##### Table of Contents



UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period ended September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from
____________ to ____________
 Commission
File Number: 0-13599
 OMEGA FINANCIAL CORPORATION
  Pennsylvania
    
    25-1420888(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 366 Walker Drive, State College, PA 16801
 (814) 231-7680
  þ o
  þ o
  o þ




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TABLE OF CONTENTS



|                                                                 |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. Financial Information                                   
|                                                                 | Item 1. Financial Statements                                                                 
|                                                                 | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                                 | Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                                 | Item 4. CONTROLS AND PROCEDURES                                                              
|PART II.Other Information                                       
|                                                                 | Item 1. Legal Proceedings                                                                    
|                                                                 | Item 3. Defaults upon Senior Securities                                                      
|                                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                                 | Item 5. Other Information                                                                    
|                                                                 | Item 6. Exhibits                                                                             
|SIGNATURES                                                      
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302
|CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906
|CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906



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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS  September 30,
    
    
    December 31,Assets
    
    2005
    
    
    2004Cash and due from banks
    
    $
    57,945
    
    
    $
    47,877Interest bearing deposits with other banks
    
    
    6,981
    
    
    
    31,122Federal funds sold
    
    
    
    
    
    
    36,350Trading account assets
    
    
    464Investment securities available for sale
    
    
    367,330
    
    
    
    327,979Investment in unconsolidated subsidiary
    
    
    1,625
    
    
    
    1,625Loans held for sale
    
    
    217
    
    
    
    22,515Total portfolio loans
    
    
    1,230,679
    
    
    
    1,305,735Less: Allowance for loan losses
    
    
    (15,208
    )
    
    
    (15,644
    )Net portfolio loans
    
    
    1,215,471
    
    
    
    1,290,091Premises and equipment, net
    
    
    38,176
    
    
    
    35,509Other real estate owned
    
    
    852
    
    
    
    3,082Bank-owned life insurance
    
    
    74,565
    
    
    
    72,845Investment in limited partnerships
    
    
    6,854
    
    
    
    8,605Core deposit intangibles
    
    
    6,935
    
    
    
    13,927Other intangibles
    
    
    2,597
    
    
    
    2,799Goodwill
    
    
    161,142
    
    
    
    156,959Other assets
    
    
    30,676
    
    
    
    31,286TOTAL ASSETS
    
    $
    1,971,830
    
    
    $
    2,082,571Liabilities and Shareholders EquityDeposits:Non-interest bearing
    
    $
    237,853
    
    
    $
    228,408Interest bearing
    
    
    1,209,997
    
    
    
    1,273,674Total deposits
    
    
    1,447,850
    
    
    
    1,502,082Short-term borrowings
    
    
    107,798
    
    
    
    90,259ESOP debt
    
    
    1,933
    
    
    
    2,192Junior subordinated debentures
    
    
    56,816
    
    
    
    57,190Long-term debt
    
    
    26,614
    
    
    
    99,579Other interest bearing liabilities
    
    
    852
    
    
    
    854Other liabilities
    
    
    11,427
    
    
    
    14,676TOTAL LIABILITIES
    
    
    1,653,290
    
    
    
    1,766,832Shareholders EquityPreferred stock, par value $5.00 per share:Authorized - 5,000,000 shares, none issuedCommon stock, par value $5.00 per share:Authorized - 25,000,000 shares;Issued -12,643,861
shares at September 30, 2005;12,593,524 shares at December 31, 2004;
    
    
    63,235
    
    
    
    62,968Outstanding -
12,609,546 shares at September 30, 2005;12,593,524 shares at December 31, 2004;Capital surplus
    
    
    99,399
    
    
    
    98,370Retained earnings
    
    
    158,076
    
    
    
    152,249Accumulated other comprehensive income
    
    
    27
    
    
    
    3,526Unearned compensation related to ESOP debt
    
    
    (1,188
    )
    
    
    (1,374
    )Cost of common stock in treasury:34,315 shares at September 30, 2005
    
    
    (1,009
    )
    
    
    TOTAL SHAREHOLDERS EQUITY
    
    
    318,540
    
    
    
    315,739TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,971,830
    
    
    $
    2,082,571
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Interest Income:Interest and fees on loans
    
    $
    19,887
    
    
    $
    10,926
    
    
    $
    58,846
    
    
    $
    33,118Interest and dividends on investment securities
    
    
    2,975
    
    
    
    1,774
    
    
    
    8,031
    
    
    
    5,386Other interest income
    
    
    288
    
    
    
    158
    
    
    
    984
    
    
    
    305TOTAL INTEREST INCOME
    
    
    23,150
    
    
    
    12,858
    
    
    
    67,861
    
    
    
    38,809Interest Expense:Interest on deposits
    
    
    5,754
    
    
    
    2,738
    
    
    
    16,005
    
    
    
    8,073Interest on short-term borrowings
    
    
    576
    
    
    
    151
    
    
    
    1,504
    
    
    
    299Interest on long-term debt and
other interest bearing liabilities
    
    
    1,211
    
    
    
    196
    
    
    
    4,151
    
    
    
    688TOTAL INTEREST EXPENSE
    
    
    7,541
    
    
    
    3,085
    
    
    
    21,660
    
    
    
    9,060NET INTEREST INCOME
    
    
    15,609
    
    
    
    9,773
    
    
    
    46,201
    
    
    
    29,749Provision for loan losses
    
    
    290
    
    
    
    0
    
    
    
    612
    
    
    
    0INCOME FROM CREDIT ACTIVITIES
    
    
    15,319
    
    
    
    9,773
    
    
    
    45,589
    
    
    
    29,749Other Income:Service fees on deposit accounts
    
    
    2,409
    
    
    
    1,652
    
    
    
    6,857
    
    
    
    4,568Service fees on loans
    
    
    332
    
    
    
    232
    
    
    
    989
    
    
    
    879Earnings on bank-owned life insurance
    
    
    571
    
    
    
