<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-K/A

                                (AMENDMENT NO. 1)

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

                        COMMISSION FILE NUMBER 000-23777

                     PENSECO FINANCIAL SERVICES CORPORATION

                             SCRANTON, PENNSYLVANIA
                          COMMONWEALTH OF PENNSYLVANIA
                I.R.S. EMPLOYER IDENTIFICATION NUMBER 23-2939222
                           150 NORTH WASHINGTON AVENUE
                        SCRANTON, PENNSYLVANIA 18503-1848
                          TELEPHONE NUMBER 570-346-7741

                           SECURITIES REGISTERED UNDER
                            SECTION 12(g) OF THE ACT

                     Common Stock, Par Value $ .01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_|  No|X|

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No|_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_|

Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act).  Yes |_| No |X|

The aggregate market value of the Company's voting stock held by non-affiliates
of the registrant on June 30, 2006, based on the closing price of such stock on
that date, equals approximately $79,136,087. The number of shares of common
stock outstanding as of February 9, 2007 equals 2,148,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the Corporation's definitive proxy statement relating to the
 2007 Annual Meeting of Stockholders are incorporated by reference in Part III.



<PAGE>
<TABLE>
<CAPTION>


                                     PENSECO FINANCIAL SERVICES CORPORATION

                                                   FORM 10-K/A

                                                 Amendment No. 1

                                   For the fiscal year ended December 31, 2006



                                                      INDEX

                                                                                                          PAGE
                                                                                                         NUMBER
                                                                                                         ------
<S>                                                                                                         <C>
EXPLANATORY NOTE

PART II

     Item 8.    Financial Statements and Supplementary Data.............................................    1

     Item 9A.   Controls and Procedures.................................................................    30

PART IV

     Item 15.   Exhibits and Financial Statement Schedules..............................................    30

SIGNATURE


</TABLE>


<PAGE>


                                EXPLANATORY NOTE

         This Form 10-K/A is being filed by Penseco Financial Services
Corporation (the "Company") to include a correctly dated Report of Independent
Registered Public Accounting Firm, which was inadvertently dated February 26,
2006 (rather than February 26, 2007) as a result of a typographical error and
included as part of the Annual Report on Form 10-K that the Company filed with
the Securities and Exchange Commission on March 16, 2007. The corrected Item 8
and Item 9A of the Form 10-K follow. Aside from the corrected date on the Report
of Independent Registered Public Accounting Firm, no other changes have been
made to the information included in Item 8 or Item 9A.




<PAGE>


                                     PART II

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                           INDEX
                                                           -----

                                                                                                           PAGE NO.
                                                                                                           --------
<S>                                                                                                          <C>
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING..............................................1

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM......................................................2

CONSOLIDATED BALANCE SHEETS...................................................................................5

CONSOLIDATED STATEMENTS OF INCOME.............................................................................6

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY...............................................................7

CONSOLIDATED STATEMENTS OF CASH FLOWS.........................................................................8

GENERAL NOTES TO FINANCIAL STATEMENTS.........................................................................9

</TABLE>



<PAGE>

        MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

         The management of Penseco Financial Services Corporation is responsible
for establishing and maintaining adequate internal control over financial
reporting. Penseco Financial Services Corporation's internal control system was
designed to provide reasonable assurance to the Company's management and Board
of Directors regarding the preparation and fair presentation of published
financial statements in accordance with U.S. generally accepted accounting
principles. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.

         Management maintains a comprehensive system of controls intended to
ensure that transactions are executed in accordance with management's
authorization, assets are safeguarded, and financial records are reliable.
Management also takes steps to see that information and communication flows are
effective and to monitor performance, including performance of internal control
procedures.

         Penseco Financial Services Corporation's management assessed the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2006 based on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on this assessment, management believes that, as of December
31, 2006, the Company's internal control over financial reporting is effective.

         Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2006 has been audited by
McGrail, Merkel, Quinn & Associates, the Company's independent registered public
accounting firm, as stated in their report appearing on page 2, which expresses
unqualified opinions on management's assessment and on the effectiveness of the
Company's internal control over financial reporting as of December 31, 2006.

<PAGE>

                 [McGrail Merkel Quinn & Associates Letterhead]



             Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Penseco Financial Services Corporation
Scranton, Pennsylvania

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Penseco
Financial Services Corporation and subsidiary maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Penseco Financial
Services Corporation and subsidiary's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.


                                        2

<PAGE>


To the Board of Directors and Stockholders
Penseco Financial Services Corporation


Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that Penseco Financial Services
Corporation and subsidiary maintained effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all material respects,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also in our opinion, Penseco Financial Services Corporation and subsidiary
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006 based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of Penseco Financial Services Corporation and subsidiary and our
report dated February 26, 2007 expressed an unqualified opinion.

/s/ McGrail Merkel Quinn & Associates

Scranton, Pennsylvania
February 26, 2007

                                        3

<PAGE>


                 [McGrail Merkel Quinn & Associates Letterhead]





             Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Penseco Financial Services Corporation
Scranton, Pennsylvania

We have audited the accompanying consolidated balance sheets of Penseco
Financial Services Corporation and subsidiary as of December 31, 2006 and 2005,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2006. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provided a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Penseco Financial
Services Corporation and subsidiary as of December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Penseco
Financial Services Corporation and subsidiary's internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and our report dated February 26, 2007
expressed an unqualified opinion on management's assessment of the effectiveness
of Penseco Financial Services Corporation and subsidiary's internal control over
financial reporting and an unqualified opinion on the effectiveness of Penseco
Financial Services Corporation and subsidiary's internal control over financial
reporting.

/s/ McGrail Merkel Quinn & Associates

Scranton, Pennsylvania
February 26, 2007

                                        4

<PAGE>
<TABLE>
<CAPTION>
                                         CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                                   <C>                       <C>
DECEMBER 31,                                                                2006                      2005
Cash and due from banks                                               $   12,999                $   11,310
Interest bearing balances with banks                                       1,779                       263
----------------------------------------------------------------------------------------------------------
  Cash and Cash Equivalents                                               14,778                    11,573
Investment securities:
  Available-for-sale, at fair value                                       91,705                   147,942
Held-to-maturity (fair value of $75,120
     and $83,130, respectively)                                           74,375                    82,015
----------------------------------------------------------------------------------------------------------
  Total Investment Securities                                            166,080                   229,957
Loans, net of unearned income                                            369,922                   321,362
  Less: Allowance for loan losses                                          4,200                     3,800
----------------------------------------------------------------------------------------------------------
  Loans, Net                                                             365,722                   317,562
Bank premises and equipment                                                9,471                     9,453
Other real estate owned                                                        -                        91
Accrued interest receivable                                                3,632                     3,473
Cash surrender value of life insurance                                     7,054                         -
Other assets                                                               3,084                     3,579
----------------------------------------------------------------------------------------------------------
  TOTAL ASSETS                                                        $  569,821                $  575,688
==========================================================================================================

Deposits:
  Non-interest bearing                                                $   71,585                $   91,713
  Interest bearing                                                       342,215                   306,154
----------------------------------------------------------------------------------------------------------
  Total Deposits                                                         413,800                   397,867
Other borrowed funds:
  Repurchase agreements                                                   13,441                    30,414
  Short-term borrowings                                                    5,486                     4,626
  Long-term borrowings                                                    65,853                    75,401
Accrued interest payable                                                   1,472                     1,261
Other liabilities                                                          3,198                     2,320
----------------------------------------------------------------------------------------------------------
  TOTAL LIABILITIES                                                      503,250                   511,889
==========================================================================================================

Common stock, $.01 par value, 15,000,000 shares
  authorized, 2,148,000 shares issued and outstanding                         21                        21
Surplus                                                                   10,819                    10,819
Retained earnings                                                         56,393                    53,607
Accumulated other comprehensive income                                      (662)                     (648)
----------------------------------------------------------------------------------------------------------
  TOTAL STOCKHOLDERS' EQUITY                                              66,571                    63,799
==========================================================================================================

  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          $  569,821                $  575,688
==========================================================================================================

The accompanying Notes are an integral part of these Consolidated Financial Statements.

</TABLE>

                                              5


<PAGE>
<TABLE>
<CAPTION>

                                        CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEARS ENDED DECEMBER 31,                                                    2006             2005              2004
-------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>              <C>               <C>
Interest and fees on loans                                              $ 23,374         $ 18,569          $ 13,632
Interest and dividends on investments:
  U.S. Treasury securities and U.S. Agency obligations                     5,360            6,408             8,044
  States & political subdivisions                                          2,688            2,616             3,476
  Other securities                                                           340              190               107
Interest on Federal funds sold                                                 -              176                58
  Interest on balances with banks                                            160              211                68
-------------------------------------------------------------------------------------------------------------------
  TOTAL INTEREST INCOME                                                   31,922           28,170            25,385
-------------------------------------------------------------------------------------------------------------------
Interest on time deposits of $100,000 or more                              1,408              808               806
Interest on other deposits                                                 6,204            4,212             3,153
Interest on other borrowed funds                                           3,442            3,560             3,620
-------------------------------------------------------------------------------------------------------------------
  TOTAL INTEREST EXPENSE                                                  11,054            8,580             7,579
-------------------------------------------------------------------------------------------------------------------
  NET INTEREST INCOME                                                     20,868           19,590            17,806
-------------------------------------------------------------------------------------------------------------------
Provision for loan losses                                                    433              263               144
-------------------------------------------------------------------------------------------------------------------
  NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                     20,435           19,327            17,662
-------------------------------------------------------------------------------------------------------------------
Trust department income                                                    1,483            1,479             1,353
Service charges on deposit accounts                                          860              940             1,056
Merchant transaction income                                                3,947            4,521             5,001
Other fee income                                                           1,423            1,575             1,650
Other operating income                                                       173              372               177
Realized gains (losses) on securities, net                                   319             (13)               357
-------------------------------------------------------------------------------------------------------------------
  TOTAL OTHER INCOME                                                       8,205            8,874             9,594
-------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits                                            10,315            9,261             9,165
Expense of premises and equipment, net                                     2,397            2,455             2,391
Merchant transaction expenses                                              3,141            3,646             4,058
Other operating expenses                                                   5,184            5,357             4,970
-------------------------------------------------------------------------------------------------------------------
  TOTAL OTHER EXPENSES                                                    21,037           20,719            20,584
-------------------------------------------------------------------------------------------------------------------
Income before income taxes                                                 7,603            7,482             6,672
Applicable income taxes                                                    1,595            1,613             1,071
-------------------------------------------------------------------------------------------------------------------
  NET INCOME                                                           $   6,008        $   5,869         $   5,601
-------------------------------------------------------------------------------------------------------------------
  EARNINGS PER SHARE                                                   $    2.80        $    2.73         $    2.61
-------------------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of these Consolidated Financial Statements.

