J.
    
    Acquisition of Sun Bancorp, Inc:Omegas previously announced acquisition of Sun Bancorp, Inc. closed on
October 1, 2004. In accordance with the terms of the merger agreement,
each Sun Bancorp shareholder received either 0.664 shares of Omega common
stock for each share of Sun common stock or $23.25 in cash for each share
held, depending on shareholder elections and subject to the allocation
provisions of the merger agreement. Under the terms of the merger
agreement, 20% of Sun common stock was exchanged for cash and 80% of the
outstanding Sun stock was exchanged for Omega common stock. Total cash
paid to Sun shareholders was $35,879,000 and 4,097,964 shares of Omega
common stock were issued in connection with the acquisition.The acquisition will be accounted for as a purchase. Purchase accounting
requires the Corporation to allocate the total purchase price of the
acquisition to the assets acquired and liabilities assumed, based on their
respective fair values at the acquisition date, with any remaining
acquisition cost being recorded as goodwill. Resulting goodwill balances
are then subject to an impairment review on at least an annual basis. The
results of Sun Bancorps operations will be included in the Corporations
financial statements prospectively from the date of the acquisition.The total purchase price is estimated to be approximately $191 million,
which includes the value of the Corporations stock to be issued, Sun
Bancorp options to be converted and certain acquisition costs. Acquisition
costs currently deferred, and included in other assets as of September 30,
2004 were $1,981,000 (See Note K). The estimated fair value of the net
assets of Sun Bancorp as of October 1, 2004 Page 10




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##### Table of Contents



were $43 million, including the fair value of identified intangible
assets, and accordingly, the purchase price exceeds the estimated fair
value of the net assets by approximately $148 million as of this date. The
total purchase price will be allocated to the net assets acquired as of
the merger effective date, based on fair market values at that date.
Estimated fair value of net assets acquired includes $661,548,000 of loans
(including leases), $213,278,000 of investments, $622,124,000 of deposits
and $323,708,000 of debt.Subsequent to the acquisition, Omega sold $116,000,000 of investments and
$76,000,000 of the auto lease portfolio. Some of the proceeds from these
sales were utilized to repay $112,000,000 of long-term FHLB debt and a
related interest rate swap acquired in the acquisition. The net pre-tax
gain or loss on this activity was not material. Page 11




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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Investment Considerations  In analyzing whether to make, or to continue to make, an investment in
Omega, investors should consider, among other factors, certain investment
considerations more particularly described in Item 1: Business -
Investment Considerations in the Companys Annual Report on Form 10-K for
the year ended December 31, 2003. A copy of this report can be obtained by
written request to David N. Thiel, Senior Vice President, Omega Financial
Corporation, 366 Walker Drive, State College, Pennsylvania 16801.Forward Looking StatementsThe information in this Report on Form 10-Q contains forward looking
statements (as such term is defined in the Securities Exchange Act of 1934
and the regulations thereunder), including without limitation, statements
as to the future loan and deposit volumes, the allowance and provision for
possible loan losses, future interest rates and their effect on Omegas
financial condition or results of operations, the classification of
Omegas investment portfolio or as to trends or managements beliefs,
expectations or opinions and other statements other than historical facts.
Such forward looking statements are subject to risks and uncertainties and
may be affected by various factors which may cause actual results to
differ materially from those in the forward looking statements. In
addition to the factors discussed in this report, certain risks,
uncertainties and other factors, including without limitation, risks
arising from economic conditions and related uncertainties, changes in
interest rates, federal and state regulation, competition and the adequacy
of the allowance and provision for loan losses, are discussed in the
Companys 2003 Annual Report to Shareholders or in the Companys Annual
Report on Form 10-K for the year ended December 31, 2003. Copies of these
reports may be obtained from Omega upon request and without charge (except
for the exhibits thereto) as described above.1.
    
