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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, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from to
 Commission File Number: 0-13599
 OMEGA FINANCIAL CORPORATION
  Pennsylvania
    
    25-1420888(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 366 Walker Drive, State College, PA 16801
  (814) 231-7680
  Not applicable
   þ o
  o þ o
  o þ




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##### 



INDEX TO QUARTERLY REPORT ON FORM 10-Q
OMEGA FINANCIAL CORPORATION
 FORWARD LOOKING STATEMENTS DISCLOSURE
    
    
    3PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets  September 30, 2006 (unaudited)
and December 31, 2005
    
    
    4Consolidated Statements of Income (unaudited)  for the
three and nine month periods ended September 30, 2006 and
2005
    
    
    6Consolidated Statements of Cash Flows (unaudited)  for the
nine months ended September 30, 2006 and 2005
    
    
    8Notes to the Consolidated Financial Statements (unaudited)
    
    
    10Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    23Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4.
    
    Controls and Procedures
    
    
    33PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    35Item 1A.
    
    Risk Factors
    
    
    35Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3.
    
    Defaults Upon Senior Securities
    
    
    36Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    36Item 5.
    
    Other Information
    
    
    36Item 6.
    
    Exhibits
    
    
    36SIGNATURES
    
    
    
    
    37EXHIBIT INDEX
    
    
    
    
    38CHIEF EXECUTIVE OFFICER'S CERTIFICATION SECTION 302CHIEF FINANCIAL OFFICER'S CERTIFICATION SECTION 302CHIEF EXECUTIVE OFFICER'S CERTIFICATION SECTION 906CHIEF FINANCIAL OFFICER'S CERTIFICATION SECTION 906PRESS RELEASE ISSUED ON NOVEMBER 3, 2006
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 September 30,2006
    
    
    December 31,(unaudited)
    
    
    2005AssetsCash and due from banks
    
    $
    52,733
    
    
    $
    56,194Interest bearing deposits with other banks
    
    
    11,664
    
    
    
    8,908Federal funds sold
    
    
    7,150
    
    
    
    Trading securities
    
    
    43
    
    
    
    468Investment securities available for sale
    
    
    315,175
    
    
    
    347,300Other investments
    
    
    11,885
    
    
    
    6,055Investment in unconsolidated subsidiary
    
    
    1,625
    
    
    
    1,625Loans held for sale
    
    
    
    
    
    
    264Total portfolio loans
    
    
    1,152,089
    
    
    
    1,214,591Less: Allowance for loan losses
    
    
    (15,727
    )
    
    
    (15,482
    )Net portfolio loans
    
    
    1,136,362
    
    
    
    1,199,109Premises and equipment, net
    
    
    31,420
    
    
    
    35,997Other real estate owned
    
    
    525
    
    
    
    956Bank-owned life insurance
    
    
    75,706
    
    
    
    75,144Investment in limited partnerships
    
    
    5,964
    
    
    
    6,612Core deposit intangibles
    
    
    5,825
    
    
    
    6,729Other intangibles
    
    
    1,112
    
    
    
    1,193Goodwill
    
    
    159,387
    
    
    
    159,191Assets held for sale
    
    
    32,122
    
    
    
    Assets of discontinued operations
    
    
    
    
    
    
    4,599Other assets
    
    
    27,407
    
    
    
    29,635TOTAL ASSETS
    
    $
    1,876,105
    
    
    $
    1,939,979
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 September 30,2006
    
    
    December 31,(unaudited)
    
    
    2005Liabilities and Shareholders EquityDeposits:Non-interest bearing
    
    $
    236,783
    
    
    $
    236,683Interest bearing
    
    
    1,118,342
    
    
    
    1,185,847Total deposits
    
    
    1,355,125
    
    
    
    1,422,530Short-term borrowings
    
    
    62,708
    
    
    
    90,153ESOP debt
    
    
    1,574
    
    
    
    1,845Junior subordinated debentures
    
    
    56,318
    
    
    
    56,692Long-term debt
    
    
    28,224
    
    
    
    36,322Other interest bearing liabilities
    
    
    815
    
    
    
    882Liabilities held for sale
    
    
    34,690
    
    
    
    Liabilities of discontinued operations
    
    
    
    
    
    
    156Other liabilities
    
    
    14,262
    
    
    
    12,909TOTAL LIABILITIES
    
    
    1,553,716
    
    
    
    1,621,489Shareholders EquityPreferred stock, par value $5.00 per share:Authorized - 5,000,000 shares, none issuedCommon stock, par value $5.00 per share:Authorized - 25,000,000 shares;Issued -12,778,331 shares at September 30, 2006;12,670,323 shares at December 31, 2005;
    
    
    63,889
    
    
    
    63,368Outstanding -12,573,916 shares at September 30, 2006;12,599,508 shares at December 31, 2005;Capital surplus
    
    
    102,030
    
    
    
    99,874Retained earnings
    
    
    164,126
    
    
    
    159,583Accumulated other comprehensive income
    
    
    (550
    )
    
    
    (1,226
    )Unearned compensation related to ESOP debt
    
    
    (928
    )
    
    
    (1,125
    )Cost of common stock in treasury:204,415 shares at September 30, 200670,815 shares at December 31, 2005
    
    
    (6,178
    )
    
    
    (1,984
    )TOTAL SHAREHOLDERS EQUITY
    
    
    322,389
    
    
    
    318,490TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,876,105
    
    
    $
    1,939,979
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005Interest Income:Interest and fees on loans
    
    $
    20,621
    
    
    $
    19,887
    
    
    $
    60,830
    
    
    $
    58,846Interest and dividends on investment securities
    
    
    3,043
    
    
    
    2,975
    
    
    
    9,224
    
    
    
    8,031Other interest income
    
    
    516
    
    
    
    288
    
    
    
    858
    
    
    
    984TOTAL INTEREST INCOME
    
    
    24,180
    
    
    
    23,150
    
    
    
    70,912
    
    
    
    67,861Interest Expense:Interest on deposits
    
    
    6,824
    
    
    
    5,754
    
    
    
    19,128
    
    
    
    16,005Interest on short-term borrowings
    
    
    708
    
    
    
    576
    
    
    
    2,142
    
    
    
    1,504Interest on long-term debt and
other interest bearing liabilities
    
    
    1,259
    
    
    
    1,211
    
    
    
    3,771
    
    
    
    4,151TOTAL INTEREST EXPENSE
    
    
    8,791
    
    
    
    7,541
    
    
    
    25,041
    
    
    
    21,660NET INTEREST INCOME
    
    
    15,389
    
    
    
    15,609
    
    
    
    45,871
    
    
    
    46,201Provision for loan losses
    
    
    900
    
    
    
    290
    
    
    
    1,120
    
    
    
    612INCOME FROM CREDIT ACTIVITIES
    
    
    14,489
    
    
    
    15,319
    
    
    
    44,751
    
    
    
    45,589Other Income:Service fees on deposit accounts
    
    
    2,594
    
    
    
    2,409
    
    
    
    7,546
    
    
    
    6,857Service fees on loans
    
    
    445
    
    
    
    362
    
    
    
    1,270
    
    
    
    989Earnings on bank-owned life insurance
    
    
    620
    
    
    
    571
    
    
    
    1,779
    
    
    
    1,720Trust fees
    
    
    919
    
    
    
    1,017
    
    
    
    3,064
    
    
    
    3,188Investment and insurance product sales
    
    
    668
    
    
    
    619
    
    
    
    2,210
    
    
    
    2,429Gain on the early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,043Gain (loss) on sale of loans and other assets
    
    
    112
    
    
    
    (1
    )
    
    
    233
    
    
    
    (379
    )Net gains on the sale of investment securities
    
    
    577
    
    
    
    134
    
    
    
    815
    
    
    
    1,671Other
    
    
    1,226
    
    
    
    1,263
    
    
    
    3,607
    
    
    