</TABLE>


                                                         6
<PAGE>
<TABLE>
<CAPTION>


                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
--------------------------------------------                                          ACCUMULATED
                                                                                        OTHER            TOTAL
                                               COMMON                   RETAINED    COMPREHENSIVE     STOCKHOLDERS'
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)        STOCK      SURPLUS      EARNINGS        INCOME           EQUITY
=================================================================================================================
<S>                                           <C>         <C>           <C>          <C>               <C>
Balance, December 31, 2003                    $   21      $ 10,819      $ 48,131     $   1,836         $  60,807

Comprehensive income:
  Net income, 2004                                 -             -         5,601             -             5,601
  Unrealized losses on securities,
    net of reclassification adjustment
    and taxes                                      -             -             -        (1,132)           (1,132)
Comprehensive income                                                                                       4,469

Cash dividends declared ($1.35 per share)          -             -        (2,900)            -            (2,900)
-----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004                        21        10,819        50,832           704            62,376

Comprehensive income:
  Net income, 2005                                 -             -         5,869             -             5,869
  Other comprehensive income, net of tax
    Unrealized losses on securities,
      net of reclassification adjustment           -             -             -          (341)             (341)
    Minimum pension liability adjustment           -             -             -        (1,011)           (1,011)
  Other comprehensive income                                                            (1,352)           (1,352)
Comprehensive income                                                                                       4,517

Cash dividends declared ($1.44 per share)          -             -        (3,094)            -            (3,094)
-----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005                        21        10,819        53,607          (648)           63,799

Comprehensive income:
  Net income, 2006                                 -             -         6,008             -             6,008
  Other comprehensive income, net of tax
    Unrealized gains on securities,
      net of reclassification adjustment           -             -             -           648               648
    Minimum pension liability adjustment           -             -             -         1,011             1,011
  Other comprehensive income                                                             1,659             1,659
Comprehensive income                                                                                       7,667

Cash dividends declared ($1.50 per share)          -             -        (3,222)            -            (3,222)

Adjustment to initially apply FASB Statement
          No. 158, net of tax                      -             -             -        (1,673)           (1,673)
-----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2006                    $   21      $ 10,819      $ 56,393     $    (662)        $  66,571
=================================================================================================================

 The accompanying Notes are an integral part of these Consolidated Financial Statements.

</TABLE>

                                                      7

<PAGE>
<TABLE>
<CAPTION>

                                      CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

YEARS ENDED DECEMBER 31,                                                    2006             2005              2004
====================================================================================================================
<S>                                                                   <C>             <C>               <C>
Net Income                                                            $    6,008      $     5,869       $     5,601
Adjustments to reconcile net income to net
  cash provided by operating activities:
    Depreciation                                                             723              704               813
    Provision for loan losses                                                433              263               144
    Deferred income tax (benefit) provision                                 (254)             166              (119)
    Amortization of securities (net of accretion)                            419            1,379             1,573
    Increase in cash surrender value of life insurance                       (54)               -                 -
    Net realized (gains) losses on securities                               (319)              13              (357)
    Loss (gain) on other real estate                                          10              (46)               (2)
    Gain on disposition of fixed asset                                         -               (5)                -
    Increase in interest receivable                                         (159)             (67)             (108)
    (Increase) decrease in other assets                                     (304)             313               366
    (Decrease) increase in income taxes payable                               (4)            (442)              117
    Increase (decrease) in interest payable                                  211              375              (272)
    Increase (decrease) in other liabilities                                 940              (29)              110
--------------------------------------------------------------------------------------------------------------------
    NET CASH PROVIDED BY OPERATING ACTIVITIES                              7,650            8,493             7,866
====================================================================================================================
Purchase of investment securities available-for-sale                     (25,770)         (47,526)          (49,975)
Proceeds from sales and maturities of investment
  securities available-for-sale                                           68,287           46,451            41,938
Proceeds from repayments of investment
  securities available-for-sale                                           15,028           19,140            17,893
Proceeds from repayments of investment
  securities to be held-to-maturity                                        7,213           12,746            17,661
Net loans originated                                                     (48,676)         (41,550)          (40,015)
Proceeds from other real estate                                              164              432               124
Proceeds from sale of fixed assets                                             -               10                 -
Investment in premises and equipment                                        (741)            (929)             (111)
Purchase of life insurance policies                                       (7,000)               -                 -
--------------------------------------------------------------------------------------------------------------------
    NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES                       8,505          (11,226)          (12,485)
====================================================================================================================
Net (decrease) increase in demand and savings deposits                    (1,374)          (3,984)            5,977
Net proceeds (payments) on time deposits                                  17,307            6,550           (18,620)
(Decrease) increase in repurchase agreements                             (16,973)          12,016            (1,056)
Net increase (decrease) in short-term borrowings                             860            3,740                63
Payments on long-term borrowings                                          (9,548)          (9,219)           (8,903)
Cash dividends paid                                                       (3,222)          (3,094)           (2,900)
--------------------------------------------------------------------------------------------------------------------
    NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES                     (12,950)           6,009           (25,439)
====================================================================================================================
    Net increase (decrease) in cash and cash equivalents                   3,205            3,276           (30,058)
Cash and cash equivalents at January 1                                    11,573            8,297            38,355
--------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31                              $   14,778       $   11,573       $     8,297
====================================================================================================================

The accompanying Notes are an integral part of these Consolidated Financial Statements.

</TABLE>


                                                8
<PAGE>


                      GENERAL NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Penseco Financial Services Corporation (Company) is a financial holding
company, incorporated in 1997 under the laws of Pennsylvania. It is the parent
company of Penn Security Bank and Trust Company (Bank), a state chartered bank.

         The Company operates from nine banking offices under a state bank
charter and provides full banking services, including trust services, to
individual and corporate customers primarily in Northeastern Pennsylvania. The
Company's primary deposit products are savings and demand deposit accounts and
certificates of deposit. Its primary lending products are real estate,
commercial and consumer loans.

         The Company's revenues are attributable to a single reportable segment,
therefore segment information is not presented.

         The accounting policies of the Company conform with accounting
principles generally accepted in the United States of America and with general
practices within the banking industry.

BASIS OF PRESENTATION

         The Financial Statements of the Company have been consolidated with
those of its wholly-owned subsidiary, Penn Security Bank and Trust Company,
eliminating all intercompany items and transactions.

         The Statements are presented on the accrual basis of accounting.

         All information is presented in thousands of dollars, except per share
amounts.

USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

         Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.

EMERGING ACCOUNTING STANDARDS

         In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement No. 123 (Revised 2004), SHARE-BASED PAYMENT. Statement No. 123
(Revised 2004) is a revision of FASB Statement 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION and supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and its related implementation guidance. The Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. Statement No. 123 (Revised 2004)
requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award, except in certain circumstances. That cost will be recognized over
the period during which an employee is required to provide service in exchange
for the award. The Company adopted this Statement on January 1, 2006.

         The adoption of this Statement had no effect on the Company's results
of operations or financial position.

         In December 2004, FASB issued Statement No. 153, EXCHANGES OF
NONMONETARY ASSETS - AN AMENDMENT OF APB OPINION NO. 29, ACCOUNTING FOR
NONMONETARY TRANSACTIONS. Statement No. 153 eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29 and replaces it with an exception for
exchanges that do not have commercial substance. Statement No. 153 specifies
that a nonmonetary exchange has commercial substance if the future cash flows of
the entity are expected to change significantly as a result of the exchange. The
Statement was effective for fiscal periods beginning after June 15, 2005.

         The adoption of this Statement had no effect on the Company's results
of operations or financial position.

         In May 2005, FASB issued Statement No. 154, ACCOUNTING CHANGES AND
ERROR CORRECTIONS - A REPLACEMENT OF APB OPINION NO. 20, ACCOUNTING CHANGES, AND
FASB STATEMENT NO. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL
STATEMENTS - AN AMENDMENT OF APB OPINION NO, 28. Statement No. 154 provides

                                       9

<PAGE>


guidance on the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or earliest date
practicable, as the required method for reporting a change in accounting
principle or correction of an error. The Statement was effective for accounting
changes or corrections of errors made in fiscal periods beginning after December
15, 2005.

         The adoption of this Statement had no effect on the Company's results
of operations or financial position.

         In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115- 1
and FAS 124-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS
APPLICATION TO CERTAIN INVESTMENTS. The FSP addresses the determination of when
an investment is considered impaired and whether that impairment is other than
temporary, and provides guidance on measuring an impairment loss. The FSP
requires certain disclosures about unrealized losses not recognized as
other-than-temporary impairments. The guidance in the FSP amends FASB Statements
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, and
No. 124, ACCOUNTING FOR CERTAIN INVESTMENTS HELD BY NOT-FOR-PROFIT
ORGANIZATIONS, and APB Opinion No. 18, THE EQUITY METHOD OF ACCOUNTING FOR
INVESTMENTS IN COMMON STOCK. The Company has considered the requirements of this
FSP in its assessment of the investment portfolio.

         In February 2006, FASB issued Statement No. 155, ACCOUNTING FOR CERTAIN
HYBRID FINANCIAL INSTRUMENTS - AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140.
Statement No. 155 eliminates the exception from applying Statement 133 to
interests in securitized financial assets so that similar instruments are
accounted for similarly regardless of the form of the instruments. The Statement
is effective for all financial instruments acquired or issued after the
beginning of the first fiscal year that begins after September 15, 2006.

         The Company believes that the adoption of this Statement will not have
a significant impact on its results of operations or financial position.

         In March 2006, FASB issued Statement No. 156, ACCOUNTING FOR SERVICING
OF FINANCIAL INSTRUMENTS - AN AMENDMENT OF FASB STATEMENT NO. 140. Statement No.
156 requires the recognition of the fair value of a servicing asset or servicing
liability each time an obligation to service a financial asset by entering into
a servicing contract is undertaken, if practicable.