    319
    
    
    
    1,720
    
    
    
    1,003Trust fees
    
    
    1,541
    
    
    
    790
    
    
    
    4,683
    
    
    
    2,589Investment and insurance product sales
    
    
    649
    
    
    
    271
    
    
    
    2,500
    
    
    
    926Gain on the early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,043
    
    
    
    (Loss) Gain on sale of loans and other assets
    
    
    (1
    )
    
    
    12
    
    
    
    (379
    )
    
    
    13Net gains on the sale of investment securities
    
    
    134
    
    
    
    60
    
    
    
    1,671
    
    
    
    271Other
    
    
    1,263
    
    
    
    582
    
    
    
    3,441
    
    
    
    1,691TOTAL OTHER INCOME
    
    
    6,898
    
    
    
    3,918
    
    
    
    22,525
    
    
    
    11,940Other Expense:Salaries and employee benefits
    
    
    7,720
    
    
    
    4,938
    
    
    
    22,992
    
    
    
    14,695Net occupancy expense
    
    
    948
    
    
    
    547
    
    
    
    3,123
    
    
    
    1,733Equipment expense
    
    
    1,040
    
    
    
    706
    
    
    
    3,160
    
    
    
    2,137Data processing service
    
    
    632
    
    
    
    439
    
    
    
    1,879
    
    
    
    1,292Pennsylvania shares tax
    
    
    107
    
    
    
    380
    
    
    
    1,275
    
    
    
    1,143Amortization of intangible assets
    
    
    274
    
    
    
    3
    
    
    
    711
    
    
    
    8Other
    
    
    4,471
    
    
    
    2,032
    
    
    
    12,684
    
    
    
    6,314TOTAL OTHER EXPENSE
    
    
    15,192
    
    
    
    9,045
    
    
    
    45,824
    
    
    
    27,322Income before taxes
    
    
    7,025
    
    
    
    4,646
    
    
    
    22,290
    
    
    
    14,367Income tax expense
    
    
    1,460
    
    
    
    1,094
    
    
    
    4,767
    
    
    
    3,280NET INCOME
    
    $
    5,565
    
    
    $
    3,552
    
    
    $
    17,523
    
    
    $
    11,087Net income per common share:Basic
    
    $
    .44
    
    
    $
    .42
    
    
    $
    1.39
    
    
    $
    1.31Diluted
    
    $
    .44
    
    
    $
    .42
    
    
    $
    1.38
    
    
    $
    1.30Weighted average shares and equivalents:Basic
    
    
    12,616
    
    
    
    8,443
    
    
    
    12,606
    
    
    
    8,461Diluted
    
    
    12,666
    
    
    
    8,500
    
    
    
    12,658
    
    
    
    8,530Dividends declared per share:Common
    
    $
    .31
    
    
    $
    .30
    
    
    $
    .93
    
    
    $
    .90
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    17,523
    
    
    $
    11,087Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    3,298
    
    
    
    3,051Provision for loan losses and off-balance sheet reserve
    
    
    582
    
    
    
    Gain on sale of investment securities
    
    
    (1,671
    )
    
    
    (271
    )Gain on early extinguishment of debt
    
    
    (1,043
    )
    
    
    Gain on sale of fixed assets and other property owned
    
    
    (21
    )
    
    
    (9
    )Loss on sale of loans and leases
    
    
    381
    
    
    
    (5
    )Non-monetary gift
    
    
    45
    
    
    
    Provision for deferred income tax
    
    
    4,171
    
    
    
    110Increase in cash surrender value of bank owned life insurance
    
    
    (1,720
    )
    
    
    (1,003
    )Decrease (increase) in interest receivable and other assets
    
    
    549
    
    
    
    (2,140
    )Decrease in interest payable
    
    
    (465
    )
    
    
    27Increase in taxes payable
    
    
    612
    
    
    
    460Amortization of deferred net loan fees
    
    
    (226
    )
    
    
    (273
    )Deferral of net loan fees
    
    
    157
    
    
    
    249Decrease in accounts payable and accrued expenses
    
    
    (3,343
    )
    
    
    (1,129
    )Total adjustments
    
    
    1,306
    
    
    
    (933
    )Net cash provided by operating activities
    
    
    18,829
    
    
    
    10,154Cash flows from investing activities:Investment securities available for sale:Proceeds from sales
    
    
    61,591
    
    
    
    5,147Proceeds from maturities
    
    
    38,472
    
    
    
    88,435Cash used for purchases
    
    
    (144,874
    )
    
    
    (111,885
    )Investment in unconsolidated subsidiary
    
    
    
    
    
    
    (1,114
    )Net change in interest bearing deposits with other banks
    
    
    24,141
    
    
    
    (12,656
    )Decrease in loans and leases
    
    
    68,759
    
    
    
    14,382Gross proceeds from sale of loans and leases
    
    
    27,644
    
    
    
    526Investment in limited partnerships
    
    
    (84
    )
    
    
    Sale of investment in limited partnership
    
    
    1,088
    
    
    
    Capital expenditures
    
    
    (5,254
    )
    
    
    (1,235
    )Sale of fixed assets and other property owned
    
    
    2,344
    
    
    
    12Net change in federal funds sold
    
    
    36,350
    
    
    
    7,750Net cash provided by (used in) investing activities
    
    
    110,177
    
    
    
    (10,638
    )Cash flows from financing activities:Net change in deposits
    
    
    (53,094
    )
    
    
    7,481Net increase (decrease) in short-term borrowings, net
    
    
    16,039
    
    
    
    (4,467
    )Issuance of junior subordinated debt
    
    
    
    
    
    
    37,114Issuance of long-term debt
    
    
    
    
    
    
    5,000Principal payment on long term debt
    
    
    (70,562
    )
    
    
    (900
    )Net change in other interest bearing liabilities
    
    
    (2
    )
    
    
    10Dividends paid
    
    
    (11,726
    )
    