    3,441TOTAL OTHER INCOME
    
    
    7,161
    
    
    
    6,374
    
    
    
    20,524
    
    
    
    20,959Other Expense:Salaries and employee benefits
    
    
    7,397
    
    
    
    7,527
    
    
    
    22,189
    
    
    
    22,046Net occupancy expense
    
    
    1,019
    
    
    
    1,002
    
    
    
    3,207
    
    
    
    3,105Equipment expense
    
    
    1,111
    
    
    
    1,028
    
    
    
    3,382
    
    
    
    3,124Data processing service
    
    
    683
    
    
    
    632
    
    
    
    2,001
    
    
    
    1,879Pennsylvania shares tax
    
    
    598
    
    
    
    107
    
    
    
    2,038
    
    
    
    1,275Amortization of intangible assets
    
    
    221
    
    
    
    234
    
    
    
    664
    
    
    
    591Other
    
    
    3,517
    
    
    
    4,384
    
    
    
    10,967
    
    
    
    12,354TOTAL OTHER EXPENSE
    
    
    14,546
    
    
    
    14,914
    
    
    
    44,448
    
    
    
    44,374Income before income taxes and discontinued
operations
    
    
    7,104
    
    
    
    6,779
    
    
    
    20,827
    
    
    
    22,174Income tax expense
    
    
    1,638
    
    
    
    1,388
    
    
    
    4,689
    
    
    
    4,771Income from continuing operations
    
    
    5,466
    
    
    
    5,391
    
    
    
    16,138
    
    
    
    17,403Discontinued operations:Income from discontinued operations, net of tax
    
    
    284
    
    
    
    174
    
    
    
    446
    
    
    
    120Loss on disposal of discontinued operations,
net of tax
    
    
    (393
    )
    
    
    
    
    
    
    (539
    )
    
    
    Income (Loss) from discontinued operations
    
    
    (109
    )
    
    
    174
    
    
    
    (93
    )
    
    
    120NET INCOME
    
    $
    5,357
    
    
    $
    5,565
    
    
    $
    16,045
    
    
    $
    17,523
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302006
    
    2005
    
    2006
    
    2005Net income per common shareBasic
    
    $
    0.43
    
    
    $
    0.44
    
    
    $
    1.28
    
    
    $
    1.39Diluted
    
    $
    0.43
    
    
    $
    0.44
    
    
    $
    1.27
    
    
    $
    1.38Net income per common share from
continuing operationsBasic
    
    $
    0.44
    
    
    $
    0.43
    
    
    $
    1.28
    
    
    $
    1.38Diluted
    
    $
    0.43
    
    
    $
    0.43
    
    
    $
    1.28
    
    
    $
    1.37Net income (loss) per common share from discontinued
operationsBasic
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    0.01Diluted
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    0.01Weighted average shares and equivalentsBasic
    
    
    12,560
    
    
    
    12,616
    
    
    
    12,573
    
    
    
    12,606Diluted
    
    
    12,592
    
    
    
    12,666
    
    
    
    12,615
    
    
    
    12,658Dividends declared per shareCommon
    
    $
    0.31
    
    
    $
    0.31
    
    
    $
    0.93
    
    
    $
    0.93
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedSeptember 302006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    16,045
    
    
    $
    17,523Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    3,827
    
    
    
    3,298Provision for loan losses and off-balance sheet reserve
    
    
    1,147
    
    
    
    582Gain on sale of investment securities
    
    
    (815
    )
    
    
    (1,671
    )Gain on early extinguishment of debt
    
    
    
    
    
    
    (1,043
    )Non-monetary gift
    
    
    
    
    
    
    45Gain on sale of fixed assets and other property owned
    
    
    (272
    )
    
    
    (21
    )Loss on sale of loans and leases
    
    
    
    
    
    
    381Provision for deferred income tax
    
    
    1,272
    
    
    
    4,171Increase in cash surrender value of bank owned life insurance
    
    
    (1,779
    )
    
    
    (1,720
    )(Increase) decrease in interest receivable and other assets
    
    
    (298
    )
    
    
    549(Decrease) in interest payable
    
    
    (645
    )
    
    
    (465
    )Increase in taxes payable
    
    
    552
    
    
    
    612Amortization of deferred net loan (fees) costs
    
    
    275
    
    
    
    (226
    )Deferral of net loan fees (costs)
    
    
    (442
    )
    
    
    157Increase (decrease) in accounts payable and accrued expenses
    
    
    1,549
    
    
    
    (3,343
    )Total adjustments
    
    
    4,371
    
    
    
    1,306Net cash provided by operating activities
    
    
    20,416
    
    
    
    18,829Cash flows from investing activities:Investment securities available for sale:Proceeds from sales
    
    
    11,869
    
    
    
    61,591Proceeds from maturities
    
    
    74,300
    
    
    
    38,472Cash used for purchases
    
    
    (58,713
    )
    
    
    (144,874
    )Proceeds from sale of Trading Account
    
    
    435
    
    
    
    (Increase) decrease in interest bearing deposits with other banks
    
    
    (2,756
    )
    
    
    24,141Decrease in loans and leases
    
    
    27,371
    
    
    
    68,759Gross proceeds from sale of loans and leases
    
    
    6,409
    
    
    
    27,644Return of capital (investment) in limited partnership
    
    
    46
    
    
    
    (84
    )Sale of investment in limited partnership
    
    
    
    
    
    
    1,088Capital expenditures
    
    
    (1,719
    )
    
    
    (5,254
    )Sale of fixed assets and other property owned
    
    
    1,316
    
    
    
    2,344Sale of discontinued operations
    
    
    4,875
    
    
    
    Payout from bank owned life insurance
    
    
    1,217
    
    
    
    (Increase) decrease in federal funds sold
    
    
    (7,150
    )
    
    
    36,350Net cash provided by investing activities
    
    
    57,500
    
    
    
    110,177
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 302006
    
    
    2005Cash flows from financing activities:Net change in demand deposits, checking with interest and savings
    
    $
    (48,779
    )
    
    $
    (33,048
    )Net change in time deposits
    
    
    16,744
    
    
    
    (20,046
    )Decrease in short-term borrowings, net
    
    
    (36,045
    )
    
    
    16,039Issuance of long term debt
    
    
    1,500
    
    
    
    Principal payment on long term debt
    
    
    (1,008
    )
    
    
    (70,562
    )Net change in other interest bearing liabilities
    
    
    (67
    )
    
    
    (2
    )Dividends paid
    
    
    (11,728
    )
    
    
    (11,726
    )Issuance of common stock
    
    
    2,677
    
    
    
    1,296Acquisition of treasury stock
    
    
    (4,194
    )
    
    
    (889
    )Net cash used in financing activities
    
    
    (80,900
    )
    
    
    (118,938
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (2,984
    )
    
    $
    10,068Cash and cash equivalents at beginning of period
    
    $
    56,194
    
    
    $
    47,877Cash and cash equivalents at end of period
    
    
    53,210
    
    
    
    57,945Net (decrease) increase in cash and cash equivalents
    
    $
    (2,984
    )
    
    $
    10,068Supplemental InformationInterest paid
    
    $
    25,695
    
    
    $
    22,125Income taxes paid
    
    
    3,706
    
    
    
    Supplemental schedule of noncash investing and financing activities:Transfers of loans to other real estate owned
    
    $
    582
    
    
    $
    73Cash and cash equivalentsCash equivalents consist of non-interest bearing deposits with other banks
and are classified as follows:
 September 302006
    
    
    2005Cash and due from banks
    
    $
    52,733
    
    
    $
    56,194Cash included in Assets Held for Sale
    
    
    477
    
    
    
    Total cash
    
    $
    53,210
    
    
    $
    56,194
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OMEGA FINANCIAL CORPORATION AND SUBSIDIARIES
 
   A.
    