         It also allows the entity to subsequently measure the asset or
liability under an amortization or fair value method. The Statement is effective
for all financial instruments acquired or issued after the beginning of the
first fiscal year that begins after September 15, 2006.

         The Company believes that the adoption of this Statement will not have
a significant impact on its results of operations or financial position.

         In July 2006, FASB issued FASB Interpretation No. 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT NO. 109.
Interpretation No. 48 clarifies the application of Statement No. 109 by
establishing a threshold condition that a tax position must meet for any part of
that position to be recognized in the financial statements. In addition to
recognition, the Interpretation provides guidance on the measurement,
derecognition, classification and disclosure of tax positions. The
Interpretation is effective for fiscal years beginning after December 15, 2006.

         The Company believes that the adoption of this Statement will not have
a significant impact on its results of operations or financial position.

         In September 2006, FASB issued Statement No. 157, FAIR VALUE
MEASUREMENTS. Statement No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. The Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years.

                                       10

<PAGE>

         The Company believes that the adoption of this Statement will not have
a significant impact on its results of operations or financial position.

         In September 2006, FASB issued Statement No. 158, EMPLOYERS' ACCOUNTING
FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS - AN AMENDMENT OF
FASB STATEMENTS NO. 87, 88, 106, AND 132(R). Statement No. 158 requires an
employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as 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 was effective for financial statements issued for fiscal years ending
after December 31, 2006.

         The effects of the adoption of this Statement are included in Note 14
to these Consolidated Financial Statements and relate to the Company's financial
position. The adoption of the Statement had no effect on the Company's results
of operations.

         In the September 2006 EITF meeting, a consensus was reached on EITF
06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 requires the
recognition of a liability related to the postretirement benefits covered by an
endorsement split-dollar life insurance arrangement based on the substantive
agreement with the employee. The issue is effective for fiscal years beginning
after December 15, 2007, with early adoption permitted.

         The Company is evaluating the potential impact of this statement on its
results of operations and financial position.

         In the September 2006 EITF meeting, a consensus was reached on EITF
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 06-5 requires that the amount
that could be realized under the insurance contract as of the date of the
statement of financial position should be reported as an asset net of any
potential surrender charges. The issue is effective for fiscal years beginning
after December 15, 2006.

         The Company believes the adoption of this Statement will not have a
significant impact on its results of operations and financial position.

         In September 2006, the SEC staff issued SEC Staff Accounting Bulletin
No. 108 (SAB No. 108) Topic 1N, Financial Statements - Considering the Effects
of Prior Year Misstatements When Quantifying Misstatements in Current Year
Financial Statements. SAB No. 108 addresses how a registrant should quantify the
effect of an error on the financial statements. The SEC staff concluded in that
a dual approach should be used to compute the amount of a misstatement.
Specifically, the amount should be computed using both the "rollover" (current
year income statement perspective) and "iron curtain" (year-end balance sheet
perspective) methods. This SAB was effective for annual financial statements
covering the first fiscal year ending after November 15, 2006.

         The adoption of this SAB had no effect on the Company's results of
operations or financial position.

INVESTMENT SECURITIES

         Investments in securities are classified in two categories and
accounted for as follows:

         Securities Held-to-Maturity  Bonds, notes, debentures and
         ---------------------------
mortgage-backed securities for which the Company has the positive intent and
ability to hold to maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts computed on the straight-line basis, which
approximates the interest method, over the remaining period to maturity.

         Securities Available-for-Sale   Bonds, notes, debentures,
         -----------------------------
mortgage-backed securities and certain equity securities not classified as
securities to be held to maturity are carried at fair value with unrealized
holding gains and losses, net of tax, reported as a net amount in a separate
component of stockholders' equity until realized.

         The amortization of premiums on mortgage-backed securities is done
based on management's estimate of the lives of the securities, adjusted, when
necessary, for advanced prepayments in excess of those estimates.

         Gains and losses on the sale of securities available-for-sale are
determined using the specific identification method and are reported as a
separate component of other income in the Statements of Income.

                                       11

<PAGE>

LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN LOSSES

         Loans are stated at the principal amount outstanding, net of any
unearned income, deferred loan fees and the allowance for loan losses. Interest
is accrued daily on the outstanding balances.

         Loans are generally placed on a non-accrual status when principal or
interest is past due 90 days or when payment in full is not anticipated. When a
loan is placed on non-accrual status, all interest previously accrued but not
collected is charged against current income. Loans are returned to accrual
status when past due interest is collected and the collection of principal is
probable.

         The provision for loan losses is based on past loan loss experience,
management's evaluation of the potential loss in the current loan portfolio
under current economic conditions and such other factors as, in management's
best judgment, deserve current recognition in estimating loan losses. The annual
provision for loan losses charged to operating expense is that amount which is
sufficient to bring the balance of the allowance for possible loan losses to an
adequate level to absorb anticipated losses.

PREMISES AND EQUIPMENT

         Premises and equipment are stated at cost less accumulated
depreciation. Provision for depreciation and amortization, computed principally
on the straight-line method, is charged to operating expenses over the estimated
useful lives of the assets. Maintenance and repairs are charged to current
expense as incurred.

LOAN SERVICING

         The Company generally retains the right to service mortgage loans sold
to others. The cost allocated to the mortgage servicing rights retained has been
recognized as a separate asset and is being amortized in proportion to and over
the period of estimated net servicing income.

         Mortgage servicing rights are evaluated for impairment based on the
fair value of those rights. Fair values are estimated using discounted cash
flows based on current market rates of interest and current expected future
prepayment rates. For purposes of measuring impairment, the rights must be
stratified by one or more predominant risk characteristics of the underlying
loans. The Company stratifies its capitalized mortgage servicing rights based on
the product type, interest rate and term of the underlying loans. The amount of
impairment recognized is the amount, if any, by which the amortized cost of the
rights for each stratum exceed the fair value.

ADVERTISING EXPENSES

         Advertising costs are expensed as incurred. Advertising expenses for
the years ended December 31, 2006, 2005 and 2004, amounted to $379, $472 and
$476, respectively.

INCOME TAXES

         Provisions for income taxes are based on taxes payable or refundable
for the current year (after exclusion of non-taxable income such as interest on
state and municipal securities) as well as deferred taxes on temporary
differences, between the amount of taxable income and pre-tax financial income
and between the tax bases of assets and liabilities and their reported amounts
in the Financial Statements. Deferred tax assets and liabilities are included in
the Financial Statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to be
realized or settled as prescribed in Statement of Financial Accounting Standards
No. 109, ACCOUNTING FOR INCOME TAXES (SFAS 109). As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.

PENSION EXPENSE

         Pension expense has been determined in accordance with Statement of
Financial Accounting Standards No. 87, EMPLOYERS ACCOUNTING FOR PENSIONS (SFAS
87).

                                       12

<PAGE>


LONG-LIVED ASSETS

         The Company reviews the carrying value of long-lived assets for
impairment whenever events or changes in circumstances indicate that carrying
amounts of the assets might not be recoverable, as prescribed in Statement of
Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS (SFAS 144).

POSTRETIREMENT BENEFITS EXPENSE

         Postretirement benefits expense has been determined in accordance with
Statement of Financial Accounting Standards No. 106, EMPLOYERS ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (SFAS 106).

CASH FLOWS

         For purposes of the Statements of Cash Flows, cash and cash equivalents
include cash on hand, due from banks, interest bearing balances with banks and
Federal funds sold for a one-day period.

  The Company paid interest and income taxes during the years ended December 31,
2006, 2005 and 2004 as follows:

                             2006              2005             2004
--------------------------------------------------------------------
Income taxes paid        $  1,752         $   1,886        $     802
Interest paid            $ 10,843         $   8,205        $   7,851

         Non-cash transactions during the years ended December 31, 2006, 2005
and 2004, comprised entirely of the net acquisition of real estate in the
settlement of loans, amounted to $83, $301 and $177, respectively.

TRUST ASSETS AND INCOME

         Assets held by the Company in a fiduciary or agency capacity for its
customers are not included in the Financial Statements since such items are not
assets of the Company. Trust income is reported on the accrual basis of
accounting.

EARNINGS PER SHARE

         Basic earnings per share is computed on the weighted average number of
common shares outstanding during each year (2,148,000) as prescribed in
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS
128). A calculation of diluted earnings per share is not applicable to the
Company.

RECLASSIFICATIONS

         Certain prior year amounts have been reclassified to conform to the
2006 presentation.

NOTE 2 -- CASH AND DUE FROM BANKS

Cash and due from banks are summarized as follows:

December 31,                                 2006             2005
------------------------------------------------------------------
Cash items in process of collection     $      31        $   6,568
Non-interest bearing balances               9,102            1,544
Cash on hand                                3,866            3,198
------------------------------------------------------------------
    Total                               $  12,999        $  11,310
------------------------------------------------------------------

         The Company may, from time to time, maintain bank balances with other
financial institutions in excess of $100,000 each. Management is not aware of
any evidence that would indicate that such deposits are at risk.

                                       13

<PAGE>

NOTE 3 -- INVESTMENT SECURITIES

         The amortized cost and fair value of investment securities at December
31, 2006 and 2005 are as follows:

<TABLE>
<CAPTION>
                                              AVAILABLE-FOR-SALE

                                                                  Gross            Gross
                                            Amortized        Unrealized       Unrealized            Fair
2006                                             Cost             Gains          Losses            Value
---------------------------------------------------------------------------------------------------------
<S>                                      <C>              <C>             <C>               <C>
U.S. Agency securities                   $     24,897     $           9   $         23      $     24,883
Mortgage-backed securities                     29,231                91             82            29,240
States & political subdivisions                29,281               939              -            30,220
---------------------------------------------------------------------------------------------------------
     Total Debt Securities                     83,409             1,039            105            84,343
Equity securities                               6,764               628             30             7,362
---------------------------------------------------------------------------------------------------------
     Total Available-for-Sale            $     90,173     $       1,667   $        135      $     91,705
---------------------------------------------------------------------------------------------------------

                                                                  Gross            Gross
                                            Amortized        Unrealized       Unrealized            Fair
2005                                            Cost              Gains          Losses            Value
---------------------------------------------------------------------------------------------------------
U.S. Agency securities                   $     74,852     $           -   $        308      $     74,544
Mortgage-backed securities                     44,408                 -            407            44,001
States & political subdivisions                20,698               937              -            21,635
---------------------------------------------------------------------------------------------------------
     Total Debt Securities                    139,958               937            715           140,180
Equity securities                               7,433               402             73             7,762
---------------------------------------------------------------------------------------------------------
     Total Available-for-Sale            $    147,391     $       1,339   $        788      $    147,942
---------------------------------------------------------------------------------------------------------
</TABLE>

         Equity securities at December 31, 2006 and 2005, consisted primarily of
other financial institutions stock and Federal Home Loan Bank (FHLB) stock,
which is a required investment in order to participate in an available line of
credit program. The FHLB stock is stated at par value as there is no readily
determinable fair value.

