PART I

FORWARD LOOKING STATEMENTS

Leesport Financial Corp. (the “Company”) may from time to time make written or oral “forward-looking statements,” including statements contained in the Company’s filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company’s control). The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Company’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing.

The Company cautions that the foregoing list of important factors is not exclusive. Readers are also cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this report. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

Item 1. Business

The Company is a Pennsylvania business corporation headquartered at 1240 Broadcasting Road, Wyomissing, Pennsylvania 19610. The Company was organized as a bank holding company on January 1, 1986. The Company’s election with the Board of Governors of the Federal Reserve System to become a financial holding company became effective on February 7, 2002. The Company offers a wide array of financial services through its various subsidiaries. The Company’s executive offices are located at 1240 Broadcasting Road, Wyomissing, Pennsylvania 19610.

At December 31, 2006, the Company had total assets of $1.0 billion, total shareholders’ equity of $102.1 million, and total deposits of $702.8 million.

Subsidiary Activities

The Bank

The Company’s wholly-owned banking subsidiary is Leesport Bank (“Leesport Bank” or the “Bank”), a Pennsylvania chartered commercial bank. During the year ended December 31, 2000, the charters of The First National Bank of Leesport and Merchants Bank of Pennsylvania, both wholly-owned banking

subsidiaries of the Company at that time, were merged into a single charter under the name Leesport Bank. The First National Bank of Leesport was incorporated under the laws of the United States of America as a national bank in 1909. Leesport Bank operates in Berks, Schuylkill, Philadelphia, Delaware and Montgomery counties in Pennsylvania.

On October 1, 2004, the Company acquired 100% of the outstanding voting shares of Madison Bancshares Group, Ltd., the holding company for Madison Bank (“Madison”), a Pennsylvania state-chartered commercial bank and its mortgage banking division, Philadelphia Financial Mortgage Company (“PFM” or “Philadelphia Financial”). Madison and PFM are both now divisions of Leesport Bank. The transaction enhances the Bank’s strong presence in Pennsylvania, particularly in the high growth counties of Berks, Philadelphia, Montgomery and Delaware.

Leesport Bank had two wholly-owned subsidiaries as of December 31, 2006: Leesport Realty Solutions, LLC, which provides title insurance and other real estate related services to its customers through limited partnership arrangements with third parties involved in the real estate services industry; and Leesport Mortgage, LLC, which provides mortgage brokerage services, including, without limitation, any activity in which a mortgage broker may engage. It is operated as a permissible “affiliated business arrangement” within the meaning of the Real Estate Settlement Procedures Act of 1974.

Leesport Realty Solutions, LLC provides title insurance and other real estate related services to the Company’s customers through limited partnership arrangements with unaffiliated third parties involved in the real estate services industry. The capital contributions of Leesport Realty Solutions, LLC in connection with the formation of each of the limited partnerships were not material. None of the limited partnership arrangements involves the use of a special purposes entity for financial accounting purposes or any off-balance sheet financing technique. Neither the Company nor any other affiliate of the Company nor Leesport Realty Solutions, LLC has any continuing contractual financial commitment to the limited partnerships beyond the amount of the initial capital contribution. At December 31, 2006, Leesport Realty Solutions, LLC had no full-time equivalent employees.

Commercial and Retail Banking

Leesport Bank provides services to its customers through eighteen full service financial centers, which operate under Leesport Bank’s name in Leesport, Blandon, Bern Township, Wyomissing, Breezy Corner, Hamburg, Birdsboro, Northeast Reading, Exeter Township, and Sinking Spring all of which are in Berks County, Pennsylvania. Leesport Bank also operates a financial center in Schuylkill Haven, which is located in Schuylkill County. Through its 2004 acquisition of Madison, Leesport Bank operates Madison division financial centers in Blue Bell, Conshohocken, Horsham, Oaks and Centre Square all of which are in Montgomery County, Pennsylvania. The Bank also operates Madison division branches in Fox Chase (northeast Philadelphia) in Philadelphia County, Pennsylvania and Strafford in Delaware County, Pennsylvania. The Bank also operates a limited service facility in Wernersville, Berks County, Pennsylvania. All full service facilities provide automated teller machine services. Each financial center, except the Wernersville and Breezy Corner locations, provide drive-in facilities.

Leesport Bank engages in full service commercial and consumer banking business, including such services as accepting deposits in the form of time, demand and savings accounts. Such time deposits include certificates of deposit, individual retirement accounts and Roth IRAs. The Bank’s savings accounts include money market accounts, health savings accounts, club accounts, NOW accounts and traditional regular savings accounts. In addition to accepting deposits, the Bank makes both secured and unsecured commercial and consumer loans, finances commercial transactions, provides equipment lease and accounts receivable financing and makes construction and mortgage loans, including home equity loans. The Bank also provides small business loans and other services including rents for safe deposit facilities.

At December 31, 2006, the Bank had the equivalent of 216 full-time employees.

Mortgage Banking

Leesport Bank provides mortgage banking services to its customers through Philadelphia Financial through offices in Reading, Blue Bell and Camp Hill, which are located in Berks County, Pennsylvania, Montgomery County, Pennsylvania and Cumberland County, Pennsylvania, respectively.

Insurance

Essick & Barr, LLC (“Essick & Barr”), which includes The Boothby Group, a property and casualty and employee benefits insurance agency acquired as of October 1, 2002, offers a full line of personal and commercial property and casualty insurance as well as group insurance for businesses, employee benefit plans, and life insurance. Effective September 30, 2003, Essick & Barr acquired certain assets of CrosStates Insurance Consultants, Inc., a full service insurance agency that specializes in personal property and casualty insurance located in Langhorne, Pennsylvania. Effective January 1, 2005, CrosStates Insurance Consultants, Inc. changed its name to Madison Insurance Consultants. Essick & Barr is headquartered in Reading, Pennsylvania with sales offices at 108 South Fifth Street, Reading, Pennsylvania; 460 Norristown Road, Blue Bell, Pennsylvania; 1240 Broadcasting Road, Wyomissing, Pennsylvania; and 2300 E. Lincoln Highway, Langhorne, Pennsylvania. Essick & Barr had 67 full-time employees at December 31, 2006.

Effective October 1, 2002, Essick & Barr, Inc., a Berks County based general insurance agency, was converted to a limited liability company and became a subsidiary of the Company and is no longer a subsidiary of the Bank.

Wealth Management

Effective February 13, 2003, both Leesport Wealth Management, Inc., an SEC-registered investment advisory business acquired in 1999, and Leesport Investment Group, Inc, which was formed in 1999 to purchase a securities brokerage business, were converted to limited liability companies, and became subsidiaries of the Company and are no longer subsidiaries of the Bank. Effective January 1, 2005, Leesport Investment Group, LLC merged into Leesport Wealth Management, LLC at which time Leesport Wealth Management, LLC changed its name to Madison Financial Advisors, LLC (“Madison Financial”).

Madison Financial, which includes the acquisition of certain assets of First Affiliated Investment Group, an investment management and brokerage firm, as of September 1, 2002, is headquartered at 1240 Broadcasting Road, Wyomissing, Pennsylvania and had 9 full-time employees at December 31, 2006.

Equity Investments

Health Savings Accounts - In July 2005, the Company purchased a 25% equity position in First HSA, Inc. a national health savings account (“HSA”) administrator. The investment formalized a relationship that existed since 2001. This relationship has allowed the Company to be a custodian for HSA customers throughout the country. At December 31, 2006, the Company has more than 14,000 accounts with approximately $24.5 million in deposits. The Company believes that this relationship has given it a head-start in the HSA business and will continue to give it an advantage in raising deposits in 2007.