    
    (7,611
    )Tax benefit from preferred stock dividend
and stock option activity
    
    
    
    
    
    
    121Issuance of common stock
    
    
    1,296
    
    
    
    1,584Acquisition of treasury stock
    
    
    (889
    )
    
    
    (2,467
    )Net cash used in financing activities
    
    
    (118,938
    )
    
    
    35,865Net increase in cash and cash equivalents
    
    $
    10,068
    
    
    $
    35,381Cash and cash equivalents at beginning of period
    
    $
    47,877
    
    
    $
    32,420Cash and cash equivalents at end of period
    
    
    57,945
    
    
    
    67,801Net increase in cash and cash equivalents
    
    $
    10,068
    
    
    $
    35,381Interest paid
    
    $
    22,125
    
    
    $
    9,094Income taxes paid
    
    
    
    
    
    
    2,649Supplemental schedule of noncash investing and financing activities:Transfers of loans to other real estate owned
    
    
    73
    
    
    
    27
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
   A.
    
    Basis of Presentation:The accompanying Consolidated Financial Statements include Omega Financial Corporation
(Omega or the Corporation), a bank holding company and the combined results of its
wholly owned banking and non-banking subsidiaries. The accompanying unaudited financial
statements have been prepared in accordance with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, including normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the three and
nine months ended September 30, 2005 are not necessarily indicative of the results that may
be experienced for the year ending December 31, 2005 or any other interim period. For
further information, refer to the Consolidated Financial Statements and Footnotes included
in the Companys Annual Report on Form 10-K for the year ended December 31, 2004.Summary of Significant Accounting Policies (to be read in conjunction with Summary of
Significant Accounting Policies included in the Footnotes of the Companys Annual Report on
Form 10-K for the year ended December 31, 2004):Allowance for loan lossesFor financial reporting purposes, the provision for loan losses charged to current operating
income is based on managements estimates, and actual losses may vary from estimates. These
estimates are reviewed and adjusted at least quarterly and are reported in earnings in the
periods in which they become known. In determining the adequacy of the allowance for loan
losses, management makes specific allocations to watch list loans and pools of non-watch
list loans for various credit risk factors, including the composition and growth of the loan
portfolio, overall portfolio quality, levels of delinquent loans, specific problem loans,
prior loan loss experience and current economic conditions that may affect a borrowers
ability to pay. The loan loss provision for federal income tax purposes is based on current
income tax regulations, which allow for deductions equal to net charge-offs. In the first
quarter of 2005, management refined its policy to expand the historical loan loss experience
data to a five-year period (formerly a one-year history was used). Management believes that
the five-year horizon better reflects the inherent risk in the loan portfolio.Stock-based compensationOmega accounts for stock-based compensation using the intrinsic value method in accordance
with Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to
Employees, and has adopted the disclosure provisions of FASB No. 148, Accounting for
Stock-Based Compensation. The following pro forma information regarding net income and
earnings per share assumes the adoption of Statement No. 123 for stock options granted
subsequent to December 31, 1994. The estimated fair value of the options is amortized to
expense over the vesting period for purposes of this proforma presentation.The fair value was estimated at the date of grant using a Black-Scholes option-pricing model
utilizing various assumptions. Compensation expense, net of related tax, is included in the
pro forma net income reported below (in thousands, except per share data).
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Three Months ended
    
    
    Nine Months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    As reported
    
    $
    5,565
    
    
    $
    3,552
    
    
    $
    17,523
    
    
    $
    11,087Pro forma
    
    
    5,565
    
    
    
    3,447
    
    
    
    17,515
    
    
    
    10,775Compensation expense, net of tax
    
    
    
    
    
    
    105
    
    
    
    8
    
    
    
    312Basic earnings per share
    
    As reported
    
    $
    0.44
    
    
    $
    0.42
    
    
    $
    1.39
    
    
    $
    1.31Pro forma
    
    
    0.44
    
    
    
    0.41
    
    
    
    1.39
    
    
    
    1.27Diluted earnings per share
    
    As reported
    
    $
    0.44
    
    
    $
    0.42
    
    
    $
    1.38
    
    
    $
    1.30Pro forma
    
    
    0.44
    
    
    
    0.41
    
    
    
    1.38
    
    
    
    1.26
 The Black-Scholes option valuation model was developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because Omegas employee stock options have
characteristics significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.In December 2004, the FASB revised Statement No. 123. In April 2005, the SEC announced that
it would require registrants that are not small business issuers to adopt Statement No. 123R
no later than the beginning of the first fiscal year beginning after June 15, 2005. Omega
will adopt Statement No.123R on January 1, 2006. Management has not yet determined the
method of adoption it will use and therefore, cannot estimate the impact of adoption at this
time.B.
    
    Commitments, Contingent Liabilities and Guarantees:In the ordinary course of business, Omega makes commitments to extend credit to its
customers through letters of credit and lines of credit.Standby letters of credit are instruments issued by the Corporations bank subsidiary that
guarantee the beneficiary payment by the bank in the event of default by the banks customer
in the non-performance of an obligation or service. Most standby letters of credit are
issued for one-year periods. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers. The bank
holds collateral supporting those commitments for which collateral is deemed necessary. At
September 30, 2005, standby letters of credit issued and outstanding amounted to $26,715,000
as compared to $24,064,000 on December 31, 2004. The fair market value of the standby
letters of credit at September 30, 2005 and December 31, 2004 was $128,000 and $138,000,
respectively. The fair market value of standby letters of credit is recorded as a liability
in accordance with FIN 45.At September 30, 2005, the bank had $292,126,000 outstanding in loan commitments and other
unused lines of credit extended to its customers. Of this amount, $211,438,000, or 72.4%,
were commercial commitments. The remaining amounts of $80,688,000 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 September 30, 2005, the balance of the ESOP debt was
$1,933,000 as compared to $2,192,000 at December 31, 2004.
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C.
    