         A summary of transactions involving available-for-sale debt securities
in 2006, 2005 and 2004 are as follows:

December 31,                    2006             2005              2004
-----------------------------------------------------------------------
Proceeds from sales         $      -         $ 10,250          $ 18,380
Gross realized gains               -               51               385
Gross realized losses              -               64                28

<TABLE>
<CAPTION>
                                       HELD-TO-MATURITY

                                                                  Gross             Gross
                                            Amortized        Unrealized        Unrealized                 Fair
2006                                            Cost              Gains            Losses                Value
---------------------------------------------------------------------------------------------------------------
<S>                                      <C>              <C>              <C>                    <C>
Mortgage-backed securities               $     45,124     $           4    $       1,074          $     44,054
States & political subdivisions                29,251             1,815                -                31,066
---------------------------------------------------------------------------------------------------------------
     Total Held-to-Maturity              $     74,375     $       1,819    $       1,074          $     75,120
---------------------------------------------------------------------------------------------------------------

                                                                  Gross             Gross
                                            Amortized        Unrealized        Unrealized                Fair
2005                                            Cost              Gains            Losses               Value
---------------------------------------------------------------------------------------------------------------
Mortgage-backed securities               $     52,763  $              3    $       1,274          $     51,492
States & political subdivisions                29,252             2,386                -                31,638
---------------------------------------------------------------------------------------------------------------
     Total Held-to-Maturity              $     82,015     $       2,389    $       1,274          $     83,130
---------------------------------------------------------------------------------------------------------------
</TABLE>

                                                  14

<PAGE>

         Investment securities with amortized costs and fair values of $98,949
and $99,898 at December 31, 2006 and $106,280 and $107,914 at December 31, 2005,
were pledged to secure trust funds, public deposits and for other purposes as
required by law.

         The amortized cost and fair value of debt securities at December 31,
2006 by contractual maturity, are shown in the following table. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
                                                  Available-for-Sale                           Held-to-Maturity
------------------------------------------------------------------------------------------------------------------------
                                           Amortized                Fair                Amortized               Fair
                                             Cost                  Value                  Cost                  Value
------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>                     <C>                   <C>                  <C>
Due in one year or less:

      U.S. Agency securities           $     9,999             $   9,985             $        -           $         -
After one year through five years:

      U.S. Agency securities                14,898                14,898                      -                     -
After five years through ten years:

      States & political subdivisions            -                     -                  1,041                 1,114
After ten years:

      States & political subdivisions       29,281                30,220                 28,210                29,952
------------------------------------------------------------------------------------------------------------------------
      Subtotal                              54,178                53,103                 29,251                31,006

Mortgage-backed securities                  29,231                29,240                 45,124                44,054
------------------------------------------------------------------------------------------------------------------------
      Total Debt Securities            $    83,409             $  84,343            $    74,375           $    75,120
------------------------------------------------------------------------------------------------------------------------

         The gross fair value and unrealized losses of the Company's
investments, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2006 and 2005 are as follows:

                                   Less than twelve months            Twelve months or more                    Totals
                                ------------------------------    ------------------------------    -----------------------------
                                    Fair          Unrealized          Fair          Unrealized         Fair          Unrealized
December 31, 2006                  Value            Losses           Value            Losses           Value           Losses
--------------------------------------------------------------    ------------------------------    -----------------------------
U.S. Agency securities              $  9,868           $    9         $  9,985           $   14        $ 19,853           $   23
Mortgage-backed securities                 -                -           50,379            1,156          50,379            1,156
Equities                                 160                1              541               29             701               30
                                ------------------------------    ------------------------------    -----------------------------
   Total                            $ 10,028           $   10         $ 60,905         $  1,199        $ 70,933         $  1,209
                                ==============================    ==============================    =============================


                                   Less than twelve months            Twelve months or more                    Totals
                                ------------------------------    ------------------------------    -----------------------------
                                    Fair          Unrealized          Fair          Unrealized         Fair          Unrealized
December 31, 2005                  Value            Losses           Value            Losses           Value           Losses
--------------------------------------------------------------    ------------------------------    -----------------------------
U.S. Agency securities              $ 39,870          $   227         $ 34,674           $   81        $ 74,544          $   308
Mortgage-backed securities             8,598              104           86,501            1,577          95,099            1,681
Equities                               1,298               73                -                -           1,298               73
                                ------------------------------    ------------------------------    -----------------------------
   Total                            $ 49,766          $   404         $121,175         $  1,658        $170,941         $  2,062
                                ==============================    ==============================    =============================

</TABLE>

         The table above at December 31, 2006, includes five (5) securities that
have unrealized losses for less than twelve months and ten (10) securities that
have been in an unrealized loss position for twelve or more months.

U.S. AGENCY SECURITIES

         The unrealized losses on the Company's investments in these obligations
were caused by recent interest rate increases. The contractual terms of these
investments do not permit the issuer to settle the securities at a price less
than the par value of the investment. Because the Company has the ability to
hold these investments until a recovery of fair value, which may be maturity,
the Company does not consider these investments to be other-than-temporarily
impaired at December 31, 2006.

                                       15



<PAGE>

MORTGAGE-BACKED SECURITIES

         The unrealized losses on the Company's investment in mortgage-backed
securities were caused by recent interest rate increases. The contractual cash
flows of these investments are guaranteed by an agency of the U.S. government.
Accordingly, it is expected that these securities would not be settled at a
price less than the amortized cost of the Company's investment. Because the
decline in market value is attributable to changes in interest rates and not
credit quality and because the Company has the ability to hold these investments
until a recovery of fair value, which may be maturity, the Company does not
consider these investments to be other-than-temporarily impaired at December 31,
2006.

MARKETABLE EQUITY SECURITIES

         The unrealized losses on the Company's investment in marketable equity
securities were caused primarily by recent interest rate increases and other
market conditions. The Company's investments in marketable equity securities
consist primarily of investments in common stock of companies in the financial
services industry. Because the Company has the ability and intent to hold these
investments for a reasonable period of time sufficient for a forecasted recovery
of fair value, the Company does not consider these investments to be
other-than-temporarily impaired at December 31, 2006.

NOTE 4 -- LOANS

         Major classifications of loans are as follows:
<TABLE>
<CAPTION>

December 31,                                                                2006             2005
-------------------------------------------------------------------------------------------------
<S>                                                                    <C>             <C>
Loans secured by real estate:
    Construction and land development                                  $  23,714       $   13,132
    Secured by 1-4 family residential properties:
    Revolving, open-end loans                                             17,691           15,070
    Secured by first liens                                               156,944          125,950
    Secured by junior liens                                               30,108           22,649
    Secured by multi-family properties                                     2,870              355
    Secured by non-farm, non-residential properties                       76,710           63,829
Commercial and industrial loans to U.S. addressees                        26,265           42,894
Loans to individuals for household, family
    and other personal expenditures:
    Credit card and related plans                                          3,282            3,152
    Other (installment and student loans, etc.)                           24,647           24,773
Obligations of states & political subdivisions                             6,806            8,038
All other loans                                                              885            1,520
-------------------------------------------------------------------------------------------------
    Gross Loans                                                          369,922          321,362
Less: Unearned income on loans                                                -                 -
-------------------------------------------------------------------------------------------------
    Loans, Net of Unearned Income                                     $  369,922        $ 321,362
-------------------------------------------------------------------------------------------------
</TABLE>

         Loans on which the accrual of interest has been discontinued or reduced
amounted to $3,180, $1,627 and $1,991 at December 31, 2006, 2005 and 2004,
respectively. If interest on those loans had been accrued, such income would
have been $209, $264 and $199 for 2006, 2005 and 2004, respectively. Interest
income on those loans, which is recorded only when received, amounted to $10,
$27 and $16 for 2006, 2005 and 2004, respectively. Also, at December 31, 2006
and 2005, the Bank had loans totalling $434 and $173, respectively, which were
past due 90 days or more and still accruing interest


                                       16
<PAGE>


NOTE 5 -- ALLOWANCE FOR LOAN LOSSES

         Changes in the allowance for loan losses are as follows:

<TABLE>
<CAPTION>

Years Ended December 31,                         2006              2005             2004
----------------------------------------------------------------------------------------
<S>                                           <C>               <C>              <C>
Balance at beginning of year                  $ 3,800           $ 3,600          $ 3,500
Provision charged to operations                   433               263              144
Recoveries credited to allowance                  134                50                9
                                                4,367             3,913            3,653
----------------------------------------------------------------------------------------
Losses charged to allowance                      (167)             (113)             (53)
----------------------------------------------------------------------------------------
    Balance at End of Year                    $ 4,200           $ 3,800          $ 3,600
----------------------------------------------------------------------------------------
</TABLE>

         A comparison of the provision for loan losses for Financial Statement
purposes with the allowable bad debt deduction for tax purposes is as follows:

   Years Ended December 31,       Book Provision            Tax Deduction
   ------------------------       --------------            -------------

             2006                    $ 433                    $   33
             2005                    $ 263                    $   63
             2004                    $ 144                    $   44

         The balance of the Reserve for Bad Debts as reported for Federal income
tax purposes was $0, $380 and $664 at December 31, 2006, 2005 and 2004,
respectively.

NOTE 6 --LOAN SERVICING

         The Company services $49,116 in mortgage loans for Freddie Mac which
are not included in the accompanying Consolidated Balance Sheets.

         Custodial escrow balances maintained in connection with the foregoing
loan servicing, and included in deposits, were approximately $595 and $562, at
December 31, 2006 and 2005, respectively. The balance of the servicing rights
was $197 and $314 at December 31, 2006 and 2005, respectively, net of
amortization.

         The Company has not recorded any new mortgage servicing rights during
2006 or 2005. Amortization expense of $116 and $136 was recorded for the years
ended December 31, 2006 and 2005, respectively.

         There was no allowance for impairment recorded at December 31, 2006 or
2005.