Junior Subordinated Debt

The Company owns First Leesport Capital Trust I (the “Trust”), a Delaware statutory business trust formed on March 9, 2000, in which the Company owns all of the common equity. The Trust has outstanding $5 million of 107/8% fixed rate mandatory redeemable capital securities. These securities must be redeemed in March 2030, but may be redeemed on or after March 9, 2010 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if these securities no

longer qualify as Tier 1 capital for the Company. In October, 2002 the Company entered into an interest rate swap agreement that effectively converts the securities to a floating interest rate of six month LIBOR plus 5.25%. In June, 2003 the Company purchased a six month LIBOR cap to create protection against rising interest rates for the interest rate swap.

Competition

The Company faces substantial competition in originating loans, in attracting deposits, and generating fee-based income. This competition comes principally from other banks, savings institutions, credit unions, mortgage banking companies and, with respect to deposits, institutions offering investment alternatives, including money market funds. Competition also comes from other insurance agencies and direct writing insurance companies. Due to the passage of landmark banking legislation in November 1999, competition may increasingly come from insurance companies, large securities firms and other financial services institutions. As a result of consolidation in the banking industry, some of the Company’s competitors and their respective affiliates may enjoy advantages such as greater financial resources, a wider geographic presence, a wider array of services, or more favorable pricing alternatives and lower origination and operating costs.

Supervision and Regulation

General

The Company is registered as a bank holding company, which has elected to be treated as a financial holding company, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System under the Bank Holding Act of 1956, as amended. As a bank holding company, the Company’s activities and those of its bank subsidiary are limited to the business of banking and activities closely related or incidental to banking. Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve Board. The Federal Reserve Board has issued regulations under the Bank Holding Company Act that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve Board, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to its bank subsidiary during periods of financial stress or adversity.

The Bank Holding Company Act prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock, or substantially all of the assets of any bank, or from merging or consolidating with another bank holding company, without prior approval of the Federal Reserve Board. Additionally, the Bank Holding Company Act prohibits the Company from engaging in or from acquiring ownership or control of more than 5% of the outstanding shares of any class

of voting stock of any company engaged in a non-banking business, unless such business is determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The types of businesses that are permissible for bank holding companies to own were expanded by the Gramm-Leach-Bliley Act in 1999.

As a Pennsylvania bank holding company for purposes of the Pennsylvania Banking Code, the Company is also subject to regulation and examination by the Pennsylvania Department of Banking.

The Company is under the jurisdiction of the Securities and Exchange Commission and of state securities commissions for matters relating to the offering and sale of its securities. In addition, the Company is subject to the Securities and Exchange Commission’s rules and regulations relating to periodic reporting, proxy solicitation, and insider trading.

Regulation of Leesport Bank

Leesport Bank is a Pennsylvania chartered commercial bank, and its deposits are insured (up to applicable limits) by the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is subject to regulation and examination by the Pennsylvania Department of Banking and by the FDIC. The Community Reinvestment Act requires Leesport Bank to help meet the credit needs of the entire community where Leesport Bank operates, including low and moderate income neighborhoods. Leesport Bank’s rating under the Community Reinvestment Act, assigned by the FDIC pursuant to an examination of Leesport Bank, is important in determining whether the Bank may receive approval for, or utilize certain streamlined procedures in, applications to engage in new activities.

Leesport Bank is also subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of Leesport Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.

Capital Adequacy Guidelines

Bank holding companies are required to comply with the Federal Reserve Board’s risk-based capital guidelines. The required minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be “Tier 1 capital,” consisting principally of common shareholders’ equity, less certain intangible assets. The remainder (“Tier 2 capital”) may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, and a limited amount of the general loan loss allowance. The risk-based capital guidelines are required to take adequate account of interest rate risk, concentration of credit risk, and risks of nontraditional activities.

In addition to the risk-based capital guidelines, the Federal Reserve Board requires a bank holding company to maintain a leverage ratio of a minimum level of Tier 1 capital (as determined under the risk-based capital guidelines) equal to 3% of average total consolidated assets for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a ratio of at least 1% to 2% above the stated minimum. The Pennsylvania Department of Banking requires state chartered banks to maintain a 6% leverage capital level and 10% risk based capital, defined substantially the same as the federal regulations. The Bank is subject to almost identical capital requirements adopted by the FDIC.

Prompt Corrective Action Rules

The federal banking agencies have regulations defining the levels at which an insured institution would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” The applicable federal bank regulator for a depository institution could, under certain circumstances, reclassify a “well-capitalized” institution as “adequately capitalized” or require an “adequately capitalized” or “undercapitalized” institution to comply with supervisory actions as if it were in the next lower category. Such a reclassification could be made if the regulatory agency determines that the institution is in an unsafe or unsound condition (which could include unsatisfactory examination ratings). The Company and the Bank each satisfy the criteria to be classified as “well capitalized” within the meaning of applicable regulations.

Regulatory Restrictions on Dividends

Dividend payments made by Leesport Bank to the Company are subject to the Pennsylvania Banking Code, the Federal Deposit Insurance Act, and the regulations of the FDIC. Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally, retained earnings). The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. The Prompt Corrective Action Rules, described above, further limit the ability of banks to pay dividends if they are not classified as well capitalized or adequately capitalized.

Under these policies and subject to the restrictions applicable to the Bank, the Bank had approximately $13.4 million available for payment of dividends to the Company at December 31, 2006, without prior regulatory approval.

FDIC Insurance Assessments

In February 2006, deposit insurance modernization legislation was enacted. Effective March 31, 2006, the new law merges the BIF Fund and the SAIF Fund into a single Deposit Insurance Fund, increases deposit insurance coverage for IRAs to $250,000, provides for the future increase of deposit insurance on all accounts by authorizing the FDIC to index the coverage to the rate of inflation, authorizes the FDIC to set the reserve ratio of the combined Deposit Insurance Fund at a level between 1.15% and 1.50%, and permits the FDIC to establish assessments to be paid by insured banks.

The FDIC has implemented a new risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital adequacy and supervisory measures as well as certain financial ratios. New deposit insurance assessment rates will now be billed quarterly and in arrears. For example, payment for deposit insurance coverage for the first quarter of 2007 will be collected in June 2007. The new assessment rate calculation is valid only for Risk Category I or well-capitalized institutions with minimum composite CAMELS ratings as of the end of the quarterly assessment period. Only institutions with a total capital to risk-adjusted assets ratio of 10% or greater, a Tier 1 capital to risk-based assets ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater, are assigned to the well-capitalized group. As of December 31, 2006, the Bank was well capitalized for purposes of calculating insurance assessments.

The FDIC’s Board of Directors has adopted minimum and maximum assessment rates for Risk Category I institutions of 5.0 basis points and 7.0 basis points, respectively, beginning in 2007. Based on the FDIC assessment rate calculation at December 31, 2006, the Bank’s FDIC assessment rate is 5.63 basis points. Risk Category I institutions in existence prior to 1996 will receive a partial credit for past deposit insurance premiums paid. The amount of the deposit insurance premium credit available for the Bank is approximately $380,000. For 2007 assessment periods, all credits available may be used to offset the Bank’s

insurance assessment, subject to certain statutory limitations. For assessments that become due for assessment periods beginning in fiscal years 2008, 2009, and 2010, credits may not be applied to more than 90 percent of the Bank’s assessment.