    Basis of PresentationThe accompanying Consolidated Financial Statements include Omega Financial Corporation
(Omega, the Company or the Corporation), a financial holding company, and the combined
results of its wholly owned banking and non-banking subsidiaries. The accompanying unaudited
financial statements have been prepared in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, including normal recurring
accruals, considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 2006 are not necessarily
indicative of the results that may be experienced for the fiscal year ending December 31,
2006 or any other interim period. For further information, refer to the Consolidated
Financial Statements and Footnotes included in the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2005.B.
    
    Significant Accounting PoliciesThe following significant accounting policies should be read in conjunction with the Summary
of Significant Accounting Policies included in the notes to consolidated financial
statements included in the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2005.Allowance for loan lossesFor financial reporting purposes, the provision for loan losses charged to current operating
income is based on managements estimates, and actual losses may vary from estimates. These
estimates are reviewed and adjusted at least quarterly and are reported in earnings in the
periods in which they become known. In determining the adequacy of the allowance for loan
losses, management makes specific allocations to watch list loans and pools of non-watch
list loans for various credit risk factors, including the composition
and growth of the loan portfolio, overall portfolio quality, levels of delinquent loans,
specific problem loans, prior loan loss experience and current economic conditions that may
affect a borrowers ability to pay. The loan loss provision for federal income tax purposes
is based on current income tax regulations, which allow for deductions equal to net
charge-offs.Goodwill and other intangible assetsGoodwill represents the excess of the cost of an acquisition over the fair value of the net
assets acquired. Other intangible assets represent purchased assets that also lack physical
substance but can be separately distinguished from goodwill because of contractual or other
legal rights or because the asset is capable of being sold or exchanged either on its own or
in combination with a related contract, asset or liability. It is Omegas policy that
goodwill be tested at least annually for impairment at the reporting segment level.
Goodwill impairment is measured by comparing the implied fair value of goodwill to its
carrying value.Intangible assets with finite lives include core deposits, customer relationships and trade
names. Intangible assets are subject to impairment testing whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Core deposit,
customer relationship and certain trade name intangibles are amortized over a period of time
that represents their expected life using a method of amortization that reflects the pattern
of economic benefit. Impairment of intangible assets is measured as the difference between
present value of future cash flows and its carrying value.
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Stock-based compensationIn December 2004, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share Based Payments (SFAS
123R), an amendment to SFAS 123, Accounting for StockBased Compensation. SFAS 123R
establishes accounting requirements for share-based compensation to employees and carries
forward prior guidance on accounting for awards to non-employees. The provisions of this
statement became effective January 1, 2006 for all equity awards granted after the effective
date and for vesting or modifications of previously issued awards. SFAS 123R requires an
entity to recognize compensation expense based on an estimate of the number of awards
expected to vest, exclusive of awards expected to be forfeited. The Corporation adopted
SFAS 123R on January 1, 2006, on a modified prospective basis. At December 31, 2005, all
awards previously granted by Omega were fully vested and no additional grants have been
awarded as of September 30, 2006; therefore, there is no related expense recognized in the
first nine months of 2006. Future expense will depend on the type, amount, timing and
vesting provisions of the share-based compensation granted.Previous to January 1, 2006, Omega accounted for stock-based compensation using the
intrinsic value method in accordance with Accounting Principles Board (APB) Opinion 25,
Accounting for Stock Issued to Employees, and had adopted the disclosure provisions of
FASB No. 148, Accounting for Stock-Based Compensation. The following pro forma information
for the three and nine months ended September 30, 2005, regarding net income and earnings
per share assumes the adoption of Statement No. 123 for stock options granted subsequent to
December 31, 1994. The estimated fair value of the options were amortized to expense over
the vesting period.The fair value was estimated at the date of grant using a Black-Scholes option-pricing model
utilizing various assumptions. Compensation expense, net of related tax, is included in the
pro forma net income reported below (in thousands, except per share data.)
 Three Months Ended
    
    Nine Months EndedSeptember 30, 2005
    
    September 30, 2005Net income
    
    As reported
    
    $5,565
    
    $17,523Pro forma
    
    5,565
    
    17,515Compensation expense, net of tax
    
    
    
    
    
    8Basic earnings per share
    
    As reported
    
    $  0.44
    
    $   1.39Pro forma
    
    0.44
    
    1.39Diluted earnings per share
    
    As reported
    
    $  0.44
    
    $   1.38Pro forma
    
    0.44
    
    1.38
 The Black-Scholes option valuation model was developed for use in estimating the fair value
of traded options, which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because Omegas employee stock options have
characteristics significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Companys employee stock options.Omega has six stock-based compensation plans, which provide for the granting of qualified
and non-qualified stock options to both employees and directors. The plans include the
Employee Stock Purchase Plan (ESPP), the Stock Option Plan (1986) (the 1986 Plan), the
1996 Employee Stock Option Plan (the 1996 Plan), the 2006 Equity Incentive Plan (the 2006
Plan), the Non-Employee Director Stock Option Plan (1994) (the 1994 Plan) and the 2004
Stock Option Plan for Non-Employee Directors (the 2004 Plan).No options have been issued under any of these plans in 2006 and all options previously
issued were vested prior to January 1, 2006. Therefore, no compensation expense has been
recognized in the first nine months of 2006.The ESPP provides for options to purchase common stock of Omega to all employees of Omega
and its subsidiaries who meet certain service requirements. As of September 30, 2006, the
aggregate number of shares that may be issued under the ESPP is 419,753 shares. ESPP options
outstanding at September 30,
 Page 11




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##### Table of Contents



2006 have a current weighted-average exercise price of $31.84 and a weighted average
remaining contractual life of 2.35 years. There were 132,720 options outstanding as of
September 30, 2006 and all of these options are exercisable.The 1986 Plan, the 1996 Plan and the 2006 Plan (collectively, the SOPs or the Plans)
provide options to purchase common stock of Omega to officers and key employees. Options
under the 2006 Plan can also be granted to Omegas directors. The 2006 Plan also authorizes
awards of stock, restricted stock, restricted stock units and other equity awards. No
additional grants will be made under the 1986 and 1996 Plans because future grants will be
made only under the 2006 Plan. As of September 30, 2006, the aggregate number of shares
that may be issued under the Plans were 1,046,447 shares. The SOPs options outstanding at
September 30, 2006 a have weighted average exercise price of $32.63 and a weighted average
remaining contractual life of 4.63 years. As of September 30, 2006, there were 502,008
options outstanding under these plans and all are exercisable.The 1994 Plan and the 2004 Plan (collectively, the Director Plans) provide options to
purchase common stock of Omega to the Corporations directors. No additional awards will be
granted under the Director Plans as future options to directors will be granted under the
2006 Plan. Director Plan options outstanding at September 30, 2006 have a weighted average
exercise price of $32.27. As of September 30, 2006, 33,864 of these options were
outstanding and exercisable.A summary of the status of Omegas stock-based compensation plans as of September 30, 2006
is presented below:
 ESPP
    
    SOPsWeighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding, December 31, 2005
    
    
    156,259
    
    
    $
    31.82
    
    
    
    601,460
    
    
    $
    31.63GrantedAcquired optionsExercised
    
    
    (14,900
    )
    
    
    27.60
    
    
    
    (88,216
    )
    
    
    25.37Forfeited
    
    
    (8,639
    )
    
    
    31.63
    
    
    
    (11,236
    )
    
    
    36.06Outstanding, September 30, 2006
    
    
    132,720
    
    
    
    31.84
    
    
    
    502,008
    
    
    
    32.63Options exercisable at September 30, 2006
    
    
    132,720
    
    
    
    
    
    
    
    502,008
 Director PlansWeighted-AverageExerciseShares
    
    PriceOutstanding, December 31, 2005
    
    
    36,210
    
    
    $
    32.20GrantedAcquired optionsExercised
    
    
    (1,146
    )
    
    
    24.63Forfeited
    
    
    (1,200
    )
    
    
    21.33Outstanding, September 30, 2006
    
    
    33,864
    
    
    
    32.27Options exercisable at September 30, 2006
    
    
    33,864
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ReclassificationCertain amounts in the 2005 financial statements have been reclassified to segregate
balances and results associated with discontinued operations and to conform to the 2006
presentation. The reclassification had no impact on net income.C.
    