    Investment Securities:The following schedule details characteristics of the investment portfolio as of September
30, 2005 and December 31, 2004 (in thousands).
 Securities Classified as Available for SaleGross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketSeptember 30, 2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and
obligations of other U.S. Government agencies and corporations
    
    $
    214,830
    
    
    $
    0
    
    
    
    ($3,075
    )
    
    $
    211,755Obligations of state and
political subdivisions
    
    
    61,879
    
    
    
    141
    
    
    
    (554
    )
    
    
    61,466Corporate securities
    
    
    3,477
    
    
    
    8
    
    
    
    (38
    )
    
    
    3,447Mortgage backed securities
    
    
    73,656
    
    
    
    83
    
    
    
    (713
    )
    
    
    73,026Equity securities
    
    
    13,446
    
    
    
    4,194
    
    
    
    (4
    )
    
    
    17,636Total
    
    $
    367,288
    
    
    $
    4,426
    
    
    
    ($4,384
    )
    
    $
    367,330
 Securities Classified as Available for SaleGross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketDecember 31, 2004
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and
obligations of other U.S. Government agencies and corporations
    
    $
    134,223
    
    
    $
    37
    
    
    
    ($1,330
    )
    
    $
    132,930Obligations of state and
political subdivisions
    
    
    80,628
    
    
    
    664
    
    
    
    (373
    )
    
    
    80,919Corporate securities
    
    
    4,035
    
    
    
    19
    
    
    
    (20
    )
    
    
    4,034Mortgage backed securities
    
    
    86,990
    
    
    
    765
    
    
    
    (74
    )
    
    
    87,681Equity securities
    
    
    16,679
    
    
    
    5,736
    
    
    
    
    
    
    
    22,415Total
    
    $
    322,555
    
    
    $
    7,221
    
    
    
    ($1,797
    )
    
    $
    327,979
  Less Than 12 Months
    
    
    12 Months or LongerFair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedDescription of Securities
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    145,677
    
    
    $
    1,391
    
    
    $
    66,078
    
    
    $
    1,684Obligations of state and political subdivisions
    
    
    20,828
    
    
    
    217
    
    
    
    15,392
    
    
    
    337Corporate and other securities
    
    
    512
    
    
    
    5
    
    
    
    1,421
    
    
    
    33Mortgage-backed securities
    
    
    65,228
    
    
    
    653
    
    
    
    2,202
    
    
    
    60Subtotal, debt securities
    
    
    232,245
    
    
    
    2,266
    
    
    
    85,093
    
    
    
    2,114Common stock
    
    
    135
    
    
    
    4
    
    
    
    
    
    
    
    Total temporarily impaired securities
    
    $
    232,380
    
    
    $
    2,270
    
    
    $
    85,093
    
    
    $
    2,114
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##### Table of Contents



The unrealized losses noted above are considered to be temporary impairments, as the
majority of the investments are debt securities whose decline in value is due primarily to
interest rate fluctuations. As a result, management does not believe that the payment of
contractual cash flows, including principal repayment, is 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 59 investments in U.S.
Government agency debt securities, 28 investments in mortgage-backed securities, 5
investments in corporate securities and 46 investments in obligations of state and municipal
subdivisions. Debt securities with unrealized losses for a period of 12 months or longer
includes 40 investments in U.S. Government agency debt securities, 9 investments in
corporate securities, 42 investments in obligations of state and municipal subdivisions and
4 investments in mortgage-backed securities. Debt securities included in the above table
have maturity or pre-refund dates ranging from October 2005 to September 2022. The
unrealized loss position for each security ranges from .01% to 6.11% of the securities
amortized cost as of September 30, 2005.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 September 30, 2005 consist of assets held in Rabbi Trusts, including
US Treasury Notes, mutual funds and cash equivalents. The change in the market value of the
trading securities during the three months ended September 30, 2005 was not material.D.
    
    Income Taxes:The effective tax rate for the nine months ended September 30, 2005 was 21.4%, compared to
22.8% for the same period in 2004. For the third quarter of 2005, the effective tax rate was
20.8% compared to 23.5% in the third quarter of 2004. For the year ended December 31, 2004,
the effective tax rate was 23.8%. The reduction in the effective tax rate in 2005 was
primarily due to tax benefits received from the sale of property at an amount below fair
market value, otherwise known as a bargain sale, in addition to the increase in tax
credits received from investments in low-income housing projects.E.
    
    Long term Debt:On October 1, 2004, Omega acquired Sun Bancorp, Inc. (Sun). In the first quarter of 2005,
Omega repaid certain indebtedness to the Federal Home Loan Bank, completing its systematic
program of reducing the indebtedness on Suns balance sheet acquired in the acquisition. The
final extinguishment resulted in a gain of $1,043,000. Following is a schedule showing the
change in composition of long-term debt since December 31, 2004 (in thousands of dollars).
 Long-Term Debt:
    
    September 30, 2005
    
    
    December 31, 2004Notes payable to Federal Home Loan Bank, with fixed rates
    
    $
    23,058
    
    
    $
    25,373Between 2.65% and 6.80%Notes payable to Federal Home Loan Bank, with variable ratesBetween 4.63% and 5.15%
    
    
    
    
    
    
    55,153Note payable to another financial institution with a variable interestRate payable at three month LIBOR plus 125 basis points
    
    
    
    
    
    
    12,000Notes payable to another financial institution with fixed interest
rates of 2.47% and 2.90%
    
    
    3,556
    
    
    
    7,053Total Long Term Debt
    
    $
    26,614
    
    
    $
    99,579ESOP Debt Guarantee
    
    $
    1,933
    
    
    $
    2,192
 Page 8




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##### Table of Contents



F.
    