While the Bank presently pays no premiums for deposit insurance, it is subject to assessments to pay the interest on Financing Corporation bonds. The Financing Corporation was created by Congress to issue bonds to finance the resolution of failed thrift institutions. Prior to 1997, only thrift institutions were subject to assessments to raise funds to pay the Financing Corporation bonds. Beginning in 2000, commercial banks and thrifts are subject to the same assessment for Financing Corporation bonds. The FDIC sets the Financing Corporation assessment rate every quarter. The Financing Corporation assessment for the Bank (and all other banks) for the fourth quarter of 2006 is an annual rate of $.0122 for each $100 of deposits. The deposit insurance modernization legislation does not affect the authority of the Financing Corporation to collect these assessments.

Other Legislation

The Gramm-Leach-Bliley Act, passed in 1999, dramatically changed certain banking laws. One of the most significant changes was that the separation between banking and the securities businesses mandated by the Glass-Steagall Act has now been removed, and the provisions of any state law that prohibits affiliation between banking and insurance entities have been preempted. Accordingly, the legislation now permits firms engaged in underwriting and dealing in securities, and insurance companies, to own banking entities, and permits bank holding companies (and in some cases, banks) to own securities firms and insurance companies. The provisions of federal law that preclude banking entities from engaging in non-financially related activities, such as manufacturing, have not been changed. For example, a manufacturing company cannot own a bank and become a bank holding company, and a bank holding company cannot own a subsidiary that is not engaged in financial activities, as defined by the regulators.

The legislation creates a new category of bank holding company called a “financial holding company.” In order to avail itself of the expanded financial activities permitted under the law, a bank holding company must notify the Federal Reserve Board (“Federal Reserve”) that it elects to be a financial holding company. A bank holding company can make this election if it, and all its bank subsidiaries, are well capitalized, well managed, and have at least a satisfactory Community Reinvestment Act rating, each in accordance with the definitions prescribed by the Federal Reserve and the regulators of the subsidiary banks. Once a bank holding company makes such an election, and provided that the Federal Reserve does not object to such election by such bank holding company, the financial holding company may engage in financial activities (i.e., securities underwriting, insurance underwriting, and certain other activities that are financial in nature as to be determined by the Federal Reserve) by simply giving a notice to the Federal Reserve within thirty days after beginning such business or acquiring a company engaged in such business. This makes the regulatory approval process to engage in financial activities much more streamlined than under prior law.

On February 7, 2002, the Company’s election with the Board of Governors of the Federal Reserve System to become a financial holding company became effective.

The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities laws. The Sarbanes-Oxley Act generally applies to all companies, including the Company, that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or the Exchange Act. The legislation includes provisions, among other things, governing the services that can be provided by a public company’s independent auditors and the procedures for approving such services, requiring the chief executive officer and chief financial officer to certify certain matters relating to the company’s periodic

filings under the Exchange Act, requiring expedited filings of reports by insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure requirements relating to critical financial accounting policies and their application, increasing penalties for securities law violations, and creating a new Public Company Accounting Oversight Board, a regulatory body subject to SEC jurisdiction with broad powers to set auditing, quality control and ethics standards for accounting firms. In connection with this legislation, the national securities exchanges and Nasdaq have adopted rules relating to certain matters, including the independence of members of a company’s audit committee, as a condition to listing or continued listing. The Company does not believe that the application of these rules to the Company will have a material effect on its business, financial condition or results of operations.

The USA PATRIOT Act, enacted in direct response to the terrorist attacks on September 11, 2001, strengthens the anti-money laundering provisions of the Bank Secrecy Act. Many of the new provisions added by the Act apply to accounts at or held by foreign banks, or accounts of or transactions with foreign entities. While the Bank does not have a significant foreign business, the new requirements of the Bank Secrecy Act still require the Bank to use proper procedures to identify its customers. The Act also requires the banking regulators to consider a bank’s record of compliance under the Bank Secrecy Act in acting on any application filed by a bank. As the Bank is subject to the provisions of the Bank Secrecy Act (i.e., reporting of cash transactions in excess of $10,000), the Bank’s record of compliance in this area will be an additional factor in any applications filed by it in the future. To the Bank’s knowledge, its record of compliance in this area is satisfactory.

The Fair and Accurate Credit Transaction Act was adopted in 2003. It extends and expands upon provisions in the Fair Credit Reporting Act, affecting the reporting of delinquent payments by customers and denials of credit applications. The revised act imposes additional record keeping, reporting, and customer disclosure requirements on all financial institutions, including the Bank. Also in late 2003, the Check 21 Act was adopted. This Act affects the way checks can be processed in the banking system, allowing payments to be converted to electronic transfers rather than processed as traditional paper checks.

Congress is often considering some financial industry legislation, and the federal banking agencies routinely propose new regulations. The Company cannot predict how any new legislation, or new rules adopted by the federal banking agencies, may affect its business in the future.

Essick & Barr and Madison Financial are subject to additional regulatory requirements. Essick & Barr is subject to Pennsylvania insurance laws and the regulations of the Pennsylvania Department of Insurance. The securities brokerage activities of Madison Financial are subject to regulation by the SEC and the NASD/SIPC, and Madison Financial is a registered investment advisor subject to regulation by the SEC.

Item 1A. Risk Factors

Changes in interest rates could reduce our income, cash flows and asset values.

Our income and cash flows and the value of our assets depend to a great extent on the difference between the interest rates we earn on interest-earning assets, such as loans and investment securities, and the interest rates we pay on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors which are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest we receive on our loans and investment securities and the amount of interest we pay on deposits and borrowings but will also affect our ability to originate loans and obtain deposits and the value of our investment portfolio. If the rate of interest we pay on our deposits and other borrowings increases more than the rate of interest we earn on our loans and other investments, our net interest income, and

therefore our earnings, could be adversely affected. Our earnings also could be adversely affected if the rates on our loans and other investments fall more quickly than those on our deposits and other borrowings.

Economic conditions either nationally or locally in areas in which our operations are concentrated may adversely affect our business.

Deterioration in local, regional, national or global economic conditions could cause us to experience a reduction in deposits and new loans, an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, all of which could adversely affect our performance and financial condition. Unlike larger banks that are more geographically diversified, we provide banking and financial services locally. Therefore, we are particularly vulnerable to adverse local economic conditions.

Our financial condition and results of operations would be adversely affected if our allowance for loan losses is not sufficient to absorb actual losses or if we are required to increase our allowance.

Despite our underwriting criteria, we may experience loan delinquencies and losses. In order to absorb losses associated with nonperforming loans, we maintain an allowance for loan losses based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Determination of the allowance inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. At any time there are likely to be loans in our portfolio that will result in losses but that have not been identified as nonperforming or potential problem credits. We cannot be sure that we will be able to identify deteriorating credits before they become nonperforming assets or that we will be able to limit losses on those loans that are identified. We may be required to increase our allowance for loan losses for any of several reasons. State and federal regulators, in reviewing our loan portfolio as part of a regulatory examination, may request that we increase our allowance for loan losses. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in our allowance. In addition, if charge-offs in future periods exceed our allowance for loan losses, we will need additional increases in our allowance for loan losses. Any increases in our allowance for loan losses will result in a decrease in our net income and, possibly, our capital, and may materially affect our results of operations in the period in which the allowance is increased.

Competition may decrease our growth or profits.

We face substantial competition in all phases of our operations from a variety of different competitors, including commercial banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, factoring companies, leasing companies, insurance companies and money market mutual funds. There is very strong competition among financial services providers in our principal service area. Our competitors may have greater resources, higher lending limits or larger branch systems than we do. Accordingly, they may be able to offer a broader range of products and services as well as better pricing for those products and services than we can.

In addition, some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on federally insured financial institutions. As a result, those nonbank competitors may be able to access funding and provide various services more easily or at less cost than we can, adversely affecting our ability to compete effectively.