NOTE 7 -- BANK PREMISES AND EQUIPMENT

December 31,                                     2006              2005
------------------------------------------------------------------------
Land                                         $  3,117         $   3,117
Buildings and improvements                     14,752            14,623
Furniture and equipment                        14,018            13,406
------------------------------------------------------------------------
                                               31,887            31,146
Less: Accumulated depreciation                 22,416            21,693
------------------------------------------------------------------------
   Net Bank Premises and Equipment           $  9,471         $   9,453
------------------------------------------------------------------------

         Buildings and improvements are being depreciated over 10 to 39.5 year
periods and equipment over 3 to 10 year periods. Depreciation expense amounted
to $723 in 2006, $704 in 2005 and $813 in 2004.

         Occupancy expenses were reduced by rental income received in the amount
of $64, $61 and $63 in the years ended December 31, 2006, 2005 and 2004,
respectively.

NOTE 8 -- OTHER REAL ESTATE OWNED

         Real estate acquired through foreclosure is recorded at the lower of
cost or market at the time of acquisition. Any subsequent write-downs are
charged against operating expenses. The other real estate owned as of December
31, 2006 and 2005 was $0 and $91, respectively, supported by appraisals of the
real estate involved.


                                       17

<PAGE>

NOTE 9 -- INVESTMENT IN AND LOAN TO, INCOME FROM DIVIDENDS AND EQUITY IN
EARNINGS OR LOSSES OF SUBSIDIARY

         Penseco Realty, Inc. is a wholly-owned subsidiary of the Bank which
owns certain banking premises. Selected financial information is presented
below:

                                   Equity in
         Percent                   underlying                        Bank's
       of voting      Total       net assets at      Amount       proportionate
         stock      investment      balance            of       part of loss for
Year     owned       and loan      sheet date       dividends      the period
--------------------------------------------------------------------------------
2006     100%        $ 3,250        $ 3,235           None         $     -
2005     100%        $ 3,250        $ 3,235           None         $     -
2004     100%        $ 3,350        $ 3,335           None         $     -

NOTE 10 -- CASH SURRENDER VALUE OF LIFE INSURANCE

         The Company has purchased Bank Owned Life Insurance (BOLI) policies on
certain officers.

         The policies are split-dollar life insurance policies which provide for
the company to receive the cash value of the policy and to split the residual
proceeds with the officer's designated beneficiary upon the death of the
insured. The majority of the residual proceeds are retained by the Company per
the individual agreements with the insured officers.

NOTE 11 -- DEPOSITS

December 31,                                     2006              2005
-----------------------------------------------------------------------
Demand - Non-interest bearing              $   71,585        $   91,713
Demand - Interest bearing                      57,309            33,094
Savings                                        80,328            86,013
Money markets                                  85,720            80,463
Time - Over $100,000                           39,478            28,124
Time - Other                                   79,380            78,460
-----------------------------------------------------------------------
  Total                                    $  413,800         $ 397,867
-----------------------------------------------------------------------

Scheduled maturities of time deposits are as follows:
                       2007        $  86,500
                       2008           12,082
                       2009            7,287
                       2010            9,125
                      2011             2,405
        2012 and thereafter            1,459
--------------------------------------------
                      Total        $ 118,858
--------------------------------------------

NOTE 12 -- OTHER BORROWED FUNDS

         At December 31, 2006 and 2005, other borrowed funds consisted of demand
notes to the U.S. Treasury and Repurchase agreements.

         Short-term borrowings generally have original maturity dates of thirty
days or less.

         Investment securities with amortized costs and fair values of $31,109
and $31,062 at December 31, 2006 and $35,209 and $35,026 at December 31, 2005,
were pledged to secure repurchase agreements.

                                       18

<PAGE>


Years Ended December 31,                               2006              2005
-----------------------------------------------------------------------------
Amount outstanding at year end                     $ 18,927          $ 35,040
Average interest rate at year end                     2.91%             2.01%
Maximum amount outstanding at any month end        $ 29,285          $ 35,040
Average amount outstanding                         $ 22,775          $ 27,638
Weighted average interest rate during the year:
      Federal funds purchased                          5.28%             3.96%
      Repurchase agreements                            2.34%             1.46%
      Demand notes to U.S. Treasury                    4.96%             2.99%

         The Company has an available credit facility with the Federal Reserve
Bank in the amount of $10,000, secured by pledged securities with amortized
costs and fair values of $10,202 and $9,958 at December 31, 2006 and $10,257 and
$10,008 at December 31, 2005 and with interest rates of 5.25% at both December
31, 2006 and December 31, 2005. There is no stated expiration date for the
credit facility as long as the Company maintains the pledged securities at the
Federal Reserve Bank. There was no outstanding balance as of December 31, 2006
and 2005, respectively.

         The Company has the availability of a $5,000 overnight Federal funds
line of credit with Wachovia Bank, N.A. Also, the Company has a $16,000
overnight Federal Funds line with PNC Bank. There was no balance outstanding as
of December 31, 2006 and 2005, respectively.

         The Company maintains a collateralized maximum borrowing capacity of
$178,176 with the Federal Home Loan Bank of Pittsburgh.

NOTE 13 -- LONG-TERM DEBT

         The loans from the Federal Home Loan Bank, which were borrowed to
purchase a mortgage-backed security, are secured by a general collateral pledge
of the Company's assets.

         A summary of long-term debt, including amortizing principal and
interest payments, at December 31, 2006 is as follows:

Monthly           Fixed             Maturity
Installment        Rate                 Date           Balance
--------------------------------------------------------------
$ 161             2.73%             03/13/08         $   2,366
  253             3.22%             03/13/10             9,354
  430             3.74%             03/13/13            28,722
  186             4.69%             03/13/23            25,411
--------------------------------------------------------------
Total                                                 $ 65,853
--------------------------------------------------------------

         The Company has agreed to maintain sufficient qualifying collateral to
fully secure the above borrowings.

         Aggregate maturities of long-term debt at December 31, 2006 are as
follows: 2007 $9,887, 2008 $8,781, 2009 $8,612, 2010 $6,634, 2011 $6,116 and
thereafter $25,823 for a total of $65,853.

NOTE 14 -- EMPLOYEE BENEFIT PLANS

         The Company provides an Employee Stock Ownership Plan (ESOP), a
Retirement Profit Sharing Plan, an Employees' Pension Plan, as well as an
unfunded supplemental executive pension plan and a Postretirement Life Insurance
Plan, all non-contributory, covering all eligible employees.

         Under the Employee Stock Ownership Plan (ESOP), amounts voted by the
Board of Directors are paid into the ESOP and each employee is credited with a
share in proportion to their annual compensation. All contributions to the ESOP
are invested in or will be invested primarily in Company stock. Distribution of
a participant's ESOP account occurs upon retirement, death or termination in
accordance with the plan provisions.

         At December 31, 2006 and 2005, the ESOP held 73,591 and 87,840 shares,
respectively of the Company's stock, all of which were acquired as described
above and allocated to specific participant accounts. These shares are treated
the same for dividend purposes and earnings per share calculations as are any
other outstanding shares of the Company's stock. The Company contributed $70,
$70 and $0 to the plan during the years ended December 31, 2006, 2005 and 2004,
respectively.

                                       19

<PAGE>

         Under the Retirement Profit Sharing Plan, amounts voted by the Board of
Directors are paid into a fund and each employee is credited with a share in
proportion to their annual compensation. Upon retirement, death or termination,
each employee is paid the total amount of their credits in the fund in one of a
number of optional ways in accordance with the plan provisions. The Company
contributed $70, $70 and $60 to the plan during the years ended December 31,
2006, 2005 and 2004, respectively.

         Under the Pension Plan, amounts computed on an actuarial basis are paid
by the Company into a trust fund. Provision is made for fixed benefits payable
for life upon retirement at the age of 65, based on length of service and
compensation levels as defined in the plan. Plan assets of the trust fund are
invested and administered by the Trust Department of Penn Security Bank and
Trust Company.

         The unfunded supplemental executive pension plan provides certain
officers with additional retirement benefits to replace benefits lost due to
limits imposed on qualified plans by Federal tax law.

         The postretirement life insurance plan is an unfunded, non-vesting
defined benefit plan. The plan is non-contributory and provides for a reducing
level of term life insurance coverage following retirement.

         For the unfunded plans above, amounts calculated on an actuarial basis
are recorded as a liability.
<TABLE>
<CAPTION>
         Obligations and funded status of the plans:

                                                              Pension Benefits                       Other Benefits
                                                              ----------------                       --------------
December 31,                                              2006              2005                 2006              2005
------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>               <C>                   <C>              <C>
Change in benefit obligation:
    Benefit obligation, beginning                    $  13,267         $  11,800             $    287         $     285
    Service cost                                           436               415                    6                 6
    Interest cost                                          673               678                   17                16
    Change in assumptions                               (1,167)              947                    1               (10)
    Actuarial (gain) loss                                  (55)             (223)                   -                 -
    Benefits paid                                         (554)             (350)                 (12)              (10)
------------------------------------------------------------------------------------------------------------------------
  Benefit obligation, ending                            12,600            13,267                  299               287
------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
    Fair value of plan assets, beginning                 9,709             9,469                    -                 -
    Actual return on plan assets                           954               213                    -                 -
    Employer contribution                                1,439               377                    -                 -
    Benefits paid                                         (554)             (350)                   -                 -
------------------------------------------------------------------------------------------------------------------------
  Fair value of plan assets, ending                     11,548             9,709                    -                 -
------------------------------------------------------------------------------------------------------------------------
Funded status                                        $  (1,052)           (3,558)            $   (299)             (287)
Unrecognized net actuarial loss (gain)                                     3,933                                    (33)
Unrecognized prior service cost                                               53                                     41
------------------------------------------------------------------------------------------------------------------------
  Net amount recognized                                                $     428                              $    (279)
------------------------------------------------------------------------------------------------------------------------

         Amounts recognized in the balance sheets consist of:

                                                              Pension Benefits                      Other Benefits
                                                              ----------------                      --------------
December 31,                                              2006              2005                 2006              2005
------------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost                                                  $      580                               $      -
Accrued benefit cost                                                      (1,683)                                  (279)
Intangible assets                                                            520                                      -
Accumulated other comprehensive income                                     1,011                                      -
------------------------------------------------------------------------------------------------------------------------
  Net amount recognized                                               $      428                               $   (279)
------------------------------------------------------------------------------------------------------------------------
Non Current Assets                                   $    358                                 $        -
Non Current Liabilities                              $  1,052                                 $      299

</TABLE>

                                                       20
<PAGE>

         Amounts recognized in the accumulated other comprehensive income
consist of:

<TABLE>
<CAPTION>
                                                             Pension Benefits                        Other Benefits
                                                             ----------------                        --------------
December 31,                                              2006              2005                 2006              2005
------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                                     <C>
Prior service costs                                $        52                             $       34
Net actuarial loss (gain)                                2,482                                    (34)
Deferred taxes                                            (861)                                     -
------------------------------------------------------------------------------------------------------------------------
  Net amount recognized                            $     1,673                             $        -
------------------------------------------------------------------------------------------------------------------------

         The accumulated benefit obligation for all defined benefit pension
plans was $10,915 and $10,866 at December 31, 2006 and 2005, respectively.