    Comprehensive Income:Total comprehensive income consists of Net Income plus any unrealized gains and losses in
the Corporations investment portfolio, net of tax. (in thousands):
 Three Months September 30, 2005
    
    
    Three Months September 30, 2004Before
    
    
    Tax Expense
    
    
    
    
    
    
    Before
    
    
    Tax ExpenseTax
    
    
    or
    
    
    Net-of-Tax
    
    
    Tax
    
    
    or
    
    
    Net-of-TaxAmount
    
    
    (Benefit)
    
    
    Amount
    
    
    Amount
    
    
    (Benefit)
    
    
    AmountNet income
    
    $
    7,025
    
    
    $
    1,460
    
    
    $
    5,565
    
    
    $
    4,646
    
    
    $
    1,094
    
    
    $
    3,552Other comprehensive income:Unrealized gains on available for sale securities:Unrealized holding gains (losses) arising
during the period
    
    
    (2,045
    )
    
    
    (716
    )
    
    
    (1,329
    )
    
    
    1,978
    
    
    
    692
    
    
    
    1,286Less reclassification adjustment for
gains included in net income
    
    
    (135
    )
    
    
    (47
    )
    
    
    (88
    )
    
    
    (60
    )
    
    
    (21
    )
    
    
    (39
    )Other comprehensive income (loss)
    
    
    (2,180
    )
    
    
    (763
    )
    
    
    (1,417
    )
    
    
    1,918
    
    
    
    671
    
    
    
    1,247Total comprehensive income
    
    $
    10,385
    
    
    $
    1,818
    
    
    $
    8,567
    
    
    $
    6,564
    
    
    $
    1,765
    
    
    $
    4,799
 Nine Months September 30, 2005
    
    
    Nine Months September 30, 2004Before
    
    
    Tax Expense
    
    
    
    
    
    
    Before
    
    
    Tax ExpenseTax
    
    
    or
    
    
    Net-of-Tax
    
    
    Tax
    
    
    or
    
    
    Net-of-TaxAmount
    
    
    (Benefit)
    
    
    Amount
    
    
    Amount
    
    
    (Benefit)
    
    
    AmountNet income
    
    
    22,290
    
    
    
    4,767
    
    
    
    17,523
    
    
    $
    14,367
    
    
    $
    3,280
    
    
    $
    11,087Other comprehensive income:Unrealized gains on available for sale securities:Unrealized holding losses arising during
the period
    
    
    (3,711
    )
    
    
    (1,299
    )
    
    
    (2,412
    )
    
    
    (1,759
    )
    
    
    (616
    )
    
    
    (1,143
    )Less reclassification adjustment for
gains included in net income
    
    
    (1,671
    )
    
    
    (585
    )
    
    
    (1,086
    )
    
    
    (271
    )
    
    
    (95
    )
    
    
    (176
    )Other comprehensive income (loss)
    
    
    (5,382
    )
    
    
    (1,884
    )
    
    
    (3,498
    )
    
    
    (2,030
    )
    
    
    (711
    )
    
    
    (1,319
    )Total comprehensive income
    
    $
    16,904
    
    
    $
    2,883
    
    
    $
    14,021
    
    
    $
    12,337
    
    
    $
    2,569
    
    
    $
    9,768
 Page 9




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##### Table of Contents



G.
    
    Earnings Per Share Data:Basic earnings per share are computed by dividing income available to common stockholders by
the weighted average number of shares outstanding for the period. On a diluted basis, both
earnings and shares outstanding are adjusted to assume the conversion of all potentially
dilutive securities into common stock.
 
 Three Months Ended September 30, 2005
    
    
    Three Months Ended September 30, 2004Income
    
    
    Shares
    
    
    Per-Share
    
    
    Income
    
    
    Shares
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    Amount
    
    
    Numerator
    
    
    Denominator
    
    
    AmountBasic EPSIncome available to common
shareholders
    
    
    5,565
    
    
    
    12,616
    
    
    $
    0.44
    
    
    
    3,552
    
    
    
    8,443
    
    
    $
    0.42Effect of Dilutive SecuritiesImpact of :Assumed exercises of outstanding
options
    
    
    
    
    
    
    46Potential shares required for contract settlement
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    57Diluted EPSIncome available to common
shareholders plus assumed
conversions
    
    $
    5,565
    
    
    
    12,666
    
    
    $
    0.44
    
    
    $
    3,552
    
    
    
    8,500
    
    
    $
    0.42
 Nine Months Ended September 30, 2005
    
    
    Nine Months Ended September 30, 2004Income
    
    
    Shares
    
    
    Per-Share
    
    
    Income
    
    
    Shares
    
    
    Per-ShareNumerator
    
    
    Denominator
    
    
    Amount
    
    
    Numerator
    
    
    Denominator
    
    
    AmountBasic EPSIncome available to common
shareholders
    
    
    17,523
    
    
    
    12,606
    
    
    $
    1.39
    
    
    
    11,087
    
    
    
    8,461
    
    
    $
    1.31Effect of Dilutive SecuritiesImpact of :Assumed exercises of outstanding
options
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    69Potential shares required for contract settlement
    
    
    
    
    
    
    4Diluted EPSIncome available to common
shareholders plus assumed
conversions
    
    $
    17,523
    
    
    
    12,658
    
    
    $
    1.38
    
    
    $
    11,087
    
    
    
    8,530
    
    
    $
    1.30
 Page 10




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H.
    