    Comparison of the Nine and Three Months Ended September 30, 2004 and 2003 Operations Overview A. Nine months ended September 30, 2004 and 2003 For the first nine months of 2004, income before income taxes decreased by
$2,474,000, or 14.7%, compared to the same period in 2003. Income from
credit activities decreased $2,559,000, or 7.9%. Non-interest income
decreased $1,095,000 or 8.4% while non-interest expense decreased
$1,180,000, or 4.1%. The tax provision for the first nine months of 2004 decreased by $767,000,
or 19.0% when compared to the first nine months of 2003. The effective tax
rate for this period decreased from 24.0% in 2003 to 22.8% for the
corresponding period in 2004. Net income decreased by $1,707,000, or
13.3%, in the first nine months of 2004 as compared to the same period in
2003. B. Three months ended September 30, 2004 and 2003 The third quarters income before income taxes decreased $1,103,000 when
compared to the same period in 2003. Income from credit activities
decreased by $916,000, from $10,689,000 in the third quarter of 2003 to
$9,773,000 in the third quarter of 2004. Non-interest income decreased
$236,000, or 5.7% and non-interest expense decreased by $49,000, or 0.5%. Page 12




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After the income tax provision (which decreased by $315,000, or 22.3%
compared to the same period in 2003) was deducted from earnings, net
income was $788,000, or 18.2%, lower than the third quarter of 2003. The
effective tax rate for the third quarter of 2004 was 23.5%, as compared to
the third quarter of 2003 of 24.5%. Following are selected key ratios for the period: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Return on average assets (annualized)
    
    
    1.23
    %
    
    
    1.50
    %
    
    
    1.30
    %
    
    
    1.49
    %Return on average equity (annualized)
    
    
    8.41
    
    
    
    10.39
    
    
    
    8.70
    
    
    
    10.28Dividend payout ratio (common)
    
    
    71.34
    
    
    
    54.00
    
    
    
    68.65
    
    
    
    55.08Average equity to average assets
    
    
    14.66
    
    
    
    14.45
    
    
    
    14.92
    
    
    
    14.47
 Net Interest Income A. Nine months ended September 30, 2004 and 2003 The net interest margin, at 3.77% for the first nine months of 2004, was
34 basis points lower than the first nine months of 2003, with a
$10,909,000 or 1.0% decrease in average earning assets in the first nine
months of 2004 as compared to the first nine months of 2003. Yield on
earning assets in the first nine months of 2004 decreased by 52 basis
points when compared to 2003s first nine months, while cost of funding
decreased by 18 basis points; these changes in rates resulted in a
decrease in net interest income of $2,720,000. Changes in volumes, net of
differences caused by number of days in the period, resulted in a $190,000
decrease in net interest income. In order to maximize net income, Omega
invests in certain loans and securities whose earnings are exempt from
federal income taxation and therefore have rates that are generally lower
than rates on taxable instruments. During the first nine months of 2004,
average tax-free assets owned were $11,466,000 less than in the first nine
months of 2003, with average rates of 30 basis points less. When the net
interest margin is adjusted for the tax benefit received from owning these
instruments, it is referred to as the net interest margin on a fully
tax-equivalent basis. Taking effect of the decreased balances and
decreased rates on tax-free assets in the first nine months of 2004, the
net interest margin on a fully tax-equivalent basis was 3.99% compared to
4.37% in the first nine months of 2003. B. Three months ended September 30, 2004 and 2003 The net interest margin, at 3.68% for the third quarter of 2004, was 35
basis points lower than the third quarter of 2003, with a $10,097,000 or
0.9% decrease in average earning assets resulting in a 9.4% decrease in
net interest income. Yield on earning assets in the third quarter of 2004
declined by 39 basis points when compared to 2003s third quarter, while
cost of funding decreased by 4 basis points. Following are key net interest margin ratios (annualized): Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Yield on average earning assets
    
    
    4.84
    %
    
    
    5.23
    %
    
    
    4.92
    %
    
    
    5.44
    %Cost to fund earning assets
    
    
    1.16
    
    
    
    1.20
    
    
    
    1.15
    
    
    
    1.33Net interest margin
    
    
    3.68
    
    
    
    4.03
    
    
    
    3.77
    
    
    
    4.11Net interest
margin - tax equivalent
    
    
    3.89
    
    
    