         Information for pension plans with an accumulated benefit obligation in
excess of plan assets is as follows:

                                                      Pension Benefits
                                                      ----------------
                                                2006                   2005
----------------------------------------------------------------------------
Projected benefit obligation                $      -               $ 13,267
Accumulated benefit obligation                     -                 10,866
Fair value of plan assets                          -                  9,709

         Components of net periodic pension cost and other amounts recognized in
other comprehensive income:
                                                                Pension Benefits
                                                                ----------------
Years Ended December 31,                              2006             2005              2004
----------------------------------------------------------------------------------------------
Components of net periodic pension cost:
    Service cost                                  $    436          $   415           $   385
    Interest cost                                      673              678               664
    Expected return on plan assets                    (890)            (755)             (700)
    Amortization of prior service cost                   -                -                 -
    Amortization of unrecognized net loss              166              114               114
----------------------------------------------------------------------------------------------
      Net periodic pension cost                   $    385          $   452           $   463
----------------------------------------------------------------------------------------------
         Other changes in plan assets and benefit obligations recognized in
other comprehensive income:

FASB 158 recognition of deferred cost, net        $  1,673
Reverse effect of additional minimum liability      (1,011)
-----------------------------------------------------------------
  Total recognized in other comprehensive
     income                                       $    662
-----------------------------------------------------------------
  Total recognized in net period pension
     cost and other comprehensive income          $  1,047
-----------------------------------------------------------------

                                                                  Other Benefits
                                                                  --------------
Years Ended December 31,                              2006             2005              2004
---------------------------------------------------------------------------------------------
Components of net periodic other benefit cost:
    Service cost                                     $   6            $   6             $   6
    Interest cost                                       17               16                16
    Amortization of prior service cost                   7                7                 7
    Amortization of unrecognized net gain                -                -                 -
---------------------------------------------------------------------------------------------
      Net periodic other benefit cost                $  30            $  29             $  29
---------------------------------------------------------------------------------------------
</TABLE>

         Other changes in plan assets and benefit obligations recognized in
other comprehensive income:

FASB 158 recognition of deferred costs, net          $    -
----------------------------------------------------------------
  Total recognized in other comprehensive
    income                                           $    -
----------------------------------------------------------------
  Total recognized in net periodic pension
    cost and other comprehensive income              $   30
----------------------------------------------------------------

                                       21

<PAGE>

         The estimated net loss and prior service cost for the defined benefit
pension plan(s) that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal year are $102 and $0,
respectively. The estimated prior service cost for the other defined benefit
postretirement plan will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal year is $7.

         Weighted-average assumptions used to determine benefit obligations were
as follows:
<TABLE>
<CAPTION>
                                                    Pension Benefits                             Other Benefits
                                                    ----------------                             --------------
December 31,                                     2006              2005                      2006              2005
-------------------------------------------------------------------------------------------------------------------
<S>                                       <C>               <C>                             <C>               <C>
Discount rate                             5.75%-6.00%       5.50%-6.00%                     6.00%             6.00%
Rate of compensation increase                   3.00%             4.00%                     4.50%             4.50%

                                                    Pension Benefits                             Other Benefits
                                                    ----------------                             --------------
Years Ended December 31,                         2006              2005                      2006              2005
-------------------------------------------------------------------------------------------------------------------
Discount rate                             5.75%-6.00%       5.50%-6.00%                     6.00%             6.00%
Expected long-term return on plan assets        8.50%             8.00%                        -                  -
Rate of compensation increase                   3.00%             4.00%                     4.50%             4.50%
</TABLE>

         The expected long-term return on plan assets was determined using
average historical returns of the Company's plan assets.

         The Company's pension plan weighted-average asset allocations at
December 31, 2006 and 2005 by asset category are as follows:

                                  Plan Assets at December 31,
                                  ---------------------------
                                        2006             2005
-------------------------------------------------------------
Asset Category
--------------
Equity securities                      55.9%             55.7%
Corporate bonds                        20.1%             24.6%
U.S. Government securities             23.2%             19.4%
Cash and cash equivalents                .8%               .3%
--------------------------------------------------------------
                                      100.0%            100.0%
--------------------------------------------------------------

         The Company investment policies and strategies include:

         1.)  The Trust and Investment Division's equity philosophy is Large-Cap
              Core with a value bias. We invest in individual high-grade common
              stocks that are selected from our approved list.

         2.)  Diversification is maintained by having no more than 20% in any
              industry sector and no individual equity representing more than
              10% of the portfolio.

         3.)  The fixed income style is conservative but also responsive to the
              various needs of our individual clients. For our "Fixed Income"
              securities, we buy U.S. Government bonds and Agencies or
              high-grade Corporate rated "A" or better. The Company targets the
              following allocation percentages: cash equivalents 10%, fixed
              income 40% and equities 50%.

         There is no Company stock included in equity securities at December 31,
2006 or 2005.

Contributions
-------------

The Company expects to contribute $250, to its pension plan and $13 to its other
postretirement plan in 2007.

                                       22
<PAGE>


Estimated Future Benefit Payments
---------------------------------

         The following benefit payments, which reflect expected future service,
as appropriate, are expected to be paid in the next five years and in the
aggregate for the five years thereafter:

                 Pension Benefits      Other Benefits
                 ----------------      --------------
2007                   $499              $13
2008                    497               13
2009                    507               13
2010                    540               14
2011                    599               15
2012-2016             4,041               93

NOTE 15 -- INCOME TAXES

         The total income taxes in the Statements of Income are as follows:

Years Ended December 31,                2006              2005             2004
--------------------------------------------------------------------------------
Currently payable                    $ 1,849           $ 1,447          $ 1,190
Deferred (benefit) provision            (254)              166             (119)
--------------------------------------------------------------------------------
  Total                              $ 1,595           $ 1,613          $ 1,071
--------------------------------------------------------------------------------

         A reconciliation of income taxes at statutory rates to applicable
income taxes reported in the Statements of Income is as follows:

Years Ended December 31,                2006              2005             2004
--------------------------------------------------------------------------------
Tax at statutory rate              $   2,585         $   2,544        $   2,268
Reduction for non-taxable interest    (1,052)           (1,012)          (1,262)
Other additions                           62                81               65
--------------------------------------------------------------------------------
  Applicable Income Taxes          $   1,595         $   1,613        $   1,071
--------------------------------------------------------------------------------

         The components of the deferred income tax (benefit) provision, which
result from temporary differences, are as follows:

Years Ended December 31,                2006              2005              2004
--------------------------------------------------------------------------------
Accretion of discount on bonds        $  (29)         $     18          $     24
Accelerated depreciation                  13                (4)               21
Supplemental benefit plan                 51                (3)              (1)
Allowance for loan losses               (243)             (165)            (130)
Prepaid pension cost                     (46)              320              (33)
--------------------------------------------------------------------------------
  Total                               $ (254)          $   166           $ (119)
--------------------------------------------------------------------------------

         The significant components of deferred tax assets and liabilities are
as follows:

December 31,                                              2006              2005
--------------------------------------------------------------------------------
Deferred tax assets:
  Allowance for loan losses                            $ 1,406           $ 1,163
  Minimum pension liability                                  -               520
  Accrued pension costs                                    358                 -
  Accumulated depreciation                                 309               322
  Accrued supplemental benefit plan                          -                51
--------------------------------------------------------------------------------
    Total Deferred Tax Assets                            2,073             2,056
--------------------------------------------------------------------------------
Deferred tax liabilities:
  Prepaid pension costs                                      -               571
  Unrealized securities gains                              522               187
  Accumulated accretion                                     40                69
--------------------------------------------------------------------------------
    Total Deferred Tax Liabilities                         562               827
--------------------------------------------------------------------------------
    Net Deferred Tax Assets                            $ 1,511           $ 1,229
--------------------------------------------------------------------------------

                                       23
<PAGE>

         In management's opinion, the deferred tax assets are realizable in as
much as there is a history of strong earnings and a carryback potential greater
than the deferred tax assets. Management is not aware of any evidence that would
preclude the realization of the benefit in the future and, accordingly, has not
established a valuation allowance against the deferred tax assets.

NOTE 16 -- ACCUMULATED OTHER COMPREHENSIVE INCOME

         Accumulated other comprehensive income was ($662), ($648) and $704 at
December 31, 2006, 2005 and 2004, respectively.

OTHER COMPREHENSIVE INCOME

         Other comprehensive income (comprehensive income, excluding net
income), beginning with the 2005 period, includes two components, the change in
unrealized holding gains and losses on available for sale securities and the
change in the unfunded pension liability. The components of other comprehensive
income are reported net of related tax effects in the Consolidated Statements of
Changes in Stockholders' Equity. Prior to 2005, other comprehensive income
included only one component, the change in unrealized holding gains and losses
on available for sale securities, net of related tax effects.

         In 2006, accumulated other comprehensive income includes the initial
application of FASB No. 158 to record the unrecognized components of net
periodic pension cost. In future years changes in these components will be shown
in other comprehensive income.