We may be adversely affected by government regulation.

The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Changes in the laws, regulations, and regulatory practices affecting the banking industry may increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these changes, which could have a material adverse effect on our profitability or financial condition.

We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.

We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to depend on our ability to retain and recruit key commercial loan officers. The unexpected loss of services of any key management personnel or commercial loan officers could have an adverse effect on our business and financial condition because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

Environmental liability associated with lending activities could result in losses.

In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances were discovered on any of these properties, we could be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability.

Failure to implement new technologies in our operations may adversely affect our growth or profits.

The market for financial services, including banking services and consumer finance services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking and telebanking. Our ability to compete successfully in our markets may depend on the extent to which we are able to exploit such technological changes. However, we can provide no assurance that we will be able to properly or timely anticipate or implement such technologies or properly train our staff to use such technologies. Any failure to adapt to new technologies could adversely affect our business, financial condition or operating results.

An investment in our common stock is not an insured deposit.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation, commonly referred to as the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is subject to the same market forces that affect the price of common stock in any company.

Our ability to pay dividends is limited by law and federal banking regulation.

Our ability to pay dividends to our shareholders largely depends on our receipt of dividends from Leesport Bank. The amount of dividends that Leesport Bank may pay to us is limited by federal laws and

regulations. We also may decide to limit the payment of dividends even when we have the legal ability to pay them in order to retain earnings for use in our business.

Federal and state banking laws, our articles of incorporation and our by-laws may have an anti-takeover effect.

Federal law imposes restrictions, including regulatory approval requirements, on persons seeking to acquire control over us. Pennsylvania law also has provisions that may have an anti-takeover effect. In addition, our articles of incorporation and bylaws permit our board of directors to issue, without shareholder approval, preferred stock and additional shares of common stock that could adversely affect the voting power and other rights of existing common shareholders. These provisions may serve to entrench management or discourage a takeover attempt that shareholders consider to be in their best interest or in which they would receive a substantial premium over the current market price.

We plan to continue to grow rapidly and there are risks associated with rapid growth.

We intend to continue to expand our business and operations to increase deposits and loans. Continued growth may present operating and other problems that could adversely affect our business, financial condition and results of operations. Our growth may place a strain on our administrative, operational, personnel and financial resources and increase demands on our systems and controls. Our ability to manage growth successfully will depend on our ability to attract qualified personnel and maintain cost controls and asset quality while attracting additional loans and deposits on favorable terms, as well as on factors beyond our control, such as economic conditions and interest rate trends. If we grow too quickly and are not able to attract qualified personnel, control costs and maintain asset quality, this continued rapid growth could materially adversely affect our financial performance.

Our legal lending limits are relatively low and restrict our ability to compete for larger customers.

At December 31, 2006, our lending limit per borrower was approximately $11.8 million, or approximately 12% of our capital. Accordingly, the size of loans that we can offer to potential borrowers (without participation by other lenders) is less than the size of loans that many of our competitors with larger capitalization are able to offer. Our legal lending limit also impacts the efficiency of our lending operation because it tends to lower our average loan size, which means we have to generate a higher number of transactions to achieve the same portfolio volume. We may engage in loan participations with other banks for loans in excess of our legal lending limits. However, there can be no assurance that such participations will be available at all or on terms which are favorable to us and our customers.

If we are unable to identify and acquire other financial institutions and successfully integrate their acquired businesses, our business and earnings may be negatively affected.

Acquisition of other financial institutions is a component of our growth strategy. The market for acquisitions remains highly competitive, and we may be unable to find acquisition candidates in the future that fit our acquisition and growth strategy.

Acquisitions of financial institutions involve operational risks and uncertainties, and acquired companies may have unforeseen liabilities, exposure to asset quality problems, key employee and customer retention problems and other problems that could negatively affect our organization. We may not be able to complete future acquisitions and, if completed, we may not be able to successfully integrate the operations, management, products and services of the entities that we acquire and eliminate redundancies. The integration process may also require significant time and attention from our management that they would otherwise direct at servicing existing business and developing new business. Our failure to

successfully integrate the entities we acquire into our existing operations may increase our operating costs significantly and adversely affect our business and earnings.

The market price for our common stock may be volatile.

The market price for our common stock has fluctuated, ranging between $25.11 and $21.10 per share during the 12 months ended December 31, 2006. The overall market and the price of our common stock may continue to be volatile. There may be a significant impact on the market price for our common stock due to, among other things, developments in our business, variations in our anticipated or actual operating results, changes in investors’ or analysts’ perceptions of the risks and conditions of our business and the size of the public float of our common stock. The average daily trading volume for our common stock as reported on NASDAQ was 3,315 shares during the twelve months ended December 31, 2006, with daily volume ranging from a low of zero shares to a high of 27,137 shares. There can be no assurance that a more active or consistent trading market in our common stock will develop. As a result, relatively small trades could have a significant impact on the price of our common stock.

Market conditions may adversely affect our fee based investment and insurance business.

The revenues of our fee based insurance business are derived primarily from commissions from the sale of insurance policies, which commissions are generally calculated as a percentage of the policy premium. These insurance policy commissions can fluctuate as insurance carriers from time to time increase or decrease the premiums on the insurance products we sell. Similarly, we receive fee based revenues from commissions from the sale of securities and investment advisory fees. In the event of decreased stock market activity, the volume of trading facilitated by Madison Financial Advisors, LLC will in all likelihood decrease resulting in decreased commission revenue on purchases and sales of securities. In addition, investment advisory fees, which are generally based on a percentage of the total value of an investment portfolio, will decrease in the event of decreases in the values of the investment portfolios, for example, as a result of overall market declines.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

The Company’s principal office is located in the administration building at 1240 Broadcasting Road, Wyomissing, Pennsylvania.

Listed below are the locations of properties owned or leased by the Bank and its subsidiaries. Owned properties are not subject to any mortgage, lien or encumbrance.

Property Location		Leased or Owned
Corporate Office 1240 Broadcasting Road Wyomissing, Pennsylvania		Leased
Operations Center 1044 MacArthur Road Reading, Pennsylvania		Leased
North Pointe Financial Center 241 South Centre Avenue Leesport, Pennsylvania		Leased
Northeast Reading Financial Center 1210 Rockland Street Reading, Pennsylvania		Leased
Hamburg Financial Center 801 South Fourth Street Hamburg, Pennsylvania		Leased
Bern Township Financial Center 909 West Leesport Road Leesport, Pennsylvania		Leased
Wernersville Financial Center 1 Reading Drive Wernersville, Pennsylvania		Leased
Breezy Corner Financial Center 3401-3 Pricetown Road Fleetwood, Pennsylvania		Leased
Blandon Financial Center 100 Plaza Drive Blandon, Pennsylvania		Leased
Wyomissing Financial Center 1199 Berkshire Boulevard Wyomissing, Pennsylvania		Leased
Schuylkill Haven Financial Center 237 Route 61 South Schuylkill Haven, Pennsylvania		Leased
Birdsboro Financial Center 350 West Main Street Birdsboro, Pennsylvania		Leased