    4.29
    
    
    
    3.99
    
    
    
    4.37
 At September 30, 2004, Omega had $419,166,000 of earning assets scheduled
to reprice over the next twelve months as compared to $482,754,000 in
interest-sensitive liabilities, resulting in a negative gap of
$63,588,000, or 5.4% of assets. In order to predict net interest income
at risk over the next twelve months Page 13




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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 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, 2003. For example, net
interest income at risk for an immediate 100 basis point decrease in rates
as of September 30, 2004 was $1,458,000, or 3.7%, of net interest income,
compared to $1,541,000, or 3.9%, of net interest income at risk on
December 31, 2003. Conversely, the results suggest that an immediate 100
basis point increase in interest rates would increase net interest income
by approximately $1,425,000, or 3.6%, over a 12-month period. There is no
guarantee however, that the change shown in this table will occur as
predicted in the event of changes in interest rates. Possible Effect of Interest Rate Risk on Net Interest Income
Based on Interest Rate Shock Analysis
(in $ thousands) September 30, 2004
    
    December 31, 2003Change in
    
    
    
    
    
    
    
    
    
    Change inInterest
    
    
    
    
    
    
    
    
    
    InterestRates
    
    
    
    
    
    
    
    
    
    Rates(Basis
    
    Change in Net
    
    Percent
    
    (Basis
    
    Change in Net
    
    PercentPoints)
    
    Interest Income
    
    Change
    
    Points)
    
    Interest Income
    
    Change200
    
    
    
    2,855
    
    
    
    7.3
    %
    
    
    200
    
    
    
    2,936
    
    
    
    7.5
    %100
    
    
    
    1,425
    
    
    
    3.6
    %
    
    
    100
    
    
    
    1,465
    
    
    
    3.7
    %0
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    (100
    )
    
    
    (1,458
    )
    
    
    3.7
    %
    
    
    (100
    )
    
    
    (1,541
    )
    
    
    3.9
    %(200
    )
    
    
    (3,013
    )
    
    
    7.7
    %
    
    
    (200
    )
    
    
    (4,045
    )
    
    
    10.3
    %
 Loan Loss Provision During the first nine months of 2004, no loan loss provision was recorded,
as compared to the $350,000 that was recorded in the first nine months of
2003. Any change in the loan loss provision is reflective of the change in
credit quality, including movement in non-performing loans in each
quarter, as compared to the previous quarter and an analysis of the
adequacy of the allowance for loan loss reserve. Although non-performing
loans increased by $1,883,000 from December 31, 2003 to September 30,
2004, managements analysis of the loan loss reserve indicates that it is
adequate to provide for probable losses inherent in the total loan
portfolio. Other Income and Expense A. Nine months ended September 30, 2004 and 2003 Other income decreased $1,095,000, or 8.4%, in the first nine months of
2004 as compared to the same period in 2003. Service fee income on deposit
accounts increased by $250,000, or 5.8%, due to fees generated from our
courtesy overdraft service. Service fees on loans decreased by $252,000,
or 22.3%, due to reduced activity in loan rate modifications and
refinancings. The lower rate environment has also caused a reduction in
the rate earned on bank owned life insurance (BOLI), causing a $100,000,
or 9.1%, decline in earnings on BOLI when comparing the first nine months
results of 2004 and 2003. Trust fees decreased in the first nine months of
2004 by $149,000, or 5.4% when compared to the same time period in 2003.
Other non-interest income increased by a total of $140,000, due primarily
to the following factors. Fee income from commissions received from
investment services and insurance sales increased by $232,000, or 48.0%
in the first nine months of 2004 versus the same time period in 2003.
These are services offered by Omega Financial Corporation, beginning in
December 2002. Omega representatives function as agents and registered
representatives in placing business with a broker-dealer and insurance
brokers. Fees earned from bank card services (ATMs and debit cards)
increased by approximately $82,000 in the first nine months of 2004 as
compared to the same period in 2003. These increases in other non-interest
income was offset by a reduction of $199,000 in premium earnings from
Omegas reinsurance subsidiary. Gains on the sale of investment
securities, loans and other assets were $984,000 lower in the first nine
months of 2004 than in the first nine months of 2003. Page 14