    Discontinued OperationsOn September 15, 2006, the Corporation completed the sale of Sentry Trust Company, a
non-depository trust company with approximately $450 million in assets under management.
Proceeds from the sale were $4.9 million, and the Corporation recognized a loss of $.5
million from the sale, net of tax. The results of Sentry are reflected as discontinued
operations in the consolidated statements of income. The related assets and liabilities of
Sentry Trust have been segregated as such on the consolidated balance sheet as of December
31, 2005. A final component of the sale relates to the settlement of working capital and, as
a result, a receivable of $245,000 is included in other assets at September 30, 2006.The following is a summary of the assets and liabilities of discontinued operations related
to the sale of Sentry Trust (in thousands):
 September 15
    
    
    December 312006
    
    
    2005Assets:Premise and equipment
    
    $
    2,343
    
    
    $
    2,394Goodwill
    
    
    1,610
    
    
    
    1,813Other intangible
    
    
    1,233
    
    
    
    1,336Other assets
    
    
    
    
    
    
    (944
    )Total assets
    
    $
    5,186
    
    
    $
    4,599Liabilities:Other liabilities
    
    $
    348
    
    
    $
    156Total liabilities
    
    $
    348
    
    
    $
    156
 The results of Sentry Trust are presented as discontinued operations on the consolidated
statements of income. The following is a summary of the income from discontinued operations
for the three and nine months ended September 30, 2006 and 2005 (in thousands).
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Other Income:Trust fees
    
    $
    633
    
    
    $
    524
    
    
    $
    1,606
    
    
    $
    1,495Investment and insurance product sales
    
    
    5
    
    
    
    30
    
    
    
    41
    
    
    
    71Other
    
    
    50
    
    
    
    (30
    )
    
    
    50
    
    
    
    Total other Income
    
    
    688
    
    
    
    524
    
    
    
    1,697
    
    
    
    1,566Other Expense:Salaries and employee benefits
    
    
    145
    
    
    
    193
    
    
    
    585
    
    
    
    946Net occupancy expense
    
    
    (4
    )
    
    
    (55
    )
    
    
    4
    
    
    
    18Equipment expense
    
    
    
    
    
    
    13
    
    
    
    21
    
    
    
    36Pennsylvania shares tax
    
    
    40
    
    
    
    
    
    
    
    81
    
    
    
    Amortization of intangible assets
    
    
    28
    
    
    
    40
    
    
    
    102
    
    
    
    120Other
    
    
    40
    
    
    
    87
    
    
    
    216
    
    
    
    330Total other expense
    
    
    249
    
    
    
    278
    
    
    
    1,009
    
    
    
    1,450Income from discontinued operations before
taxes and disposal
    
    
    439
    
    
    
    246
    
    
    
    688
    
    
    
    116Income tax expense
    
    
    155
    
    
    
    72
    
    
    
    242
    
    
    
    (4
    )Income from discontinued operations
    
    $
    284
    
    
    $
    174
    
    
    $
    446
    
    
    $
    120
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##### Table of Contents



The following is a summary of the cash flows from discontinued operations for the nine
months ended September 30, 2006 and 2005 (in thousands).
 September 30,2006
    
    
    2005Net cash provided by (used in) operating activities
    
    $
    206
    
    
    $
    (279
    )Net cash provided by investing activities
    
    
    712
    
    
    
    277Net cash provided by (used in) financing activities
    
    
    (1,430
    )
    
    
    600Net increase(decrease) in cash and cash
equivalents of discontinued operations
    
    $
    (512
    )
    
    $
    598
 D.
    
    Assets and Liabilities Held for SaleOn July 31, 2006, Omega entered into agreements to sell three branch locations of Omega
Bank. All three branches were acquired by Omega as part of the Sun Bancorp, Inc.
acquisition in 2004 and are being sold as part of the Companys continuing efforts to refine
its retail operations after the Sun merger. The sale of the Mechanicsburg Office was
completed on October 11th, 2006, and the Steelton and Middletown locations are
expected to close before December 31, 2006. The anticipated result of the sale of the three
branches is a pre-tax gain of approximately $2.3 million. The gain on the sale of
Mechanicsburg was recognized on October 11, 2006 and the gain on the remaining two branches
will be recognized at the time of closing of the transactions, which is anticipated to be in
the fourth quarter of 2006. As of September 30, 2006, outstanding loans in the three
branches totaled $27.9 million and deposits totaled $34.7 million. The assets and
liabilities of these branches are classified as held for sale on the September 30, 2006
consolidated balance sheet.The following is a summary of the assets and liabilities held for sale related to the sale
of the branches as of September 30, 2006 (in thousands).
 September 30,2006Assets Held for SaleCash
    
    $
    477Net loans
    
    
    27,758Premise and equipment
    
    
    3,390Core deposit intangible
    
    
    321Other assets
    
    
    176Total assets held for sale
    
    $
    32,122Liabilities Held for SaleDeposits:Non-interest bearing
    
    $
    2,804Interest bearing
    
    
    31,859Total deposits
    
    
    34,663Other liabilities
    
    
    27Total liabilities held for sale
    
    $
    34,690
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##### Table of Contents



E.
    
    Commitments, Contingent Liabilities and GuaranteesIn 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, 2006, standby letters of credit issued and outstanding amounted to $28.1
million as compared to $26.5 million on December 31, 2005. The fair market value of the
standby letters of credit at September 30, 2006 and December 31, 2005 was $135,000 and
$139,000, respectively. The fair market value of standby letters of credit is recorded as a
liability in accordance with FIN 45.At September 30, 2006, the bank had $293.8 million outstanding in loan commitments and other
unused lines of credit extended to its customers. Of this amount $212.2 million, or 72.2%,
were commercial commitments. The remaining amounts of $81.6 million 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 $5.0 million, which
is collateralized by a mortgage on the Corporations administrative center and the
Corporations guarantee. As of September 30, 2006, the balance of the ESOP debt was $1.6
million as compared to $1.8 million at December 31, 2005.F.
    
    Investment SecuritiesThe following schedule presents the composition of the investment portfolio as of September
30, 2006 and December 31, 2005 (in thousands).
 Securities Classified as Available for SaleGross
    
    
    Gross
    
    
    EstimatedSeptember 30, 2006
    
    Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    192,884
    
    
    $
    130
    
    
    $
    (1,837
    )
    
    $
    191,177Obligations of state and political subdivisions
    
    
    28,794
    
    
    
    3
    
    
    
    (411
    )
    
    
    28,386Corporate and other securities
    
    
    3,327
    
    
    
    7
    
    
    
    (30
    )
    
    
    3,304Mortgage-backed securities
    
    
    85,997
    
    
    
    78
    
    
    
    (1,351
    )
    
    
    84,724Common Stock
    
    
    5,019
    
    
    
    2,585
    
    
    
    (20
    )
    
    
    7,584Total
    
    $
    316,021
    
    
    $
    2,803
    
    
    $
    (3,649
    )
    
    $
    315,175
 Securities Classified as Available for SaleGross
    
    
    Gross
    
    
    EstimatedDecember 31, 2005
    
    Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    213,566
    
    
    $
    
    
    
    $
    (3,443
    )
    
    $
    210,123Obligations of state and political subdivisions
    
    
    56,290
    
    
    
    57
    
    
    
    (608
    )
    
    
    55,739Corporate and other securities
    
    
    3,420
    
    
    
    8
    
    
    
    (40
    )
    
    
    3,388Mortgage-backed securities
    
    
    69,992
    
    
    