Exeter Financial Center 4361 Perkiomen Avenue Reading, Pennsylvania		Leased
Sinking Spring Financial Center 4708 Penn Ave Sinking Spring, Pennsylvania		Leased
Blue Bell Financial Center The Madison Bank Building 1767 Sentry Parkway West Blue Bell, Pennsylvania		Leased
Centre Square Financial Center 1380 Skippack Pike Blue Bell, Pennsylvania		Leased
Conshohocken Financial Center Plymouth Corporate Center Suite 600 625 Ridge Pike Conshohocken, Pennsylvania		Leased
Fox Chase Financial Center 8000 Verree Road Philadelphia, Pennsylvania		Owned
Horsham Financial Center 100 Gibralter Road Horsham, Pennsylvania		Leased
Oaks Financial Center 1232 Egypt Road Oaks, Pennsylvania		Leased
Strafford Financial Center 600 West Lancaster Avenue Strafford, Pennsylvania		Leased
Essick & Barr Insurance 108 South Fifth Street Reading, Pennsylvania		Owned
The Boothby Group Suite 103 460 Norristown Road Blue Bell, Pennsylvania		Leased
Madison Insurance Consultants 2300 E. Lincoln Hwy Suite 012 Langhorne, Pennsylvania		Leased
Philadelphia Financial Mortgage Suite 220 1767 Sentry Parkway West Blue Bell, Pennsylvania		Leased

Philadelphia Financial Mortgage 930 Red Rose Court Lancaster, Pennsylvania		Leased
Philadelphia Financial Mortgage 3900 Trindle Road Camp Hill, Pennsylvania		Leased

In the fourth quarter of 2004, the Company sold the North Point, Northeast Reading, Hamburg, Bern Township, Exeter and Sinking Spring financial centers and leased them back from the purchaser with a lease term of 20 years.

Essick & Barr shares offices in the Company’s administration building located at 1240 Broadcasting Road, Wyomissing, Pennsylvania. Essick & Barr is charged a pro rata amount of the total lease expense.

Madison Financial also shares office space in the Company’s administration building in Wyomissing as well as in The Boothby Group’s office in Blue Bell and are accordingly charged a pro rata amount of the total lease expense.

Item 3. Legal Proceedings

A certain amount of litigation arises in the ordinary course of the business of the Company, and the Company’s subsidiaries. In the opinion of the management of the Company, there are no proceedings pending to which the Company, or the Company’s subsidiaries are a party or to which their property is subject, that, if determined adversely to the Company or its subsidiaries, would be material in relation to the Company’s shareholders’ equity or financial condition, nor are there any proceedings pending other than ordinary routine litigation incident to the business of the Company and its subsidiaries. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company or its subsidiaries by governmental authorities.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the Company’s fiscal year ended December 31, 2006.

Item 4A. Executive Officers of the Registrant

Certain information, as of December 31, 2006, including principal occupation during the past five years, relating to each executive officer of the Company is as follows:

Name, Address, and Position Held with the Company	Age	Position Held Since	Principal Occupation for Past 5 Years
ROBERT D. DAVIS Chester Springs, Pennsylvania President and Chief Executive Officer	59	2005	President and Chief Executive Officer of the Company and the Bank since September 2005; Chairman of Essick & Barr, LLC; Chairman of Madison Financial Advisors, LLC; prior thereto, President and Chief Executive Officer and Director of Republic First Bank since 1999; prior thereto, Regional President of Mellon PSFS.
VITO A. DELISI Blue Bell, Pennsylvania President	58	2004	President of the Madison Bank Division of Leesport Bank; prior thereto, President and Chief Executive Officer of Madison Bancshares Group, Ltd. and Madison Bank.
EDWARD C. BARRETT Wyomissing, Pennsylvania Executive Vice President and Chief Financial Officer	58	2002	Executive Vice President since October 2003 and Chief Financial Officer of the Company since September 2004; prior thereto, Chief Administrative Officer since July 2002; prior thereto, served on the Company’s Board of Directors since November 1998 and was an independent technology consultant since January 2001; prior thereto, President of the Technology Services Division of Verso Technologies, Inc.
CHRISTINA S. McDONALD Oreland, Pennsylvania Executive Vice President and Chief Retail Banking Officer of Leesport Bank	41	2004	Executive Vice President of the Company since 2004; prior thereto, Executive Vice President and Chief Retail Banking Officer of Madison Bank since 2002; prior thereto, Senior Vice President of Dime Savings Bank of New York.

CHARLES J. HOPKINS Sinking Spring, Pennsylvania Senior Vice President of Leesport Financial Corp.	56	1998	President and CEO of Essick & Barr, LLC since 1992
TERRY F. FAVILLA Lititz, Pennsylvania Senior Vice President and Treasurer	45	2006	Senior Vice President and Treasurer of the Company since June 2006; prior thereto, Vice President and Corporate Controller of the Company since June 2004, prior thereto, Vice President and Asset/Liability Management Controller of Susquehanna Bancshares, Inc. since August 1996
JENETTE L. ECK Centerport, Pennsylvania Senior Vice President and Corporate Secretary	44	1998	Vice President of the Company since 2001, Secretary of the Company since 1998.

PART II

Item 5. Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Performance Graph

Set forth below is a graph and table comparing the yearly percentage change in the cumulative total shareholder return on the Company’s common stock against the cumulative total return on the NASDAQ-Total US Index, and the SNL Mid-Atlantic Bank Index for the five-year period commencing December 31, 2001, and ending December 31, 2006.

Cumulative total return on the Company’s common stock, the NASDAQ Combination Bank Index, and the SNL Mid-Atlantic Bank Index equals the total increase in value since December 31, 2001, assuming reinvestment of all dividends. The graph and table were prepared assuming that $100 was invested on December 31, 2001, in Company common stock, the NASDAQ-Total US Index, and the SNL Mid-Atlantic Bank Index.

	Period Ending
Index	12/31/01		12/31/02		12/31/03		12/31/04		12/30/05		12/31/06
Leesport Financial Corp.		100.00		134.06		176.16		202.42		199.45		215.17
NASDAQ Composite		100.00		68.76		103.67		113.16		115.57		127.58
SNL Mid Atlantic Bank Index		100.00		76.91		109.35		115.82		117.87		141.46

As of December 31, 2006, there were 912 record holders of the Company’s common stock. The market price of the Company’s common stock for each quarter in 2006 and 2005 and the dividends declared on the Company’s common stock for each quarter in 2006 and 2005 are set forth below.

Market Price of Common Stock

The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “FLPB.” The following table sets forth, for the fiscal quarters indicated, the high and low bid and asked

price per share of the Company’s common stock, as reported on the NASDAQ Global Select Market, and has been adjusted for the effect of the 5% stock dividend declared by the Board of Directors on May 16, 2006 with a record date of June 1, 2006 and distributed to shareholders on June 15, 2006:

	Bid				Asked
	High		Low		High		Low
*2006*
First Quarter	$	25.98	$	23.15	$	26.00	$	23.36
Second Quarter	26.51		22.00		26.75		22.39
Third Quarter	24.02		20.65		24.07		20.99
Fourth Quarter	25.22		22.00		26.00		22.39
*2005*
First Quarter	$	24.49	$	21.53	$	24.76	$	21.57
Second Quarter	26.93		21.43		27.14		21.61
Third Quarter	23.87		20.95		24.05		21.26
Fourth Quarter	23.56		19.52		23.57		20.15

Cash dividends on the Company’s common stock have historically been payable on the 15th of January, April, July, and October.

	Dividends
	Declared
	(Per Share)
	2006		2005
First Quarter	$	0.171		$	0.162
Second Quarter	0.180			0.162
Third Quarter	0.190			0.171
Fourth Quarter	0.190			0.171

The Company derives a significant portion of its income from dividends paid to it by the Bank. For a description of certain regulatory restrictions on the payment of dividends by the Bank to the Company, see “Business—Regulatory Restrictions on Dividends.”

On May 20, 2004, the Company announced the extension of its stock repurchase plan, originally effective January 1, 2003, for the repurchase of up to 162,000 shares of the Company’s common stock. During 2006, the Company repurchased 45,000 shares of common stock. No shares of the Company’s common stock were purchased by the Company during the fourth quarter of 2006. At December 31, 2006, the maximum number of shares that may yet be purchased under the plan is 50,513.