    Acquisition:On October 1, 2004, Omega completed its acquisition of Sun Bancorp, Inc. (Sun) for a total
purchase price of $187,729,000. The following unaudited pro forma consolidated financial
information for 2004 presents the combined results of operations of Omega and Sun as if the
acquisition had occurred as of January 1, 2004, compared to actual results for 2005.
 Actual
    
    
    Proforma(in thousands, except per share data)For the nine
    
    
    For the ninemonths ended
    
    
    months endedSeptember 30,2005
    
    
    September 30,2004Net interest income
    
    $
    46,201
    
    
    $
    52,152Provision for loan losses
    
    
    612
    
    
    
    2,599Net interest income after provision for loan losses
    
    
    45,589
    
    
    
    49,553Other income
    
    
    22,525
    
    
    
    23,798Other expense
    
    
    45,824
    
    
    
    51,106Income before taxes
    
    
    22,290
    
    
    
    22,245Income tax expense
    
    
    4,767
    
    
    
    5,079Net income
    
    $
    17,523
    
    
    $
    17,166Net income per common share:Basic
    
    $
    1.39
    
    
    $
    1.38Diluted
    
    
    1.38
    
    
    
    1.37Weighted average shares and equivalents:Basic
    
    
    12,606
    
    
    
    12,419Diluted
    
    
    12,658
    
    
    
    12,543
 Actual
    
    
    Proforma(in thousands, except per share data)For the three
    
    
    For the threemonths ended
    
    
    months endedSeptember 30,2005
    
    
    September 30,2004Net interest income
    
    $
    15,609
    
    
    $
    17,084Provision for loan losses
    
    
    290
    
    
    
    1,714Net interest income after provision for loan losses
    
    
    15,319
    
    
    
    15,370Other income
    
    
    6,898
    
    
    
    7,899Other expense
    
    
    15,192
    
    
    
    18,456Income before income taxes
    
    
    7,025
    
    
    
    4,813Income tax expense
    
    
    1,460
    
    
    
    1,159Net income
    
    $
    5,565
    
    
    $
    3,654Net income per common share:Basic
    
    $
    0.44
    
    
    $
    0.29Diluted
    
    
    0.44
    
    
    
    0.29Weighted average shares and equivalents:Basic
    
    
    12,616
    
    
    
    12,419Diluted
    
    
    12,666
    
    
    
    12,543
  Page 11




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##### Table of Contents



I.
    
    Goodwill and Other Intangible Assets:As a result of the acquisition of Sun in the fourth quarter of 2004, Omega recorded
preliminary estimates of fair values of assets acquired, including core deposit intangibles
and goodwill of $14,211,000 and $156,959,000, respectively. In the first quarter of 2005,
Omega revised its determination of the value of the core deposit intangible. This revised
valuation was lower than originally estimated by $6,483,000. Accordingly, the value of
goodwill was increased by $4,214,000 and the deferred tax asset acquired was increased by
$2,269,000. The recorded goodwill balance at September 30, 2005 was $161,142,000.
Managements current analysis indicates that as of September 30, 2005, a 9.8% decline in
market capitalization would trigger further analysis of the carrying value of goodwill,
which could result in an adjustment to its value. The weighted average life of intangible
assets that have a finite life is 10.23 years. The estimates included in the valuation of
the core deposit intangible are generally consistent with the runoff experienced to date on
the acquired deposits. A summary of intangible assets at September 30, 2005 and December 31,
2004 follows (in thousands):
 September 30,
    
    
    December 31,2005
    
    
    2004Core deposit intangibleGross carrying amount
    
    $
    7,885
    
    
    $
    14,368Less: accumulated amortization
    
    
    950
    
    
    
    441Net carrying amount
    
    
    6,935
    
    
    
    13,927Customer relationship intangiblesGross carrying amount
    
    
    2,700
    
    
    
    2,700Less: accumulated amortization
    
    
    245
    
    
    
    61Net carrying amount
    
    
    2,455
    
    
    
    2,639Trade name intangible with finite lifeGross carrying amount
    
    
    36
    
    
    
    36Less: accumulated amortization
    
    
    24
    
    
    
    6Net carrying amount
    
    
    12
    
    
    
    30Total finite-lived intangiblesGross carrying amount
    
    
    10,621
    
    
    
    17,104Less: accumulated amortization
    
    
    1,219
    
    
    
    508Net carrying amount
    
    $
    9,402
    
    
    $
    16,596Trade name intangible with infinite lifeGross carrying amount
    
    
    130
    
    
    
    130
 Page 12




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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
 
          Page 13




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Page 14




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Operations Overview
    Third Quarter
    
    
    Second Quarter2005
    
    
    2005NET INTEREST INCOME
    
    
    15,609
    
    
    
    15,350Provision for loan losses
    
    
    290
    
    
    
    180INCOME FROM CREDIT ACTIVITIES
    
    
    15,319
    
    
    
    15,170Other Income:Service fees on deposit accounts
    
    
    2,409
    
    
    
    2,308Service fees on loans
    
    
    332
    
    
    
    345Earnings on bank-owned life insurance
    
    
    571
    
    
    
    574Trust fees
    
    
    1,541
    
    
    
    1,476Investment and insurance product sales
    
    
    649
    
    
    
    779Gain on the early extinguishment of debt
    
    
    0
    
    
    
    0Gain on sale of loans and other assets
    
    
    (1
    )
    
    
    (39
    )Net gains on the sale of investment securities
    
    
    134
    
    
    
    549Other
    
    
    1,263
    
    
    
    1,149TOTAL OTHER INCOME
    
    
    6,898
    
    
    
    7,141Other Expense:Salaries and employee benefits
    
    
    7,720
    
    
    
    7,721Net occupancy expense
    
    
    948
    
    
    
    1,064Equipment expense
    
    
    1,040
    
    
    
    1,031Data processing service
    
    
    632
    
    
    
    621Pennsylvania shares tax
    
    
    107
    
    
    
    549Amortization of intangible assets
    
    
    274
    
    
    
    274Other
    
    
    4,471
    
    
    
    4,403TOTAL OTHER EXPENSE
    
    
    15,192
    
    
    
    15,663Income before taxes
    
    
    7,025
    
    
    
    6,648Income tax expense
    
    
    1,460
    
    
    
    1,267NET INCOME
    
    $
    5,565
    
    
    $
    5,381Net income per common share:Basic
    
    $
    0.44
    
    
    $
    0.43Diluted
    
    $
    0.44
    
    
    $
    0.43Weighted average shares and equivalents:Basic
    
    
    12,616
    
    
    
    12,607Diluted
    
    
    12,666
    
    
    