         A reconciliation of other comprehensive income for the years ended
December 31, 2006, 2005 and 2004 is as follows:
<TABLE>
<CAPTION>
                                                                                                     Tax
                                                                                Before-Tax        (Expense)        Net-of-Tax
2006                                                                              Amount           Benefit           Amount
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>               <C>               <C>
Unrealized losses on available-for-sale securities:
  Unrealized gains arising during the year                                     $   1,302         $    (443)        $    859
  Less:  Reclassification adjustment for gains realized in income                    319              (108)             211
                                                                               ----------------------------------------------
  Net unrealized losses                                                              983              (335)             648
Change in minimum pension liability                                                1,531              (520)           1,011
-----------------------------------------------------------------------------------------------------------------------------
    Other Comprehensive Income                                                 $   2,514         $    (855)         $ 1,659
-----------------------------------------------------------------------------------------------------------------------------

                                                                                                     Tax
                                                                                Before-Tax        (Expense)        Net-of-Tax
2005                                                                              Amount           Benefit           Amount
-----------------------------------------------------------------------------------------------------------------------------
Unrealized losses on available-for-sale securities:
    Unrealized losses arising during the year                                  $    (531)        $     181        $    (350)
    Less:  Reclassification adjustment for losses realized in income                 (13)                4               (9)
                                                                               ----------------------------------------------
    Net unrealized losses                                                           (518)              177             (341)
Change in minimum pension liability                                               (1,531)              520           (1,011)
-----------------------------------------------------------------------------------------------------------------------------
    Other Comprehensive Income                                                 $  (2,049)        $     697        $  (1,352)
-----------------------------------------------------------------------------------------------------------------------------

                                                                                                     Tax
                                                                                Before-Tax        (Expense)        Net-of-Tax
2004                                                                              Amount           Benefit           Amount
-----------------------------------------------------------------------------------------------------------------------------
Unrealized losses on available-for-sale securities:
  Unrealized losses arising during the year                                    $  (1,357)         $    461        $    (896)
  Less:  Reclassification adjustment for gains realized in income                    357              (121)             236
-----------------------------------------------------------------------------------------------------------------------------
    Net unrealized losses                                                      $  (1,714)         $    582         $ (1,132)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                       24

<PAGE>


NOTE 17 --COMMITMENTS AND CONTINGENT LIABILITIES

         In the normal course of business, there are outstanding commitments and
contingent liabilities, created under prevailing terms and collateral
requirements such as commitments to extend credit, financial guarantees and
letters of credit, which are not reflected in the accompanying Financial
Statements. The Company does not anticipate any losses as a result of these
transactions. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the Balance Sheets.

         The contract or notional amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments.

         Financial instruments whose contract amounts represent credit risk at
December 31, 2006 and 2005 are as follows:

                                        2006              2005
--------------------------------------------------------------
Commitments to extend credit:
  Fixed rate                        $ 37,692          $ 41,229
  Variable rate                     $ 74,577          $ 75,100
Standby letters of credit           $ 15,061          $ 15,268

         Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have expiration dates of one year or less or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.

         Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.

         Various actions and proceedings are presently pending to which the
Company is a party. Management is of the opinion that the aggregate liabilities,
if any, arising from such actions would not have a material adverse effect on
the financial position of the Company.

NOTE 18 -- FAIR VALUE DISCLOSURE

GENERAL

         Statement of Financial Accounting Standards No.107, "DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS" (SFAS 107), requires the disclosure of the
estimated fair value of on and off-balance sheet financial instruments.

VALUATION METHODS AND ASSUMPTIONS

         Estimated fair values have been determined using the best available
data, an estimation methodology suitable for each category of financial
instruments. For those loans and deposits with floating interest rates it is
presumed that estimated fair values generally approximate the carrying amount
balances.

         Financial instruments actively traded in a secondary market have been
valued using quoted available market prices. Those with stated maturities have
been valued using a present value discounted cash flow with a discount rate
approximating current market for similar assets and liabilities. Those
liabilities with no stated maturities have an estimated fair value equal to both
the amount payable on demand and the carrying amount balance. The net loan
portfolio has been valued using a present value discounted cash flow. The
discount rate used in these calculations is the current loan rate adjusted for
non-interest operating costs, credit loss and assumed prepayment risk. Off
balance sheet carrying amounts and fair value of letters of credit represent the
deferred income fees arising from those unrecognized financial instruments.

         Changes in assumptions or estimation methodologies may have a material
effect on these estimated fair values.

         All assets and liabilities which are not considered financial
instruments have not been valued differently than has been customary with
historical cost accounting.

                                       25

<PAGE>
<TABLE>
<CAPTION>
                                                           December 31, 2006                         December 31, 2005
-----------------------------------------------------------------------------------------------------------------------------
                                                       Carrying           Fair                    Carrying           Fair
                                                        Amount            Value                    Amount            Value
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>               <C>                      <C>              <C>
Financial Assets:
  Cash and due from banks                            $  12,999         $  12,999                $   11,310       $   11,310
  Interest bearing balances with banks                   1,779             1,779                       263              263
-----------------------------------------------------------------------------------------------------------------------------
    Cash and cash equivalents                           14,778            14,778                    11,573           11,573
  Investment Securities:
    Available-for-sale:
      U.S. Agency obligations                           54,123            54,123                   118,545          118,545
      States & political subdivisions                   30,220            30,220                    21,635           21,635
      Federal Home Loan Bank stock                       5,093             5,093                     4,699            4,699
      Other securities                                   2,269             2,269                     3,063            3,063
    Held-to-maturity:
      U.S. Agency obligations                           45,124            44,054                    52,763           51,492
      States & political subdivisions                   29,251            31,066                    29,252           31,638
-----------------------------------------------------------------------------------------------------------------------------
      Total investment securities                      166,080           166,825                   229,957          231,072
  Loans, net of unearned income:
    Real estate mortgages                              308,037           307,508                   240,985          235,427
    Commercial                                          26,265            25,963                    42,894           42,894
    Consumer and other                                  35,620            35,492                    37,483           37,899
    Less:  Allowance for loan losses                     4,200                                       3,800
-----------------------------------------------------------------------------------------------------------------------------
      Loans, net                                       365,722           368,963                   317,562          316,220
  Cash surrender value of life insurance                 7,054             7,054                         -                -
-----------------------------------------------------------------------------------------------------------------------------
      Total Financial Assets                           553,634         $ 557,620                   559,092       $  558,865
Other assets                                            16,187                                      16,596
-----------------------------------------------------------------------------------------------------------------------------
      Total Assets                                   $ 569,821                                  $  575,688
-----------------------------------------------------------------------------------------------------------------------------

Financial Liabilities:
  Demand - Non-interest bearing                      $  71,585         $  71,585                $   91,713       $   91,713
  Demand - Interest bearing                             57,309            57,309                    33,094           33,094
  Savings                                               80,328            80,328                    86,013           86,013
  Money markets                                         85,720            85,720                    80,463           80,463
  Time                                                 118,858           118,201                   106,584          107,794
-----------------------------------------------------------------------------------------------------------------------------
      Total Deposits                                   413,800           413,143                   397,867          399,077
  Repurchase agreements                                 13,441            13,441                    30,414           30,414
  Short-term borrowings                                  5,486             5,486                     4,626            4,626
  Long-term borrowings                                  65,853            63,306                    75,401           75,710
-----------------------------------------------------------------------------------------------------------------------------
      Total Financial Liabilities                      498,580         $ 495,376                   508,308       $  509,827
Other Liabilities                                        4,670                                       3,581
Stockholders' Equity                                    66,571                                      63,799
-----------------------------------------------------------------------------------------------------------------------------
      Total Liabilities and Stockholders' Equity     $ 569,821                                  $  575,688
-----------------------------------------------------------------------------------------------------------------------------
Standby Letters of Credit                            $    (151)        $   (151)                $     (153)      $     (153)

NOTE 19 -- OPERATING LEASES

         The Company leases the land upon which the Mount Pocono Office was
built and the land upon which a drive-up ATM was built on Meadow Avenue,
Scranton. The Company also leases space at several locations which are being
used as remote banking facilities. Rental expense was $90 in 2006, $94 in 2005
and $90 in 2004. All leases contain renewal options. The Mount Pocono and the
Meadow Avenue leases contain the right of first refusal for the purchase of the
properties and provisions for annual rent adjustments based upon the Consumer
Price Index.

         Future minimum rental commitments under these leases at December 31,
2006 are as follows:

                                                 Mount            Meadow             ATM
                                                Pocono            Avenue            Sites             Total
-----------------------------------------------------------------------------------------------------------
2007                                           $   55            $   22            $   6            $   83
2008                                               55                22                4                81
2009                                               55                22                -                77
2010                                               55                22                -                77
2011                                               21                 9                -                30
-----------------------------------------------------------------------------------------------------------
    Total minimum payments required             $ 241            $   97           $   10             $ 348
-----------------------------------------------------------------------------------------------------------
</TABLE>

                                                   26

<PAGE>

NOTE 20 -- LOANS TO DIRECTORS, PRINCIPAL OFFICERS AND RELATED PARTIES

         The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. A summary of loans to directors,
principal officers and related parties is as follows:

Years Ended December 31,                2006              2005
---------------------------------------------------------------
Beginning Balance                   $ 10,490          $  9,632
Additions                              1,042             5,387
Reclassifications                          8              (217)
Collections                           (1,115)           (4,312)
---------------------------------------------------------------
     Ending Balance                 $ 10,425          $ 10,490
---------------------------------------------------------------

         In addition to the loan amounts shown above, the Bank has issued
standby letters of credit for the accounts of related parties in the amount of
$6,248.

NOTE 21 -- REGULATORY MATTERS

         The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company and the Bank's Consolidated Financial
Statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company and the Bank's capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.

         Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the Capital Adequacy table on the following page) of Tier I and
Total Capital to risk-weighted assets and of Tier I Capital to average assets
(Leverage ratio). The table also presents the Company's actual capital amounts
and ratios. The Bank's actual capital amounts and ratios are substantially
identical to the Company's. Management believes, as of December 31, 2006, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.

         As of December 31, 2006, the most recent notification from the Federal
Deposit Insurance Corporation (FDIC) categorized the Company as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized", the Company must maintain minimum Tier I
Capital, Total Capital and Leverage ratios as set forth in the Capital Adequacy
table. There are no conditions or events since that notification that management
believes have changed the Company's categorization by the FDIC.

         The Company and Bank are also subject to minimum capital levels which
could limit the payment of dividends, although the Company and Bank currently
have capital levels which are in excess of minimum capital level ratios
required.

         The Pennsylvania Banking Code restricts capital funds available for
payment of dividends to the Retained Earnings of the Bank. Accordingly, at
December 31, 2006, the balances in the Capital Stock and Surplus accounts
totalling $10,840 are unavailable for dividends.