    70
    
    
    
    (1,420
    )
    
    
    68,642Common Stock
    
    
    5,917
    
    
    
    3,507
    
    
    
    (16
    )
    
    
    9,408Total
    
    $
    349,185
    
    
    $
    3,642
    
    
    $
    (5,527
    )
    
    $
    347,300
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##### Table of Contents



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, 2006 and December 31, 2005 (in thousands):
 September 30, 2006
    
    Less Than 12 Months
    
    
    12 Months or LongerFair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    1,000
    
    
    $
    
    
    
    $
    164,072
    
    
    $
    1,836Obligations of state and political subdivisions
    
    
    629
    
    
    
    10
    
    
    
    25,559
    
    
    
    402Corporate and other securities
    
    
    202
    
    
    
    2
    
    
    
    1,482
    
    
    
    28Mortgage-backed securities
    
    
    16,338
    
    
    
    90
    
    
    
    55,724
    
    
    
    1,260Debt securities
    
    
    18,169
    
    
    
    102
    
    
    
    246,837
    
    
    
    3,526Common stock
    
    
    142
    
    
    
    21
    
    
    
    
    
    
    
    Total temporarily impaired securities
    
    $
    18,311
    
    
    $
    123
    
    
    $
    246,837
    
    
    $
    3,526
 December 31, 2005
    
    Less Than 12 Months
    
    
    12 Months or LongerFair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Treasury securities and obligations of other
U.S. Government agencies and corporations
    
    $
    88,226
    
    
    $
    894
    
    
    $
    121,897
    
    
    $
    2,549Obligations of state and political subdivisions
    
    
    13,923
    
    
    
    148
    
    
    
    19,300
    
    
    
    460Corporate and other securities
    
    
    969
    
    
    
    10
    
    
    
    1,320
    
    
    
    30Mortgage-backed securities
    
    
    47,865
    
    
    
    1,012
    
    
    
    18,482
    
    
    
    408Debt securities
    
    
    150,983
    
    
    
    2,064
    
    
    
    160,999
    
    
    
    3,447Common stock
    
    
    147
    
    
    
    16
    
    
    
    
    
    
    
    Total temporarily impaired securities
    
    $
    151,130
    
    
    $
    2,080
    
    
    $
    160,999
    
    
    $
    3,447
 The unrealized losses at September 30, 2006 are considered to be temporary impairments, as
the majority of the investments are debt securities whose decline in value is due primarily
to interest rate fluctuations. As a result, management believes the payment of contractual
cash flows, including principal repayment, is not at risk. Management has the intent and
ability to hold these investments until market recovery or maturity. Debt securities with
unrealized losses for a period of less than 12 months include 1 investment in U.S.
Government agency debt securities, 9 investments in mortgage-backed securities, 3
investments in corporate securities and 6 investments in obligations of state and municipal
subdivisions. Debt securities with unrealized losses for a period of 12 months or longer
include 78 investments in U.S. Government agency debt securities, 10 investments in
corporate securities, 63 investments in obligations of state and municipal subdivisions and
33 investments in mortgage-backed securities. Debt securities included in the above table
have maturity or pre-refund dates ranging from October 2006 to May 2027. The unrealized loss
position for each individual security ranges from .01% to 4.49% of the securities amortized
cost as of September 30, 2006.Omegas policy requires quarterly reviews of all 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 Company, 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.
 Page 16




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##### Table of Contents



Trading securities at September 30, 2006 consist of assets held in Rabbi Trusts (the
Trusts), including mutual funds and cash equivalents. During the first quarter of 2006,
investments with a market value of $435,000 were liquidated and paid out of the Trusts. The
increase in the market value of the remaining trading securities during the nine months
ended September 30, 2006 was $6,000.Other investments primarily include Federal Reserve Bank and Federal Home Loan Bank stock.
The increase in other investments from December 31, 2005 of $5.8 million is due to the
acquisition of additional Federal Reserve Bank stock.G.
    
    Allowance for Loan LossThe Allowance for Loan Losses at September 30, 2006 was $15.7 million and included specific
reserves allocated to one commercial borrower with outstanding loan balances of $20 million
that filed for bankruptcy protection in the first quarter of 2006. Omega has estimated and
provided for known exposures for this credit; however, evaluations of the credit continue.
The ongoing analysis may cause this estimate to change in the future and actual losses
resulting from the credit may differ materially from current estimates.In addition, at September 30, 2006, $.9 million of the loan loss reserve was specifically
allocated to one commercial borrower with an outstanding loan balance of $1.5 million. At
September 30, 2006, this loan was in performing status, however, in November 2006, the
borrower filed for bankruptcy protection. After that , the Company entered into an agreement
to sell the loan at a loss equivalent to the amount allocated in the loan loss reserve;
therefore no additional losses are expected for this loan.H.
    
    Long-term DebtThe following schedule shows the composition of long-term debt (in thousands).
 September 30
    
    
    December 312006
    
    
    2005Notes payable to Federal Home Loan Bank, with fixed rates
between 3.29% and 6.80%
    
    $
    28,224
    
    
    $
    32,732Notes payable to another financial institution with a fixed interest
rate of 2.84%
    
    
    
    
    
    
    3,590Total Long Term Debt
    
    $
    28,224
    
    
    $
    36,322ESOP Debt Guarantee
    
    $
    1,574
    
    
    $
    1,845
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##### Table of Contents



I.
    
    Comprehensive IncomeComponents of other comprehensive income consist of the following (in thousands):
 Three Months Ended
    
    
    Three Months EndedSeptember 30, 2006
    
    
    September 30, 2005Tax
    
    
    Net
    
    
    
    
    
    
    Tax
    
    
    NetBefore
    
    
    Expense
    
    
    of
    
    
    Before
    
    
    Expense
    
    
    ofTax
    
    
    or
    
    
    Tax
    
    
    Tax
    
    
    or
    
    
    TaxAmount
    
    
    (Benefit)
    
    
    Amount
    
    
    Amount
    
    
    (Benefit)
    
    
    AmountNet income from continuing
operations
    
    $
    7,104
    
    
    $
    1,638
    
    
    $
    5,466
    
    
    $
    6,779
    
    
    $
    1,388
    
    
    $
    5,391Net income from discontinued
operations
    
    
    51
    
    
    
    160
    
    
    
    (109
    )
    
    
    246
    
    
    
    72
    
    
    
    174Net income
    
    
    7,155
    
    
    
    1,798
    
    
    
    5,357
    
    
    
    7,025
    
    
    
    1,460
    
    
    
    5,565Other comprehensive income:Unrealized gains on available
for sale securities:Unrealized holding gains
(losses) arising during the
period
    
    
    2,860
    
    
    
    1,001
    
    
    
    1,859
    
    
    
    (2,045
    )
    
    
    (716
    )
    
    
    (1,329
    )Less reclassification adjustment
for gains included in net income
    
    
    (577
    )
    
    
    (202
    )
    
    
    (375
    )
    
    
    (135
    )
    
    
    (47
    )
    
    
    (88
    )Other comprehensive income (loss)
    
    
    2,283
    
    
    
    799
    
    
    
    1,484
    
    
    
    (2,180
    )
    
    
    (763
    )
    
    
    (1,417
    )Total comprehensive income
    
    $
    9,438
    
    
    $
    2,597
    
    
    $
    6,841
    
    
    $
    4,845
    
    
    $
    697
    
    
    $
    4,148
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2005Tax
    
    
    Net
    
    
    
    
    
    
    Tax
    
    
    NetBefore
    
    
    Expense
    
    
    of
    
    
    Before
    
    
    Expense
    
    
    ofTax
    
    
    or
    
    
    Tax
    
    
    Tax
    
    
    or
    
    
    TaxAmount
    
    
    (Benefit)
    
    
    Amount
    
    
    Amount
    
    
    (Benefit)
    