    12,660Dividends declared per share:Common
    
    $
    .31
    
    
    $
    .31
  Page 15




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    June 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2005
    
    
    2004Return on average assets (annualized)
    
    
    1.12
    %
    
    
    1.23
    %
    
    
    1.07
    %
    
    
    1.16
    %
    
    
    1.30
    %Return on average tangible assets (annualized)
    
    
    1.22
    
    
    
    1.23
    
    
    
    1.17
    
    
    
    1.27
    
    
    
    1.30Return on average stated equity (annualized)
    
    
    6.90
    
    
    
    8.41
    
    
    
    6.73
    
    
    
    7.29
    
    
    
    8.70Return on average tangible equity (annualized)
    
    
    14.68
    
    
    
    8.41
    
    
    
    14.47
    
    
    
    15.73
    
    
    
    8.70Dividend payout ratio
    
    
    70.24
    
    
    
    71.34
    
    
    
    72.66
    
    
    
    66.92
    
    
    
    68.65Average equity to average assets (stated)
    
    
    16.21
    
    
    
    14.66
    
    
    
    15.97
    
    
    
    15.91
    
    
    
    14.92Average equity to average assets (tangible)
    
    
    8.34
    
    
    
    14.66
    
    
    
    8.12
    
    
    
    8.06
    
    
    
    14.92
    Net Interest Income
     Page 16




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    June 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2005
    
    
    2004Yield on average earning assets
    
    
    5.68
    %
    
    
    4.84
    %
    
    
    5.53
    %
    
    
    5.48
    %
    
    
    4.92
    %Cost to fund earning assets
    
    
    1.84
    
    
    
    1.16
    
    
    
    1.78
    
    
    
    1.75
    
    
    
    1.15Net interest margin
    
    
    3.84
    
    
    
    3.68
    
    
    
    3.75
    
    
    
    3.73
    
    
    
    3.77Net interest margin  tax equivalent
    
    
    3.99
    
    
    
    3.89
    
    
    
    3.90
    
    
    
    3.88
    
    
    
    3.99
  
 September 30, 2005
    
    
    December 31, 2004Change in Interest
    
    Possible
    
    
    
    
    
    Change in Interest
    
    
    PossibleRates (Basis
    
    Change in Net
    
    
    
    
    
    Rates (Basis
    
    
    Change in NetPoints)
    
    Interest Income ($)
    
    Percent Change
    
    
    Points)
    
    
    Interest Income ($)
    
    
    Percent Change200
    
    2,545
    
    
    4.0
    %
    
    
    200
    
    
    
    5,422
    
    
    
    8.3
    %100
    
    1,283
    
    
    2.0
    %
    
    
    100
    
    
    
    2,743
    
    
    
    4.2
    %0
    
    0
    
    
    0.0
    %
    
    
    0
    
    
    
    0
    
    
    
    0.0
    %-100
    
    -1,324
    
    
    2.1
    %
    
    
    -100
    
    
    
    -2,658
    
    
    
    4.1
    %-200
    
    -2,665
    
    
    4.2
    %
    
    
    -200
    
    
    
    -5,420
    
    
    
    8.3
    %
 Page 17




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##### Table of Contents



Loan Loss Provision
  Other Income and Expense
     Page 18




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Page 19




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##### Table of Contents



Federal Income Tax
 The effective tax rate for the three months ended September 30, 2005 was 20.8%, compared to
the same period in 2004 when the effective tax rate was 23.5% and compared to the second
quarter of 2005 when the effective tax rate was 19.1%. For the nine-month periods ending
September 30, 2005 and 2004, the effective tax rate was 21.4% and 22.8%, respectively. For
the year ended December 31, 2004, the effective tax rate was 23.8%. The primary reason for
the improvement in the effective tax rate in 2005 is the favorable tax treatment of a
bargain sale of the former Sun administrative headquarters building that occurred in the
second quarter of 2005, as well as increased tax credits for the investment in low-income
housing projects.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, equity
securities at a cost of $509,000 were sold in the first quarter, providing a gain of
$614,000. In the second and third quarters of 2005, other securities, principally equity
securities were sold, generating net gains of $549,000 and $134,000, respectively.During 2005, a trading account was established to record assets held in RABBI trusts with a
fair market value in the amount of $464,000.Total investment securities as a percentage of total assets at September 30, 2005 and
December 31, 2004 were 18.6% and 15.7%, respectively. Amortized cost of securities maturing
or repricing in one year or less comprised 24.0% of the total amortized cost of investment
securities of $367,287,000 as of September 30, 2005, as compared to 17.2% of total
investment securities of $322,555,000 as of December 31, 2004. There was $710,000 in
investments in instruments of foreign countries on September 30, 2005 and December 31, 2004.3.
    
    LoansLoans, net of unearned interest, decreased $97,354,000 or 7.3% in the first nine months of
2005 from the balance at December 31, 2004, bringing the total to $1,230,896,000 at
September 30, 2005. As part of a planned balance sheet restructuring following the Sun
acquisition, a block of personal and mortgage loans, with a carrying value of approximately
$22 million was sold in the first quarter of 2005. The remainder of the decrease in loans
was due to balance runoffs, primarily as a result of integrating two different credit
cultures after the acquisition of Sun in the fourth quarter of 2004. Following is a table
showing the composition of the loan portfolio (in thousands).
 September 30,
    
    
    December 31,2005
    
    
    2004Commercial, financial and agricultural
    
    $
    275,533
    
    
    $
    271,650Real estate  commercial
    
    
    472,122
    
    
    
    501,394Real estate  construction
    
    
    19,078
    
    
    
    25,301Real estate  mortgage
    
    
    245,904
    
    
    
    277,208Home equity
    
    
    136,244
    
    
    
    133,077Personal
    
    
    70,045
    
    
    
    107,859Lease financing
    
    
    13,795
    
    
    
    13,387Unearned interest
    
    
    (1,825
    )
    