         In addition, the Bank is subject to restrictions imposed by Federal law
on certain transactions with the Company's affiliates. These transactions
include extensions of credit, purchases of or investments in stock issued by the
affiliate, purchases of assets subject to certain exceptions, acceptance of
securities issued by an affiliate as collateral for loans, and the issuance of
guarantees, acceptances, and letters of credit on behalf of affiliates. These
restrictions prevent the Company's affiliates from borrowing from the Bank
unless the loans are secured by obligations of designated amounts. Further, the
aggregate of such transactions by the Bank with a single affiliate is limited in
amount to 10 percent of the Bank's Capital Stock and Surplus, and the aggregate
of such transactions with all affiliates is limited to 20 percent of the Bank's
Capital Stock and Surplus. The Federal Reserve System has interpreted "Capital
Stock and Surplus" to include undivided profits.

                                       27


<PAGE>
<TABLE>
<CAPTION>
                          ACTUAL                                                         REGULATORY REQUIREMENTS
-----------------------------------------------------------------   ----------------------------------------------------------------

                                                                            For Capital                            To Be
                                                                        Adequacy Purposes                   "Well Capitalized"
                                                                        -----------------                   ------------------
As of December 31, 2006                       Amount     Ratio        Amount            Ratio              Amount           Ratio
------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>         <C>                 <C>           <C>                 <C>
Total Capital (to Risk Weighted Assets)
              PFSC (Company)               $   71,235     19.65%  >   $  28,998      >    8.0%    >     $  36,248     >     10.0%
                                                                  -                  -            -                   -
              PSB (Bank)                   $   68,029     18.84%  >   $  28,882      >    8.0%    >     $  36,103     >     10.0%
                                                                  -                  -            -                   -
Tier 1 Capital (to Risk Weighted Assets)
              PFSC (Company)               $   67,035     18.49%  >   $  14,499      >    4.0%    >     $  21,749     >      6.0%
                                                                  -                  -            -                   -
              PSB (Bank)                   $   63,829     17.68%  >   $  14,441      >    4.0%    >     $  21,662     >      6.0%
                                                                  -                  -            -                   -
Tier 1 Capital (to Average Assets)
              PFSC (Company)               $   67,035     11.93%  >   $       *      >    *        >    $  28,105     >      5.0%
                                                                  -                  -            -                   -
              PSB (Bank)                   $   63,829     11.36%  >   $       *      >    *        >    $  28,083     >      5.0%
                                                                  -                  -            -                   -

PFSC - *3.0% ($16,863), 4.0% ($22,484) or 5.0% ($28,105) depending on the bank's CAMELS Rating and other regulatory risk factors.
PSB - *3.0% ($16,850), 4.0% ($22,466) or 5.0% ($28,083) depending on the bank's CAMELS Rating and other regulatory risk factors.


As of December 31, 2005                      Amount      Ratio        Amount            Ratio               Amount          Ratio
------------------------------------------------------------------------------------------------------------------------------------

Total Capital (to Risk Weighted Assets)
              PFSC (Company)               $   66,923     19.78%  >   $  27,073      >      8.0%  >   $  33,841       >      10.0%
                                                                  -                  -            -                   -
              PSB (Bank)                   $   64,127     19.10%  >   $  26,865      >      8.0%  >   $  33,581       >      10.0%
                                                                  -                  -            -                   -
Tier 1 Capital (to Risk Weighted Assets)
              PFSC (Company)               $   63,123     18.65%  >   $  13,536      >      4.0%  >   $  20,304       >       6.0%
                                                                  -                  -            -                   -
              PSB (Bank)                   $   60,327     17.97%  >   $  13,432      >      4.0%  >   $  20,148       >       6.0%
                                                                  -                  -            -                   -
Tier 1 Capital (to Average Assets)

              PFSC (Company)               $  63,123      11.11%  >   $       *      >      *     >   $  28,400       >       5.0%
                                                                  -                  -            -                   -
              PSB (Bank)                   $  60,327      10.66%  >   $       *      >      *     >   $  28,297       >       5.0%
                                                                  -                  -            -                   -

PFSC - *3.0% ($17,040), 4.0% ($22,720) or 5.0% ($28,400) depending on the bank's CAMELS Rating and other regulatory risk factors.
PSB - *3.0% ($16,978), 4.0% ($22,638) or 5.0% ($28,297) depending on the bank's CAMELS Rating and other regulatory risk factors.
</TABLE>

NOTE 22 -- PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)

                 The condensed Company-only information follows:

BALANCE SHEETS

DECEMBER 31,                                          2006             2005
============================================================================
Cash                                            $        1       $        5
Interest bearing balances with banks                 1,554               76
----------------------------------------------------------------------------
   Cash and Cash Equivalents                         1,555               81
Investment in bank subsidiary                       62,970           60,787
Equity Investments                                   2,249            3,043
----------------------------------------------------------------------------
TOTAL ASSETS                                    $   66,774       $   63,911
============================================================================

TOTAL LIABILITIES                               $      203       $      112
TOTAL STOCKHOLDERS' EQUITY                          66,571           63,799
============================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY      $   66,774       $   63,911
============================================================================

                                       28

<PAGE>
<TABLE>
<CAPTION>

STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31,                                               2006              2005             2004
===============================================================================================================
<S>                                                                 <C>               <C>              <C>
Dividends from bank subsidiary                                      $ 3,222           $ 5,594          $ 2,900
Dividends on investment securities                                      106                45               11
Interest on balances with banks                                           5                 3                -
Gain on sale of equities                                                319                 -                -
---------------------------------------------------------------------------------------------------------------
  Total Income                                                        3,652             5,642            2,911
Other non-interest expense                                               21                10               10
---------------------------------------------------------------------------------------------------------------
Net income before undistributed earnings of bank subsidiary           3,631             5,632            2,901
Undistributed earnings of bank subsidiary                             2,377               237            2,700
---------------------------------------------------------------------------------------------------------------
NET INCOME                                                          $ 6,008           $ 5,869          $ 5,601
===============================================================================================================


STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,                                                    2006             2005              2004
====================================================================================================================
Operating Activities:
Net Income                                                              $  6,008        $   5,869         $   5,601
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Gain on sale of equities                                                (319)               -                 -
    Equity in undistributed net income of bank subsidiary                 (2,377)            (237)           (2,700)
--------------------------------------------------------------------------------------------------------------------
    NET CASH PROVIDED BY OPERATING ACTIVITIES                              3,312            5,632             2,901
====================================================================================================================
Investing Activities:
Purchase of equity investments                                              (160)          (2,465)                -
Proceeds form sales of equity securities                                   1,544                -                 -
--------------------------------------------------------------------------------------------------------------------
    NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES                       1,384           (2,465)                -
====================================================================================================================
Financing Activities:
Cash dividends paid                                                       (3,222)          (3,094)           (2,900)
--------------------------------------------------------------------------------------------------------------------
    NET CASH USED BY FINANCING ACTIVITIES                                 (3,222)          (3,094)           (2,900)
====================================================================================================================
    Net increase in cash and cash equivalents                              1,474               73                 1
Cash and cash equivalents at January 1                                        81                8                 7
--------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31                                $  1,555        $      81         $       8
====================================================================================================================
</TABLE>



                                                 29

<PAGE>


ITEM 9A       CONTROLS AND PROCEDURES

         Under the supervision and with the participation of our management,
including our Chief Executive Officer and Controller, we conducted an evaluation
of our disclosure controls and procedures, as such term is defined under Rule
13a-15(e) under the Securities Exchange Act of 1934. Based upon this evaluation,
our Chief Executive Officer and our Controller concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this annual report. Management's annual report on internal control over
financial reporting is included under the heading "Report on Internal Control
Over Financial Reporting" at Item 8 of this Annual Report on Form 10-K. The
attestation report of the registered public accounting firm is included under
the heading "Report of the Independent Registered Public Accounting Firm" at
Item 8 of this Annual Report on Form 10-K.

         The Company continually assesses the adequacy of its internal control
over financial reporting and enhances its controls in response to internal
control assessments, and internal and external audit and regulatory
recommendations. No change in internal control over financial reporting during
the quarter ended December 31, 2006 or through the date of this Annual Report on
Form 10-K have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.

         Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate due to changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

                                     PART IV

ITEM 15       EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     (a)(1)       Financial Statements - The following financial statements are
                  incorporated by reference in Part II, Item 8 hereof:
                       Balance Sheets
                       Consolidated Statements of Income
                       Consolidated Statements of Stockholders' Equity
                       Consolidated Statements of Cash Flows
                       General Notes to Financial Statements
                       Report of Independent Registered Public Accounting Firm
        (2)       Financial Statement Schedules - The Financial Statement
                  Schedules are incorporated by reference in Part II, Item 8
                  hereof.
        (3)       Exhibits - The following exhibits are filed herewith or
                  incorporated by reference as part of this Annual Report.
          (3)(i)     Registrant's Articles of Incorporation (Incorporated herein
                     by reference to Exhibit 3(i) of Registrant's report on
                     Form 10-K filed with the SEC on March 30, 1998.)
           3(ii)     Registrant's By-Laws (Incorporated herein by reference to
                     Exhibit 3(ii) of Registrant's report on Form 10-K filed
                     with the SEC on March 16, 2006.)
           10        Material contracts
           13        Annual report to security holders (Included herein by
                     reference on pages 1- 56.)
           14        Code of Ethics (Incorporated herein by reference to Exhibit
                     10 of Registrant's report on Form 10-K filed with the SEC
                     on March 16, 2006.)
           21        Subsidiaries of the registrant (Incorporated herein by
                     reference to Exhibit 21 of Registrant's report on Form 10-K
                     filed with the SEC on March 30, 1998.)
           23        Consent of McGrail Merkel Quinn & Associates
           31        Certifications required under Section 302 of the
                     Sarbanes-Oxley Act of 2002
           32        Certifications required under Section 906 of the
                  Sarbanes-Oxley Act of 2002
     (b)   A Form 8-K was filed during the fourth quarter of the fiscal year
           ended December 31, 2006.
     (c)   The exhibits required to be filed by this Item are listed under
           Item 15(a)(3), above.
     (d)   There are no financial statement schedules required to be filed under
           this item.

                                       30

<PAGE>



                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                        PENSECO FINANCIAL SERVICES CORPORATION


December 18, 2007                       By:  /s/ Craig W. Best
                                             -------------------------
                                             Craig W. Best
                                             President and CEO