    
    AmountNet income from continuing
operations
    
    $
    20,827
    
    
    $
    4,689
    
    
    $
    16,138
    
    
    $
    22,174
    
    
    $
    4,771
    
    
    $
    17,403Net income from discontinued
operations
    
    
    725
    
    
    
    818
    
    
    
    (93
    )
    
    
    116
    
    
    
    (4
    )
    
    
    120Net income
    
    
    21,552
    
    
    
    5,507
    
    
    
    16,045
    
    
    
    22,290
    
    
    
    4,767
    
    
    
    17,523Other comprehensive income:Unrealized gains on available
for sale securities:Unrealized holding gains
(losses) arising during the
period
    
    
    1,855
    
    
    
    649
    
    
    
    1,206
    
    
    
    (3,711
    )
    
    
    (1,299
    )
    
    
    (2,412
    )Less reclassification adjustment
for gains included in net income
    
    
    (815
    )
    
    
    (285
    )
    
    
    (530
    )
    
    
    (1,671
    )
    
    
    (585
    )
    
    
    (1,086
    )Other comprehensive income (loss)
    
    
    1,040
    
    
    
    364
    
    
    
    676
    
    
    
    (5,382
    )
    
    
    (1,884
    )
    
    
    (3,498
    )Total comprehensive income
    
    $
    22,592
    
    
    $
    5,871
    
    
    $
    16,721
    
    
    $
    16,908
    
    
    $
    2,883
    
    
    $
    14,025
 Page 18




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##### Table of Contents



J.
    
    Earnings Per ShareBasic earnings per share are computed by dividing income available to common stockholders by
the weighted average number of shares outstanding for the period. On a diluted basis, both
earnings and shares outstanding are adjusted to assume the conversion of all potentially
dilutive securities into common stock (in thousands, except per share amounts.)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005NumeratorIncome from continuing operations
    
    $
    5,466
    
    
    $
    5,391
    
    
    $
    16,138
    
    
    $
    17,403Income (loss) from discontinued operations
    
    
    (109
    )
    
    
    174
    
    
    
    (93
    )
    
    
    120Net Income
    
    $
    5,357
    
    
    $
    5,565
    
    
    $
    16,045
    
    
    $
    17,523DenominatorBasic weighted-average shares outstanding
    
    
    12,560
    
    
    
    12,616
    
    
    
    12,573
    
    
    
    12,606Dilutive potential shares from stock-basked compensation
    
    
    28
    
    
    
    46
    
    
    
    38
    
    
    
    48Potential Shares required for contract settlement
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Dilutive weighted-average shares outstanding
    
    
    12,592
    
    
    
    12,666
    
    
    
    12,615
    
    
    
    12,658Earnings per share  BasicIncome from continuing operations
    
    $
    0.44
    
    
    $
    0.43
    
    
    $
    1.28
    
    
    $
    1.38Income (loss) from discontinued operations
    
    
    (0.01
    )
    
    
    0.01
    
    
    
    (0.01
    )
    
    
    0.01Net Income (1)
    
    $
    0.43
    
    
    $
    0.44
    
    
    $
    1.28
    
    
    $
    1.39Earnings per share  DilutedIncome from continuing operations
    
    $
    0.43
    
    
    $
    0.43
    
    
    $
    1.28
    
    
    $
    1.37Income (loss) from discontinued operations
    
    
    (0.01
    )
    
    
    0.01
    
    
    
    (0.01
    )
    
    
    0.01Net Income (1)
    
    $
    0.43
    
    
    $
    0.44
    
    
    $
    1.27
    
    
    $
    1.38
 
 (1)
    
    Totals may not sum due to rounding. Page 19




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##### Table of Contents



K.
    
    Goodwill and Other Intangible AssetsAs a result of the acquisition of Sun Bancorp, Inc. in the fourth quarter of 2004, Omega
recorded core deposit intangible assets and goodwill of $7.7 million and $161.2 million,
respectively. The recorded goodwill balance at September 30, 2006 was $159.4 million.
Managements current analysis indicates that as of September 30, 2006, a decline in Omegas
market capitalization in excess of 13.9% would trigger further analysis of the carrying
value of goodwill, which could result in an adjustment to its value. The weighted average
life of all finite-lived intangible assets is 8.25 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, 2006 and December 31, 2005 follows (in thousands):
 September 30,
    
    December 31,2006
    
    2005Core deposit intangibleGross carrying amount
    
    $
    7,885
    
    
    $
    7,885Less: accumulated amortization
    
    
    1,739
    
    
    
    1,156Net carrying amount
    
    
    6,146
    
    
    
    6,729Customer relationship intangiblesGross carrying amount
    
    
    1,200
    
    
    
    2,700Less: accumulated amortization
    
    
    218
    
    
    
    307Net carrying amount
    
    
    982
    
    
    
    2,393Trade name intangible with finite lifeGross carrying amount
    
    
    
    
    
    
    36Less: accumulated amortization
    
    
    
    
    
    
    30Net carrying amount
    
    
    
    
    
    
    6Total finite-lived intangiblesGross carrying amount
    
    
    9,085
    
    
    
    10,621Less: accumulated amortization
    
    
    1,957
    
    
    
    1,493Net carrying amount
    
    
    7,128
    
    
    
    9,128Trade name intangible with infinite lifeGross carrying amount
    
    $
    130
    
    
    $
    130
 The net carrying amount of the core deposit intangible above includes $321,000 related to
the three branch locations being sold and is classified on the balance sheet in assets held
for sale. The customer relationship intangible at December 31, 2005 included $1.336 million
related to Sentry Trust and is classified on the balance sheet as assets of discontinued
operations. The trade name intangible with finite life is the Sentry trade name and is
classified on the balance sheet as assets of discontinued operations at December 31, 2005.
Goodwill of $1.813 million has been allocated to Sentry Trust and is classified on the
balance sheet as assets of discontinued operations at December 31, 2005.
 Page 20




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##### Table of Contents



L.
    
    New Accounting PronouncementsIn March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets
(SFAS 156), an amendment of FASB Statement No. 140. SFAS No. 156 requires an entity to
recognize a servicing asset or servicing liability each time it undertakes an obligation to
service a financial asset by entering into a servicing contract in specific situations.
Additionally, the servicing asset or liability shall be initially measured at fair value;
however, an entity may elect the amortization method or fair value method for
subsequent balance sheet reporting periods. SFAS No. 156 is effective as of an entitys
first fiscal year beginning after September 15, 2006. Early adoption is permitted as of
the beginning of an entitys fiscal year, provided the entity has not yet issued financial
statements, including interim financial statements, for any period of that fiscal year.
The Company does not expect the adoption of this statement to have a material impact on our
consolidated financial condition, results of operations or cash flows.In June 2006, the Emerging Issues Task Force (EITF) released Issue No. 06-4, Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar
Life Insurance Arrangements (EITF 06-4). This EITF consensus opinion was ratified by
the FASB on September 20, 2006. EITF 06-4 requires employers who have entered into a
split-dollar life insurance arrangement with an employee that extends to post-retirement
periods, to recognize a liability and related compensation costs in accordance with SFAS
No. 106, Accounting for Post Retirement Benefit Obligations or Accounting Principles
Board Opinion No. 12, Omnibus Opinion. The effective date of EITF No. 06-4 is for
fiscal years beginning after December 15, 2006, and the opinion may be adopted through
either a cumulative effect adjustment to retained earnings at the beginning of the year of
adoption, or through retrospective application to prior periods. Management has not yet
completed the analysis required to determine the impact of this new accounting standard on
the Corporations consolidated financial statements. This analysis is currently in process
and will be completed during the fourth quarter of 2006.In May 2006, the EITF released Issue No. 06-5, Accounting for Purchases of Life
InsuranceDetermining the Amount That Could Be Realized in Accordance with FASB Technical
Bulletin No. 85-4, Accounting for Purchases of Life Insurance (EITF 06-05). This EITF
consensus opinion was ratified by the FASB on September 20, 2006. EITF 06-5 provides
clarifying guidance on determining the amount that could be realized from a life insurance
contract, which is the measurement amount for the asset in accordance with Technical
Bulletin 85-4. The effective date of EITF 06-5 is for fiscal years beginning after
December 15, 2006, and should be applied as either a change in accounting principle through
a cumulative effect adjustment to retained earnings or a change in accounting principle
through retrospective application to all prior periods. Management is currently evaluating
the impact of adopting EITF 06-5 on the Corporations consolidated financial statements.In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being recognized in
the financial statements. In addition, FIN 48 provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 also requires expanded disclosures, including a roll
forward of unrecognized tax benefits as well as specific detail related to tax
uncertainties for which it is reasonably possible the amount of unrecognized tax benefit
will significantly change within 12 months. FIN 48 is effective for fiscal years beginning
after December 15, 2006. Management is currently evaluating the impact of adopting this
new accounting standard on the Corporations consolidated financial statements.In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS No. 157 or the Statement). The Statement was issued to
define fair value, establish a framework for measuring fair value in generally accepted
accounting principles (GAAP), and to expand fair value disclosure requirements. Prior to
issuance of this Statement, different definitions of fair value existed within GAAP and
there was limited guidance available on applying existing fair value definitions. The
statement does not require any new fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years. Management does not expect the adoption of this Statement to have a material impact
on the Corporations consolidated financial statements.