    
    (1,626
    )Total
    
    $
    1,230,896
    
    
    $
    1,328,250Nonaccrual loans
    
    $
    7,006
    
    
    $
    5,220
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##### Table of Contents



2005
    
    
    2004Balance of allowance  beginning of period
    
    $
    15,644
    
    
    $
    10,569Loans charged off:Commercial, financial and agricultural
    
    
    290
    
    
    
    208Real estate  commercial
    
    
    165
    
    
    
    6Real estate  mortgage
    
    
    235
    
    
    
    173Personal
    
    
    632
    
    
    
    289Lease financing receivables
    
    
    15
    
    
    
    0Total charge-offs
    
    
    1,337
    
    
    
    676Recoveries of loans previously charged off:Commercial, financial and agricultural
    
    
    71
    
    
    
    7Real estate  commercial
    
    
    10
    
    
    
    1Real estate  mortgage
    
    
    41
    
    
    
    5Personal
    
    
    167
    
    
    
    88Lease financing receivables
    
    
    0
    
    
    
    0Total recoveries
    
    
    289
    
    
    
    101Net charge-offs
    
    
    1,048
    
    
    
    575Provision for loan losses
    
    
    612
    
    
    
    0Reclassification of off-balance sheet liability
    
    
    0
    
    
    
    (287
    )Balance of allowance  end of period
    
    $
    15,208
    
    
    $
    9,707
  September 30, 2005
    
    
    December 31, 2004Impaired loans:Recorded balance at period end
    
    $
    6,073,000
    
    
    $
    2,475,000Impaired loan balance for which there is a related allowance
    
    
    6,073,000
    
    
    
    2,475,000Amount of allowance for impaired loans
    
    
    1,449,000
    
    
    
    755,000Impaired loan balance for which there is no related allowance
    
    
    0
    
    
    
    0Average recorded balance
    
    
    4,685,667
    
    
    
    1,597,000
 Nine months endedSeptember 30, 2005
    
    
    September 30, 2004Interest income recognized (on a cash basis)
    
    $
    73,000
    
    
    $
    46,000
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##### Table of Contents



Non-performing Loans
 September 30,
    
    
    December 31,2005
    
    
    2004Non-accrual loans
    
    $
    7,006
    
    
    $
    5,220Accruing loans past due 90 days or more
    
    
    2,452
    
    
    
    2,667Restructured loans
    
    
    215
    
    
    
    220Total non-performing loans
    
    $
    9,673
    
    
    $
    8,107Non-performing loans as percent of allowance
    
    
    63.6
    %
    
    
    51.8
    %
 The increase of $1,566,000 in non-performing loans from December 31, 2004 to September 30,
2005 was due primarily to the increase in non-accrual loans. In the third quarter, a large
commercial loan relationship with outstanding loans of over $2.4 million was placed on
non-accrual status. Loans in this relationship have been allocated a specific loan loss
reserve as of September 30, 2005.4.
    
    Deposits and Other Sources of FundsDeposits provide the primary source of funding for loans and investment securities. As of
September 30, 2005, total deposits decreased by $54,232,000 as compared to December 31,
2004. The majority of this decrease is the result of a planned reduction in public funds
acquired as part of the Sun merger. As of September 30, 2005, non-interest bearing deposits
increased by $9,445,000, or 4.1% and interest bearing accounts decreased by $63,677,000, or
5.0% when compared to December 31, 2004.Borrowed funds are used as an additional source of funding for loans and investment
securities. As of September 30, 2005, Omega had short-term borrowings (maturities within one
year) in the amount of $107,798,000 as compared to $90,259,000 at December 31, 2004,
representing an increase of $17,539,000, or 19.4%.Long-term debt was $26,614,000 at September 30, 2005 compared to $99,579,000 at December 31,
2004. The decrease was due primarily to the early extinguishment of FHLB debt acquired
through the merger with Sun. Approximately $55 million of FHLB debt was repaid in the first
quarter of 2005, giving rise to a $1,043,000 gain from the early extinguishment of debt.
Additionally, long-term debt that had originated due to cash needs from the Sun merger in
the amount of $12,000,000 was repaid in the second quarter of 2005.The balance of junior subordinated debt was $56,816,000 and $57,190,000 at September 30,
2005 and December 31, 2004, 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 September 30, 2005, 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%.
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##### Table of Contents



6.
    
    Share Repurchase ProgramIn April of 2005, 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 12,610,951 common shares outstanding with 1,261,095 shares
eligible to be repurchased. This program will remain in effect through December 31, 2005, or
until the 10% limit is reached; however, the Board of Directors may discontinue it at any
time. As of September 30, 2005, 30,569 shares have been repurchased in conjunction with this
program, at an average cost of $29.06 per share.
 
   
  
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##### Table of Contents



(d) Maximum Number(c) Total Number of
    
    
    (or ApproximateShares (or Units)
    
    
    Dollar Value) ofPurchased as Part
    
    
    Shares (or Units)(a) Total Number of
    
    
    (b) Average Price
    
    
    of Publicly
    
    
    that May Yet BeShares (or Units)
    
    
    Paid per Share (or
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    Unit)
    
    
    Programs
    
    
    Plans or ProgramsJuly 1, 2005 to
July 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,252,295August 1, 2005 to
August 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,252,295September 1, 2005
to September 30,
2005
    
    
    21,769
    
    
    
    $28.84
    
    
    
    21,769
    
    
    
    1,230,526Total
    
    
    21,769
    
    
    
    $28.84
    
    
    
    21,769
    
    
    
    1,230,526
 
   
   
   
  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
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##### Table of Contents



OMEGA FINANCIAL CORPORATION(Registrant)November 9, 2005
    
    By:
    
    /s/ David B. LeeDate
    
    
    
    David B. LeeChairman and Chief Executive OfficerNovember 9, 2005
    
    
    
    /s/ Daniel L. WarfelDate
    
    
    
    Daniel L. WarfelExecutive Vice President and
Chief Financial Officer
 Page 25