Item 6. Selected Financial Data

The selected consolidated financial and other data and management’s discussion and analysis of financial condition and results of operation set forth below and in Item 7 hereof is derived in part from, and should be read in conjunction with, the consolidated financial statements and notes thereto contained elsewhere herein.

	Year Ended December 31,
	2006			2005			2004			2003			2002
	(Dollars in thousands except per share data)
Selected Financial Data:
Total assets	$	1,041,632		$	965,752		$	877,382		$	622,252		$	562,372
Securities available for sale	164,180			182,541			165,778			200,650			157,564
Securities held to maturity	3,117			6,173			6,403			—			—
Loans, net of unearned income	764,783			654,244			596,328			357,482			335,184
Allowance for loan losses	7,611			7,619			7,248			4,356			4,182
Deposits	702,839			659,730			612,291			408,582			379,832
Short-term borrowings	173,092			135,685			88,892			103,678			34,119
Long-term debt	19,500			43,000			54,500			34,500			72,200
Junior subordinated debt	20,150			20,150			20,150			15,000			15,000
Shareholders’ equity	102,130			94,756			90,935			53,377			52,900
Book value per share	18.96			17.83			17.37			15.02			15.54
Selected Operating Data:
Interest income	$	61,617		$	50,653		$	33,611		$	29,170		$	30,630
Interest expense	29,521			20,319			12,842			12,682			14,113
Net interest income before provision for loan losses	32,096			30,334			20,769			16,488			16,517
Provision for loan losses	1,084			1,460			1,320			965			1,455
Net interest income after provision for loan losses	31,012			28,874			19,449			15,523			15,062
Other income	21,218			23,865			17,669			18,864			10,881
Other expense	40,238			41,281			30,548			27,560			19,038
Income before income taxes	11,992			11,458			6,570			6,827			6,905
Income taxes	2,839			2,727			1,154			1,878			1,985
Net income	$	9,153		$	8,731		$	5,416		$	4,949		$	4,920
Earnings per share-basic	$	1.71		$	1.65		$	1.31		$	1.32		$	1.35
Earnings per share-diluted	$	1.70		$	1.63		$	1.29		$	1.31		$	1.34
Cash dividends per share	$	0.73		$	0.67		$	0.62		$	0.60		$	0.54
Return on average assets	0.92		%	0.95		%	0.78		%	0.84		%	0.95		%
Return on average shareholders’ equity	9.38		%	9.36		%	8.69		%	9.39		%	10.33		%
Dividend payout ratio	42.74		%	40.45		%	51.24		%	44.41		%	40.38		%
Average equity to average assets	9.82		%	10.16		%	9.03		%	8.99		%	9.72		%

Earnings and cash dividends per share amounts reflect the 5% stock dividend declared by the Board of Directors on May 16, 2006 with a record date of June 1, 2006 and distributed to shareholders on June 15, 2006.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company is a financial services company. As of December 31, 2006, Leesport Bank, Essick & Barr, LLC, and Madison Financial Advisors, LLC were wholly-owned subsidiaries of the Company. As of December 31, 2006, Leesport Realty Solutions, LLC and Leesport Mortgage Holdings, LLC were wholly-owned, non-bank subsidiaries of Leesport Bank.

During 2000, Leesport Realty Solutions, LLC was formed as a subsidiary of Leesport Bank for the purpose of providing title insurance and other real estate related services to its customers through limited partnership arrangements with third parties involved in the real estate services industry.

In May 2002, the Company’s subsidiary, Leesport Bank, jointly formed Leesport Mortgage, LLC with a real estate company. Leesport Mortgage, LLC was formed to provide mortgage brokerage services, including, without limitation, any activity in which a mortgage broker may engage. It is operated as a permissible “affiliated business arrangement” within the meaning of the Real Estate Settlement Procedures Act of 1974. Leesport Bank’s initial investment was $15,000. In July 2004, Leesport Bank dissolved its investment with the real estate company.

On August 30, 2002, the Company completed its purchase of certain assets of First Affiliated Investment Group, an investment management and brokerage firm located in State College, Pennsylvania. In addition to cash payments payable to the shareholder of $175,000, the Company issued 9,460 shares of its common stock at a price of $18.50, resulting in an aggregate purchase price of $350,000 as of the closing date.

On October 1, 2002, the Company completed its acquisition of 100% of the outstanding common stock of The Boothby Group, Inc., a full service insurance agency headquartered in Blue Bell, Pennsylvania. In addition to cash payments of $3.6 million, the Company issued 132,448 shares of its common stock at a price of $18.12 resulting in an aggregate purchase price of $6.2 million as of the closing date. Contingent payments payable to the five former shareholders totaling up to $1.6 million, payable in shares of the Company’s common stock at the then current market values, are based on The Boothby Group division of Essick & Barr achieving certain annual revenue levels over the next two years.

On September 30, 2003, the Company completed its purchase of certain assets of CrosStates Insurance Consultants, Inc., a full service insurance agency that specializes in personal property and casualty insurance located in Langhorne, Pennsylvania. The Company made a cash payment of $1.0 million as of the closing date. Contingent payments payable to the former shareholder totaling up to $1.2 million, payable 50% in cash and 50% in shares of the Company’s common stock at the then current market values, are based on the CrosStates Insurance division of Essick & Barr achieving certain levels of earnings over the next two years. Effective January 1, 2005, the CrosStates Insurance Consultants division changed its name to Madison Insurance Consultants.

On October 1, 2004, the Company acquired 100% of the outstanding voting shares of Madison Bancshares Group, Ltd. (“Madison”), the holding company for Madison Bank, a Pennsylvania state-chartered commercial bank, and its mortgage banking division, Philadelphia Financial. Madison Bank has become a division of Leesport Bank. For each share of Madison common stock, the Company exchanged 0.6028 shares of Leesport common stock resulting in the issuance of 1,311,010 shares of Leesport common stock and a cash payment of $11,790. The total purchase price was $34.6 million. The value of the common shares issued was determined based on the average market price of Leesport common shares five days before and five days after the date of the announcement. In connection with the transaction, Madison paid cash of $7.1 million and recognized the expense for 699,122 Madison options and warrants outstanding at September 30, 2004. In addition, Madison paid cash of $2.3 million and recognized the expense for the termination of existing contractual arrangements.

Critical Accounting Policies

Disclosure of the Company’s significant accounting policies is included in Note 1 to the consolidated financial statements. Certain of these policies are particularly sensitive requiring significant judgments, estimates and assumptions to be made by management. Additional information is contained in Management’s Discussion and Analysis and the Notes to the Consolidated Financial Statements for the most sensitive of these issues. These include, the provision and allowance for loan losses, revenue recognition for insurance activities, stock based compensation, derivative financial instruments, purchase accounting, goodwill and intangible assets and other-than-temporary impairment. These discussions, analysis and disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

Allowance for Loan Losses

The provision for loan losses charged to operating expense reflects the amount deemed appropriate by management to provide for known and inherent losses in the existing loan portfolio. Management’s judgment is based on the evaluation of individual loans past experience, the assessment of current economic conditions, and other relevant factors. Loan losses are charged directly against the allowance for loan losses and recoveries on previously charged-off loans are added to the allowance.