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As a percentage of average assets, annualized other income net of gains on
securities, loans and other assets was 1.36 % for the first nine months of
2004 and 1.37% for the first nine months of 2003. Other expenses decreased $1,180,000, or 4.1%, in the first nine months of
2004 as compared to the same period in 2003. Salaries and employee
benefits decreased $465,000, or 3.1%, in the first nine months of 2004 as
compared to the same period in 2003. Occupancy and equipment expense in
total increased by $5,000, or 0.1%. Other non-interest expenses decreased
by $720,000 or 7.6%, compared to the same period in 2003. The bulk of this
decrease was related to accelerated amortization of $802,000 recorded on
investments in limited partnership low-income housing projects in June of
2003, due to declines in estimated residual values. Costs related to
preparation for combined operations post-merger (see discussion below in
Recent Development) have increased other expense by approximately $88,000
in the third quarter of 2004. As a percentage of average assets, annualized expenses for the
year-to-date through September 30, 2004 were 3.20% and were 3.31% for the
same period in 2003. B. Three months ended September 30, 2004 and 2003 Other income decreased $236,000, or 5.7%, in the third quarter of 2004 as
compared to the same period in 2003. Service fee income on deposit
accounts increased by $200,000, or 13.9%, due to fees generated from our
courtesy overdraft service. Service fees on loans decreased by $118,000,
or 34.1% due to reduced activity in loan rate modifications and
refinancings. The lower rate environment has also caused a reduction in
the rate earned on BOLI, causing an $11,000 decline in earnings on BOLI
when comparing the third quarter results of 2004 and 2003. Trust fees
decreased in the third quarter of 2004 by $144,000, or 15.4% when compared
to the same time period in 2003. Other non-interest income increased by a
total of $24,000, due primarily to the following factors. Fee income from
commissions received from investment services and insurance sales
increased by $22,000, or 8.6% in the third quarter of 2004. Fees
generated from bank card services were approximately $50,000 higher in the
first nine months of 2004 than in the same period in 2003. These increases
in other non-interest income was offset by a reduction of $60,000 in
premium earnings from Omegas reinsurance subsidiary. Gains on the sale of
investment securities, loans and other assets were $187,000 lower in the
third quarter of 2004 than in the third quarter of 2003. As a percentage of average assets, annualized other income net of gains on
securities, loans and other assets was 1.34 % for the third quarter of
2004 as compared to 1.35 % for the same period in 2003. Other expenses decreased $49,000, or 0.6%, in the third quarter of 2004 as
compared to the same period in 2003. Salaries and employee benefits
decreased $194,000, or 3.8%, in 2004 as compared to the same period in
2003. Occupancy and equipment expense in total decreased by $30,000, or
2.3%. Other non-interest expenses increased by $175,000 or 6.5%, compared
to the same period in 2003. Approximately $88,000 was recorded in the
third quarter of 2004 for costs associated with merger preparation. Of the
remaining $87,000 in increased expenses, $39,000 was due to higher claims
incurred on credit life insurance policies reinsured by Omegas
reinsurance subsidiary. As a percentage of average assets, annualized expenses for the quarter
ended September 30, 2004 were 3.14% and were 3.15% for the same period in
2003. Federal Income Tax The effective tax rate for the nine months ended September 30, 2004 was
22.8%, compared to the same period in 2003 when the effective tax rate was
24.0%. For the third quarter of 2004, the effective tax rate was 23.5%
compared to 24.5% in the third quarter of 2003. These decreases in
effective tax rates from 2003 to 2004 are primarily the effect of the
Corporation receiving increased tax deductions for dividends it paid on
company stock held by the Employee Stock Ownership Plan. Page 15




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##### Table of Contents



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. The following schedule
details characteristics of the investment portfolio as of September 30,
2004 and December 31, 2003 (in thousands). Securities Classified as Available for SaleGross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketSeptember 30, 2004
    