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##### Table of Contents



In September 2006, FASB also issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS
No. 158 or the Statement). The Statement requires employers to recognize the over or
under funded status of their single-employer pension and postretirement benefit plans as
either an asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through comprehensive
income. The Statement also requires most employers to measure the funded status of a plan
as of the date of its year-end statement of financial position. The funded status of a
benefit plan shall be measured as the difference between plan assets at fair value and the
benefit obligation, which shall be measured as follows: for a pension plan, the benefit
obligation is the projected benefit obligation (PBO); for any other postretirement benefit
plan, the benefit obligation is the accumulated postretirement benefit obligation.
Additionally, the Statement also requires the measurement of the benefit plans assets and
obligations to be measured as of the date of the employers year-end statement of financial
position.The effective date of SFAS No. 158, for the funded status-reporting requirement, is for
fiscal years ending on or after December 15, 2006 (for publicly traded companies or
companies close to becoming publicly traded) with retrospective application prohibited.
However, the measurement date provision is effective for fiscal years ending after December
15, 2008 and retrospective application is also prohibited, but early adoption is permitted
and encouraged. The Corporation does not provide any pension or other postretirement
benefits to its employees. Therefore, the new standard will not have any effect on the
Corporations consolidated financial statements.M.
    
    Subsequent EventIn early November 2006, the Company received information regarding the bankruptcy filing of
a commercial borrower. Management evaluated this information and recorded a $0.9 million
provision for loss on this $1.5 million loan as of September 30, 2006.
Additionally, concurrent with this assessment of loss, management entered into an agreement
to sell this loan for $0.6 million, the carrying value of the loan as of September 30,
2006. The sale of this loan is expected to close in the fourth quarter of 2006 and is not
expected to result in any additional loss.




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##### Table of Contents



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 1A of Part II Risk Factors in this Quarterly Report on Form 10-Q and in
the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
 Application of Critical Accounting Policies and Estimates
 The Corporations consolidated financial statements are prepared based upon the application
of U.S. generally accepted accounting principles, the most significant of which are
described in Notes A and B to consolidated financial statements included in this Quarterly
Report on Form 10-Q. Certain of these policies require numerous estimates and economic
assumptions, based upon information available as of the date of the financial statements.
As such, over time, they may prove inaccurate or vary and may significantly affect the
Corporations reported results and financial position for the period or in future periods.
The accounting policy for establishing the allowance for loan losses has a greater reliance
on the use of estimates, and as such has a greater possibility of producing results that
could be different than originally reported. Changes in underlying factors, assumptions or
estimates in the allowance for loan losses could have a material impact on the
Corporations future financial condition and results of operations.The allowance for loan losses is maintained at a level believed adequate by management to
absorb probable losses in the loan portfolio. Managements determination of the adequacy of
the allowance for loan losses is based upon an evaluation of individual credits in the loan
portfolio, historical loan loss experience, current economic conditions, and other relevant
factors. This determination is inherently subjective, as it requires material estimates
including the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change. The allowance for loan losses related
to loans considered to be impaired is generally evaluated based on the discounted cash
flows using the impaired loans initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans.Omegas accounting policy for goodwill and other intangibles also places significant
reliance on the use of estimates. Goodwill represents the excess of the cost of an
acquisition over the fair value of the net assets acquired. Other intangible assets
represent purchased assets that lack physical substance but that can be separately
distinguished from goodwill because of contractual or other legal rights, or because the
asset is capable of being sold or exchanged either on its own or in combination with a
related contract, asset or liability. It is Omegas policy that goodwill be tested at least
annually for impairment. Managements current analysis indicates that as of September 30,
2006, a 13.9% decline in Omegas market capitalization would trigger further analysis of
the carrying value of goodwill, which could result in a reduction to its value and a
charge to earnings.Intangible assets with finite lives include core deposits and customer relationships.
Intangible assets are subject to impairment testing whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Core deposit and
customer relationship intangibles are amortized over a period of time that represents their
expected life using method of amortization that reflects the pattern of economic benefit.
Management estimates that consecutive annual declines of more than 10% of the acquired
customer base subsequent to September 30, 2006 could result in an impairment of the core
deposit intangible and affect Omegas operating results in future years.
 Page 23




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##### Table of Contents



1. Operations Overview
 Three Months Ended September 30, 2006 and 2005
     Nine Months Ended September 30, 2006 and 2005




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Return on average assets (annualized)
    
    
    1.13
    %
    
    
    1.12
    %
    
    
    1.12
    %
    
    
    1.16
    %Return on average tangible assets (annualized)
    
    
    1.24
    
    
    
    1.22
    
    
    
    1.23
    
    
    
    1.27Return on average stated equity (annualized)
    
    
    6.64
    
    
    
    6.90
    
    
    
    6.64
    
    
    
    7.29Return on average tangible equity (annualized)
    
    
    13.94
    
    
    
    14.68
    
    
    
    14.04
    
    
    
    15.73Dividend payout ratio
    
    
    72.74
    
    
    
    70.24
    
    
    
    72.86
    
    
    
    66.92Average equity to average assets (stated)
    
    
    16.97
    
    
    
    16.21
    
    
    
    16.86
    
    
    
    15.91Average equity to average assets (tangible)
    
    
    8.87
    
    
    
    8.34
    
    
    
    8.76
    
    
    
    8.06
 Net Interest Income
  Three Months Ended September 30, 2006 and 2005
  Nine months ended September 30, 2006 and 2005




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Yield on average earning assets
    
    
    6.23
    %
    
    
    5.68
    %
    
    
    6.07
    %
    
    
    5.48
    %Cost to fund earning assets
    
    
    2.26
    
    
    
    1.84
    
    
    
    2.15
    
    
    
    1.75Net interest margin
    
    
    3.97
    
    
    
    3.84
    
    
    
    3.92
    
    
    
    3.73Net interest margin  tax equivalent
    
    
    4.08
    
    
    
    3.99
    
    
    
    4.05
    
    
    
    3.88
 Effects of Interest Rate Changes on Net Interest Income
  
 September 30, 2006
    
    December 31, 2005Change in
    
    Change in Net
    
    
    
    
    
    Change in
    
    Change in NetInterest Rates
    
    Interest
    
    Percent
    
    Interest Rates
    
    Interest
    
    Percent(Basis points)
    
    Income $
    
    Change
    
    (Basis points)
    
    Income $
    
    Change200
    
    
    3,437
    
    
    