Management uses significant estimates to determine the allowance for loan losses. Consideration is given to a variety of factors in establishing these estimates including current economic conditions, diversification of the loan portfolio, delinquency statistics, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant factors. Since the sufficiency of the allowance for loan losses is dependent, to a great extent, on conditions that may be beyond our control, it is possible that management’s estimates of the allowance for loan losses and actual results could differ in the near term. Although we believe that we use the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation. For example, a downturn in the local economy could cause increases in non-performing loans. Additionally, a decline in real estate values could cause some of our loans to become inadequately collateralized. In either case, this may require us to increase our provisions for loan losses, which would negatively impact earnings. Additionally, a large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively impact earnings. In addition, regulatory authorities, as an integral part of their examination, periodically review the allowance for loan losses. They may require additions to the allowance for loan losses based upon their judgments about information available to them at the time of examination. Future increases to our allowance for loan losses, whether due to unexpected changes in economic conditions or otherwise, could adversely affect our future results of operations.

Stock-Based Compensation

Prior to 2006, the Company accounted for stock-based compensation in accordance with Accounting Principals Board Opinion (“APB”) No. 25, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123. Under APB No. 25, no compensation expense was recognized in the income statement related to any option granted under the Company’s stock option plans. The pro forma impact to net income and earnings per share that would occur if compensation expense was recognized, based on the estimated fair value of the options on the date of the grant, is disclosed in the notes to the consolidated financial statements.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (R), “Share-Based Payment.” Statement No. 123 (R) addresses the accounting for share-based payment

transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Statement 123 (R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to the employees in the income statement. The revised Statement generally requires that an entity account for those transactions using the fair-value-based method, and eliminates the intrinsic value method of accounting in APB Opinion No. 25. “Accounting for Stock Issued to Employees,” which was permitted under Statement No. 123, as originally issued.

The revised Statement requires entities to disclose information about the nature of the share-based payment transaction and the effects of those transactions on the financial statements. Statement No. 123 (R) is effective for fiscal periods beginning after June 15, 2005. All public companies must use either the modified prospective or the modified retrospective transition method. Effective January 1, 2006, the Company has adopted the modified prospective method. Using the modified prospective method, the Company’s total stock-based compensation expense, net of related tax effects, was $162,000 for the year ending December 31, 2006. Any additional impact that the adoption of this statement will have on our results of operations will be determined by share-based payments granted in future periods.

Goodwill

The Company has recorded goodwill of $39.2 million at December 31, 2006 related to Madison, Essick & Barr and First Affiliated Investment Group. The Company performs its annual goodwill impairment test in the fourth quarter of each calendar year. A fair value is determined for the banking and financial service, insurance services and investment services reporting segments. If the fair value of the reporting unit exceeds the book value, no write downs of goodwill is necessary. If the fair value is less than the book value, an additional test is necessary to assess the proper carrying value of goodwill. The Company determined that no impairment write-offs were necessary during 2006 and 2005.

Business unit valuation is inherently subjective, with a number of factors based on assumption and management judgments. Among these are future growth rates, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors and reporting unit performance could result in different assessments of the fair value and could result in impairment charges in the future.

Investment Securities Impairment Evaluation

Management evaluates securities for the other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Results of Operations

Net income for 2006 was $9.15 million or $1.70 per share diluted compared to $8.73 million or $1.63 per share diluted for 2005 and $5.42 million or $1.29 per share for 2004. These changes are a result of increasing net interest income after provision for loan losses and other income each year, net of increases in other expenses. Details regarding changes in each of these areas follows.

Included in the operating results for the twelve months ended December 31, 2006 were severance costs of approximately $594,000 resulting from the departure of the Company’s Chief Lending Officer and other internal departmental restructuring associated with the Company’s corporate-wide reorganization plan. In addition to these severance costs, included in net income for the twelve months ended

December 31, 2006 were approximately $95,000 in costs associated with closing a retail branch office. Excluding the above-mentioned severance and branch closing costs, the net income and earnings per share results for the periods indicated were:

	For the Year Ended December 31,
	2006			2005
	(Dollars in thousands except per share data)
Reported Net Income		$ 9,153			$ 8,731
Charges:
Branch Closing		95			—
Severance Costs		594			445
Total Charges		689			445
Income tax effect		234			151
Net Impact of Charges		455			294
Net Income Adjusted		$ 9,608			$ 9,025
Increase From December 31, 2005		6.5	%
Basic Earnings Per Share		$ 1.71			$ 1.65	*
Adjusted Earnings Per Share		1.80			1.71	*
Diluted Earnings Per Share		$ 1.70			$ 1.63	*
Adjusted Diluted Earnings Per Share		1.78			1.69	*

* References to per-share amounts reflect the 5% stock dividend distributed to shareholders on June 15, 2006.

Return on average assets was 0.92% for 2006, 0.95% for 2005 and 0.78% for 2004. Return on average shareholders’ equity was 9.38% for 2006, 9.36% for 2005 and 8.69% for 2004.

Net Interest Income

Net interest income is a primary source of revenue for the Company. This income results from the difference between the interest and fees earned on loans and investments and the interest paid on deposits to customers and other non-deposit sources of funds, such as repurchase agreements and borrowings from the Federal Home Loan Bank and other correspondent banks. Net interest margin is the difference between the gross (tax-effected) yield on earning assets and the cost of interest bearing funds as a percentage of earning assets. All discussion of net interest margin is on a fully taxable equivalent basis. Both net interest income and net interest margin are influenced by the frequency, magnitude and direction of interest rate changes and by product concentrations and volumes of earning assets and funding sources.

Average Balances, Rates and Net Yield

The following table sets forth the average daily balances of major categories of interest earning assets and interest bearing liabilities, the average rate paid thereon, and the net interest margin for each of the periods indicated.

	Year Ended December 31,
	2006							2005							2004
			Interest							Interest							Interest
	Average		Income/		%			Average		Income/		%			Average		Income/		%
	Balances		Expense		Rate			Balances		Expense		Rate			Balances		Expense		Rate
	(in thousands except percentage data)
Interest Earning Assets:
Interest bearing deposits in other banks and federal funds sold		$ 317		$ 18		5.57	%		$ 1,351		$ 21		1.52	%		$ 790		$ 12		1.52	%
Securities (taxable)		161,402		8,021		4.97			166,523		7,444		4.47			166,193		6,696		4.03
Securities (tax-exempt)(1)		18,539		1,192		6.43			15,846		1,076		6.79			17,726		1,171		6.61
Loans(1)(2)		711,240		53,409		7.41			632,631		42,963		6.70			433,941		26,357		5.97
Total interest earning assets		891,498		62,640		6.93			816,351		51,504		6.22			618,650		34,236		5.44
Interest Bearing Liabilities:
Interest bearing demand deposits		222,385		5,945		2.67			214,936		3,848		1.79			148,849		1,800		1.21
Savings deposits		68,536		1,598		2.33			62,765		768		1.22			62,983		688		1.09
Time deposits		288,644		12,598		4.36			238,403		8,909		3.74			184,273		6,655		3.61
Total interest bearing deposits		579,565		20,141		3.48			516,104		13,525		2.62			396,105		9,143		2.31
Short-term borrowings		67,192		3,507		5.15			59,610		2,118		3.55			43,273		650		1.50
Repurchase agreements		71,809		2,847		3.96			56,006		1,487		2.65			43,831		799		1.82
Long-term borrowings		34,038		1,174		3.40			50,214		1,642		3.22			39,218		1,333		3.34
Mandatory redeemable capital debenture		20,150		1,852		9.19			20,150		1,547		7.68			16,295		917		5.63
Total interest bearing liabilities		772,754		29,521		3.82			702,084		20,319		2.89			538,722		12,842		2.38
Noninterest bearing deposits		$ 111,759							$ 111,525							$ 79,582
Net interest margin				$ 33,119		3.71	%				$ 31,185		3.82	%				$ 21,394		3.46	%

(1) Rates on loans and investment securities are reported on a tax-equivalent basis of 34%.