    Cost
    
    Gains
    
    Losses
    
    ValueU.S. Treasury securities and
obligations of other U.S. Government agencies and corporations
    
    $
    132,214
    
    
    $
    191
    
    
    $
    (890
    )
    
    $
    131,515Obligations of state and
political subdivisions
    
    
    80,023
    
    
    
    1,108
    
    
    
    (59
    )
    
    
    81,072Corporate securities
    
    
    2,633
    
    
    
    12
    
    
    
    (19
    )
    
    
    2,626Mortgage backed securities
    
    
    22,950
    
    
    
    181
    
    
    
    (24
    )
    
    
    23,107Equity securities
    
    
    11,900
    
    
    
    5,496
    
    
    
    (11
    )
    
    
    17,385Total
    
    $
    249,720
    
    
    $
    6,988
    
    
    $
    (1,003
    )
    
    $
    255,705
 Securities Classified as Available for SaleGross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    MarketDecember 31, 2003
    
    Cost
    
    Gains
    
    Losses
    
    ValueU.S. Treasury securities and
obligations of other U.S. Government agencies and corporations
    
    $
    117,928
    
    
    $
    985
    
    
    $
    (583
    )
    
    $
    118,330Obligations of state and
political subdivisions
    
    
    99,002
    
    
    
    1,965
    
    
    
    (139
    )
    
    
    100,828Corporate securities
    
    
    2,901
    
    
    
    23
    
    
    
    (13
    )
    
    
    2,911Mortgage backed securities
    
    
    1,298
    
    
    
    34
    
    
    
    
    
    
    
    1,332Equity securities
    
    
    11,397
    
    
    
    5,741
    
    
    
    
    
    
    
    17,138Total
    
    $
    232,526
    
    
    $
    8,748
    
    
    $
    (735
    )
    
    $
    240,539
  Total investment securities as a percentage of total assets at September
30, 2004 and December 31, 2003 were 21.6% and 21.1%, respectively.
Amortized cost of securities maturing or repricing in one year or less
comprised 22.7% of the total amortized cost of investment securities of
$249,720,000 as of September 30, 2004, as compared to 43.6% of total
investment securities of $232,526,000 as of December 31, 2003. There was
$210,000 in investments in instruments of foreign countries on September
30, 2004 and September 30, 2003.3.
    
    LoansNet loans in the first nine months of 2004 decreased by $14,879,000, or
1.9% from the balance at December 31, 2003, bringing the total to
$762,696,000 at September 30, 2004. Following is a table showing the
composition of the loan portfolio (in thousands). September 30,
    
    December 31,2004
    
    2003Commercial, financial and agricultural
    
    $
    111,308
    
    
    $
    111,471Real estate - commercial
    
    
    343,604
    
    
    
    338,703Real estate - construction
    
    
    12,666
    
    
    
    17,598Real estate - mortgage
    
    
    190,227
    
    
    
    197,656Home equity
    
    
    86,475
    
    
    
    90,612Personal
    
    
    28,123
    
    
    
    32,059Lease financing
    
    
    0
    
    
    
    46Unearned interest
    
    
    0
    
    
    
    (1
    )Total
    
    $
    772,403
    
    
    $
    788,144
 Page 16




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##### Table of Contents



Changes in the allowance for loan losses for the nine months ended
September 30, 2004 and 2003 were as follows (in thousands): 2004
    
    2003Balance of allowance - beginning of period
    
    $
    10,569
    
    
    $
    11,052Loans charged off:Commercial, financial and agricultural
    
    
    208
    
    
    
    57Real estate - commercial
    
    
    6
    
    
    
    5Real estate - mortgage
    
    
    173
    
    
    
    97Personal
    
    
    289
    
    
    
    459Total charge-offs
    
    
    676
    
    
    
    618Recoveries of loans previously charged off:Commercial, financial and agricultural
    
    
    7
    
    
    
    10Real estate - commercial
    
    
    1
    
    
    
    3Real estate - mortgage
    
    
    5
    
    
    
    5Personal
    
    
    88
    
    
    
    74Total recoveries
    
    
    101
    
    
    
    92Net charge-offs
    
    
    575
    
    
    