    5.2
    %
    
    
    200
    
    
    
    3,500
    
    
    
    5.4
    %100
    
    
    1,716
    
    
    
    2.6
    %
    
    
    100
    
    
    
    1,785
    
    
    
    2.7
    %0
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0(100)
    
    
    (1,729
    )
    
    
    (2.6
    )%
    
    
    (100
    )
    
    
    (1,777
    )
    
    
    (2.7
    )%(200)
    
    
    (3,489
    )
    
    
    (5.3
    )%
    
    
    (200
    )
    
    
    (3,540
    )
    
    
    (5.4
    )%
 Loan Loss Provision




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##### Table of Contents



Other Income and Expense
 Three months ended September 30, 2006 and 2005
 Other Income
   Other Expense
   Nine months ended September 30, 2006 and 2005
 Other Income
   Other Expense




---



##### Table of Contents



Income Taxes
 Three months ended September 30, 2006 and 2005
  Nine months ended September 30, 2006 and 2005
  2. Consolidated Balance Sheet Review
 Overview
  A. Investment Securities




---



##### Table of Contents



B. Loans
  September 30
    
    
    December 312006
    
    
    2005Commercial, financial and agricultural
    
    $
    257,800
    
    
    $
    271,162Real estate  commercial
    
    
    444,711
    
    
    
    465,724Real estate  construction
    
    
    20,286
    
    
    
    22,000Real estate  mortgage
    
    
    226,227
    
    
    
    242,606Home equity
    
    
    164,359
    
    
    
    137,496Personal
    
    
    49,322
    
    
    
    63,687Lease financing
    
    
    20,700
    
    
    
    14,045Unearned interest
    
    
    (3,362
    )
    
    
    (1,865
    )Total loans
    
    
    1,180,043
    
    
    
    1,214,855Less loans included in assets held for sale
    
    
    27,954
    
    
    
    Total portfolio loans
    
    $
    1,152,089
    
    
    $
    1,214,855Nonaccrual loans
    
    $
    23,263
    
    
    $
    6,562




---



##### Table of Contents



September 30,2006
    
    
    2005Balance of allowance  beginning of period
    
    $
    15,482
    
    
    $
    15,644Loans charged off:Commercial, financial and agricultural
    
    
    777
    
    
    
    290Real estate  commercial
    
    
    
    
    
    
    165Real estate  mortgage
    
    
    96
    
    
    
    235Personal and lease financing loans
    
    
    261
    
    
    
    647Total charge-offs
    
    
    1,134
    
    
    
    1,337Recoveries of loans previously charged off:Commercial, financial and agricultural
    
    
    303
    
    
    
    71Real estate  commercial
    
    
    
    
    
    
    10Real estate  mortgage
    
    
    16
    
    
    
    41Personal and lease financing loans
    
    
    136
    
    
    
    167Total recoveries
    
    
    455
    
    
    
    289Net charge-offs
    
    
    679
    
    
    
    1,048Provision for loan losses
    
    
    1,120
    
    
    
    612Balance of allowance  end of period.
    
    $
    15,923
    
    
    $
    15,208Less: Balance, held for sale
    
    
    (196
    )
    
    
    Balance of allowance, loan portfolio
    
    $
    15,727
    
    
    $
    15,208
  September 30,
    
    December 31,2006
    
    2005Impaired loans:Recorded investment at period end
    
    $
    22,461,000
    
    
    $
    5,676,000Impaired loan balance for which there is a related allowance
    
    
    22,461,000
    
    
    
    5,676,000Amount of allowance for impaired loans
    
    
    4,490,000
    
    
    
    1,217,000Impaired loan balance for which there is no related allowance
    
    
    
    
    
    
    Average recorded investment
    
    
    18,218,000
    
    
    
    4,933,000
 Three months ended2006
    
    June 28, 1904Interest income recognized (on a cash basis)
    
    $
    72,000
    
    
    $
    13,000
  Page 30




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##### Table of Contents



Non-performing Loans(Dollars in thousands)September 30
    
    
    December 312006
    
    
    2005Non-accrual loans
    
    $
    23,263
    
    
    $
    6,562Accruing loans past due 90 days or more
    
    
    2,943
    
    
    
    2,616Total non-performing loans
    
    $
    26,206
    
    
    $
    9,178Non-performing loans as percent of allowance
    
    
    164.6
    %
    
    
    59.3
    %
    C. Deposits and Other Sources of Funds
   Page 31




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##### Table of Contents



September 30, 2006
    
    December 31, 2005Non-interest bearing demand deposits
    
    $
    239,587
    
    
    
    17.2
    %
    
    $
    236,683
    
    
    
    16.6
    %Interest bearing demand deposits
    
    
    299,452
    
    
    
    21.5
    
    
    
    330,855
    
    
    
    23.2Savings and money market
    
    
    271,933
    
    
    
    19.6
    
    
    
    292,920
    
    
    
    20.6Time deposits less than $100,000
    
    
    479,364
    
    
    
    34.5
    
    
    
    467,420
    
    
    
    32.9Time deposits greater than $100,000
    
    
    99,452
    
    
    
    7.2
    
    
    
    94,652
    
    
    
    6.71,389,788
    
    
    
    100.0
    
    
    
    1,422,530
    
    
    
    100.0Less deposits included in assets held for sale
    
    
    (34,663
    )
    
    
    (2.5
    )
    
    
    
    
    
    
    Total Deposits
    
    $
    1,355,125
    
    
    
    97.5
    %
    
    $
    1,422,530
    
    
    
    100.0
    %
   D. Liquidity and Capital Resources
    3. Regulatory Capital Compliance
  Page 32




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##### Table of Contents



4. Share Repurchase Program
  5. Subsequent Event
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
     Page 33




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Page 34




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##### Table of Contents



PART II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
   Changes in interest rates could adversely affect our financial condition and results of
operations.
  Most of our loans are secured by real estate located in our market area. If there is a
downturn in our real estate market, these borrowers may default on their loans and we may
not be able to fully recover our loans.
  Page 35




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##### Table of Contents



We have established an allowance for loan losses based on our managements estimate. Actual
losses could differ significantly from those estimates. If the allowance is not adequate,
it could have a material adverse effect on our earnings and the price of our stock.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
   
 Item 6. Exhibits
 ExhibitNumber
    
    Description3.1*
    
    Amended and Restated Bylaws31.1
    
    Chief Executive Officers Rule 13a-14(a)/15d-14(a) (Section 302) Certification31.2
    
    Chief Financial Officers Rule 13a-14(a)/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 Officer99.1
    
    Press Release issued on November 3, 2006
 
 *
    
    Incorporated by reference to Form 8-K filed on September 28, 2006 Page 36




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##### Table of Contents



SIGNATURES
  OMEGA FINANCIAL CORPORATION(Registrant)November 9, 2006
    
    By:
    
    /s/ Donita R. KovalDate
    
    
    
    Donita R. KovalPresident andChief Executive OfficerNovember 9, 2006
    
    
    
    /s/ Daniel L. WarfelDate
    
    
    
    Daniel L. WarfelExecutive Vice President andChief Financial Officer
 Page 37




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##### Table of Contents



3.1
    
    
    Amended and Restated Bylaws
    
    
    *31.1
    
    
    Chief Executive Officers Rule 13a-14(a)/15d-14(a) (Section 302) Certification
    
    
    3931.2
    
    
    Chief Financial Officers Rule 13a-14(a)/15d-14(a) (Section 302) Certification
    
    
    4032.1
    
    
    Section 1350 (Section 906) Certification by Chief Executive Officer
    
    
    4132.2
    
    
    Section 1350 (Section 906) Certification by Chief Financial Officer
    
    
    4299.1
    
    
    Press Release issued on November 3, 2006
    
    
    43
 
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    Incorporated by reference to Form 8-K filed on September 28, 2006 Page 38