    526Provision for loan losses
    
    
    
    
    
    
    350Reclassification of off-balance sheet liability
    
    
    (287
    )
    
    
    Balance of
allowance - end of period
    
    $
    9,707
    
    
    $
    10,876
  Management performs a quantitative analysis to support the adequacy of the
allowance for loan losses. This analysis includes review of historical
charge-off rates for loan categories, fluctuations and trends in the
amount of classified loans and economic factors. Significant to this
analysis is any change in observable trends that may be occurring relative
to loans, to assess potential credit weaknesses. Current economic factors
and trends in risk ratings are considered in the determination and
allocation of the allowance for loan losses. The allowance for loan losses
at September 30, 2004 and 2003 represented 1.26% and 1.34%, respectively,
of the total loans outstanding, net of unearned interest.Set forth below is an analysis of Omegas non-performing loans as of
September 30, 2004 as compared to December 31, 2003. Non-performing Loans

(In thousands) September 30,
    
    December 31,2004
    
    2003Non-accrual loans
    
    $
    4,499
    
    
    $
    2,588Accruing loans past due 90 days or more
    
    
    581
    
    
    
    607Restructured loans
    
    
    221
    
    
    
    223Total non-performing loans
    
    $
    5,301
    
    
    $
    3,418Non-performing loans as percent of allowance
    
    
    54.6
    %
    
    
    32.3
    %
 Page 17




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The increase of $1,883,000 in non-performing loans from December 31, 2003
to September 30, 2004 was primarily due to the classification to
non-accrual status of one large commercial credit relationship during the
third quarter of 2004, who has filed for bankruptcy and is in liquidation.4.
    
    Deposits and Other Sources of FundsDeposits provide the primary source of funding for loans and investment
securities. As of September 30, 2004, total deposits increased by
$7,481,000 as compared to December 31, 2003. As of September 30, 2004,
non-interest bearing deposits increased by $7,321,000, or 4.7% and
interest bearing accounts increased by $160,000, when compared to December
31, 2003.Borrowed funds are used as an additional source of funding for loans and
investment securities as well as to fund the Corporations Stock
Repurchase Program. Additionally, to fund the acquisition of Sun Bancorp,
Inc. Omega created a new trust, Omega Financial Capital Trust I, which
issued $37,114,000 of junior subordinated debt to Omega, at an initial
fixed rate of 5.98%, on September 20, 2004. As of September 30, 2004,
Omega had short-term borrowings (maturities within one year) in the amount
of $28,796,000 and long-term debt in the amount of $25,700,000. At
December 31, 2003, short-term borrowings were $33,263,000 and long-term
debt was $21,600,000. This represents an overall increase in outstanding
debt of $36,747,000, with long-term debt increasing by $4,100,000,
short-term borrowings decreasing by $4,467,000 and the addition of
$37,114,000 of the junior subordinated debt. Page 18




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##### Table of Contents



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 September 30, 2004, 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 Repurchase ProgramIn March of 2004, the Board of Directors approved a new share repurchase
program to begin immediately, authorizing management to buy back up to 10%
of Omegas outstanding common stock. At that time, there were 8,483,950
common shares outstanding with 848,395 shares eligible to be repurchased.
This program is expected to remain in effect through December 31, 2004, or
until the 10% limit is reached; however, the Board of Directors may
discontinue it at any time. As of September 30, 2004, 70,000 shares have
been repurchased in conjunction with this program, at an average cost of
$35.25 per share.7.
    
    Recent DevelopmentOn April 20, 2004, Omega and Sun Bancorp, Inc., parent company of SunBank,
Mid-Penn Insurance Associates, Sun Investment Services, Bank Capital
Services and Sentry Trust Company, announced that Omega had agreed to
acquire Sun Bancorp, Inc. All required regulatory approvals were obtained.
Omega Financial Corporation and Sun Bancorp, Inc. shareholders approved
the transaction on September 9, 2004. The transaction closed on October 1,
2004. Under the terms of the merger agreement, Sun Bancorp shareholders
received either 0.664 shares of Omega common stock for each share of Sun
Bancorp common stock or $23.25 in cash for each share held subject to pro
rata allocation such that 20% of Sun Bancorp common stock was paid in cash
and 80% in the form of Omega common stock. The Boards of Directors of both
companies unanimously approved the definitive merger agreement. Page 19




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##### Table of Contents



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Omega is impacted by market risks, and has procedures in place to evaluate
and mitigate these risks. These market risks and Omegas procedures are
described in the Managements Discussion and Analysis section of the 2003
Annual Report to Shareholders. To the knowledge of Omega, there have been
no material changes in the market risks that impact Omega or its
procedures relative to these risks, since December 31, 2003. 
 Item 4. CONTROLS AND PROCEDURES  Quarterly evaluation of the Companys Disclosure Controls and Internal
Controls.
The Companys management, with the participation of its chief executive
officer and chief financial officer, conducted an evaluation of the
effectiveness of our disclosure controls and procedures, as defined in
Exchange Act Rule 13a-15(e), as of September 30, 2004. Based on that
evaluation, the Companys chief executive officer and chief financial
officer concluded that the Companys disclosure controls and procedures
were effective in reaching a reasonable level of assurance that management
is alerted to material information relating to the Company during the
period when the Companys periodic reports are being prepared.  During the quarter ended September 30, 2004, there has not occurred any
change in the Companys internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f), that has materially affected, or
is reasonably likely to materially affect, the Companys internal control
over financial reporting.  A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or fraud may occur and not be detected. Page 20




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##### Table of Contents



PART II. Other Information 
 Item 1. Legal Proceedings  None of a material nature. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  In March of 2004, Omegas Board approved a new share repurchase program to
begin immediately, authorizing management to buy back up to 10% of Omegas
outstanding common stock. At that time, there were 8,483,950 common shares
outstanding with 848,395 shares eligible to be repurchased. This program
will remain in effect through December 31, 2004, or until the 10% limit is
reached; however, the Board of Directors may discontinue it at any time.
As of September 30, 2004, 70,000 shares have been repurchased in
conjunction with this program. (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
    
    Under the Plans orPeriod
    
    Units) Purchased
    
    Unit)
    
    or Programs
    
    ProgramsApril 1, 2004 to
April 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    848,395May 1, 2004 to 
May 31, 2004
    
    
    70,000
    
    
    $
    35.25
    
    
    
    70,000
    
    
    
    778,395June 1, 2004 to
June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    778,395July 1, 2004 to
September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    778,395Total
    
    
    70,000
    
    
    $
    35.25
    
    
    
    70,000
    
    
    
    778,395
 
 Item 3. Defaults upon Senior Securities  None 
 Item 4. Submission of Matters to a Vote of Security Holders  A Special Meeting of Shareholders of Omega was held on September
9, 2004. At the Special Meeting, the shareholders approved the
Agreement and Plan of Merger dated April 20, 2004, which provided
for Sun Bancorp, Inc. to be merged with and into Omega. The
results were as follows: For
    
    Against
    
    Abstain
    
    Broker Non-Votes5,069,346
    
    
    217,928
    
    
    
    42,862
 
 Item 5. Other Information  None Page 21




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Item 6. Exhibits ExhibitNumber
    
    Description31.1
    
    Chief Executive Officers Rule 13a-14/15d-14(a) (Section 302) Certification31.2
    
    Chief Financial Officers Rule 13a-14/15d-14(a) (Section 302) Certification32.1
    
    Section 1350 (Section 906) Certification by Chief Executive Officer32.2
    
    Section 1350 (Section 906) Certification by Chief Financial Officer
 Page 22




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OMEGA FINANCIAL CORPORATION(Registrant)November 5, 2004
    
    
    
    By:
    
    /s/ David B. LeeDate
    
    
    
    
    
    David B. LeeChairman and
Chief Executive OfficerNovember 5, 2004
    
    
    
    
    
    /s/ Daniel L. WarfelDate
    
    
    
    
    
    Daniel L. WarfelExecutive Vice President and
Chief Financial Officer
 Page 23