(2) Non-accrual loans have been included in average loan balances.

Tax-equivalent net interest income increased to $33.1 million or 6.2% for the year ended December 31, 2006, compared to $31.2 million for 2005. The increase in tax-equivalent interest income during 2006 was primarily the result of an increase in average earning assets, due mainly to strong commercial loan growth and the targeted short-term interest rate, as established by the Federal Reserve Bank (“FRB”), increasing, which resulted in an increase in the prime rate from 7.25% at December 31, 2005, to 8.25% at December 31, 2006. Average loans increased by $78.6 million or 12.4% from 2005 to 2006. Management attributes the increase in organic commercial loan growth to penetration into the Philadelphia market through successful marketing initiatives and the favorable interest rate environment.

Tax-equivalent net interest income increased to $31.2 million or 45.8% for the year ended December 31, 2005, compared to $21.4 million for 2004. The increase in tax-equivalent net interest income during 2005 was primarily the result of an increase in average earning assets, due mainly to strong commercial and consumer loan growth, loans acquired from Madison and increases in interest rates. Average loans increased by $198.7 million or 45.8% from 2004 to 2005. Management attributes the increase in organic loan growth to successful marketing initiatives and the favorable interest rate environment.

Interest expense increased during the year along with the overall growth in funding sources. The overall cost of funds increased from 2.89% in 2005 to 3.82% in 2006. Interest bearing deposit rates increased from 2.62% in 2005 to 3.48% in 2006. The increase in interest-bearing deposit rates was the result of both management pricing strategy as well as the effect of longer-term certificates of deposit that matured during the year and repriced at higher rates. Average interest bearing deposits increased $63.5 million or 12.3% from 2005 to 2006 due primarily to strong organic growth in time deposits. Total average interest-bearing funding grew by $7.2 million and, combined with the growth in interest bearing deposits, provided all of the funding needed for the $76.2 million in average loan and investment security growth. Average balances for federal funds purchased and repurchase agreements for the year 2006 were $67.2 million and $71.8 million, respectively, compared to average balances for federal funds purchased and repurchase agreements for the year 2005 of $59.6 million and $56.0 million, respectively. Average rates paid for federal funds purchased and repurchase agreements for the year 2006 were 5.15% and 3.96%, respectively compared to average rates paid for federal funds purchased and repurchase agreements for the year 2005 of 3.55% and 2.65%, respectively. Average long-term borrowings decreased $16.2 million or 32.2% from 2005 to 2006.

Interest expense increased during 2005 along with the overall growth in primary funding sources. The overall cost of funds increased from 2.38% in 2004 to 2.89% in 2005. Interest bearing deposit rates increased from 2.31% in 2004 to 2.62% in 2005. The increase in interest-bearing deposit rates was the result of both management pricing strategy as well as the effect of longer-term certificates of deposit that matured during the year and repriced at higher rates. Average interest bearing deposits increased $120.0 million or 30.3% from 2004 to 2005 due primarily to strong organic growth in deposits and deposits acquired from Madison. Total interest-bearing funding grew by $82.7 million and, combined with the growth in non-interest bearing deposits, provided all of the funding needed for the $81.1 million in loan and investment security growth. The average rate paid on long-term borrowings has dropped steadily over the last three years, from 4.51% for the year ended 2003, to 3.34% for 2004, to 3.22% for 2005. Average long-term borrowings increased $11.0 million or 28.0% from 2004 to 2005. At year-end 2005, actual balances for federal funds purchased and long term debt were $66.2 million and $43.0 million, respectively compared to $36.1 million and $54.5 million at year-end 2004, respectively.

As a result of an increase in the volume of commercial loans originated along with an increased yield in the available for sale investment portfolio, tax-equivalent net interest income was able to increase despite the rising cost of funds. Tax-equivalent net interest margin decreased to 3.71% in 2006 from 3.82% in 2005. As a result of an increase in the commercial loan portfolio, an increase in the investment portfolio yield, increased non-interest bearing deposits, lower long-term borrowing costs and the increase in prime rate, the net interest margin increased to 3.82% in 2005 from 3.46% in 2004.

Changes in Interest Income and Interest Expense

The following table sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (period to period changes in average balance multiplied by beginning rate), and (2) changes in rate (period to period changes in rate multiplied by beginning average balance).

Analysis of Changes in Interest Income/Expense(1)(2)(3)

	2006/2005 Increase (Decrease)									2005/2004 Increase (Decrease)
	Due to Change in									Due to Change in
	Volume			Rate			Net			Volume			Rate			Net
	(in thousands)
Interest-bearing deposits in other banks and federal funds sold	$	(15	)	$	12		$	(3	)	$	9		$	—		$	9
Securities (taxable)	(13		)	590			577			13			735			748
Securities (tax-exempt)	183			(67		)	116			(126		)	31			(95		)
Loans	5,477			4,969			10,446			13,106			3,500			16,606
Total Interest Income	5,632			5,504			11,136			13,002			4,266			17,268
Short-term borrowed funds	315			1,074			1,389			396			1,070			1,466
Repurchase agreements	451			909			1,360			189			501			690
Long-term borrowed funds	(529		)	61			(468		)	605			(296		)	309
Junior Subordinated Debt	—			305			305			—			630			630
Interest-bearing demand deposits	12			2,085			2,097			985			1,063			2,048
Savings deposits	69			761			830			(2		)	82			80
Time deposits	1,851			1,838			3,689			2,008			246			2,254
Total Interest Expense	2,169			7,033			9,202			4,181			3,296			7,477
Increase (Decrease) in Net Interest Income	$	3,463		$	(1,529	)	$	1,934		$	8,821		$	970		$	9,791

(1) Loan fees have been included in the change in interest income totals presented. Non-accrual loans have been included in average loan balances.

(2) Changes due to both volume and rates have been allocated in proportion to the relationship of the dollar amount change in each.

(3) Interest income on loans and securities is presented on a taxable equivalent basis.

Other Income

The following table details non-interest income as follows:

	2006 versus 2005										2005 versus 2004
			Increase/								Increase/
	2006		Decrease				%		2005		Decrease				%		2004
	(Dollars in thousands)
Customer service fees	$	2,689		$	2		0.1		$	2,687		$	740		38.0		$	1,947
Mortgage banking activities, net	3,574			(1,805		)	(33.6	)	5,379			3,283			156.6		2,096
Commissions and fees from insurance sales	11,269			(365		)	(3.1	)	11,634			853			7.9		10,781
Broker and investment advisory commissions and fees	721			(277		)	(27.8	)	998			470			89.0		528
Gain on sale of loans	102			(574		)	(84.9	)	676			244			56.5		432
Earnings on investment in life insurance	560			117			26.4		443			(182		)	(29.1	)	625
Other income	1,788			111			6.6		1,677			762			83.3		915
Net realized gains on sale of securities	515			144			38.8		371			26			7.5		345
Total	$	21,218		$	(2,647	)	(11.1	)	$	23,865		$	6,196		35.1		$	17,669

The Company’s primary source of other income for 2006 was commissions and other revenue generated through sales of insurance products through its insurance subsidiary, Essick & Barr. Revenues from insurance operations totaled $11.3 million in 2006 compared to $11.6 million in 2005 and $10.8 million in 2004. The decrease in revenue from insurance operations was due mainly to a decrease in contingency income received. Revenues from broker and investment advisory commissions generated through Madison Financial, the Company’s investment subsidiary, decreased to $721,000 in 2006 from $998,000 in 2005 due to a decrease in investment and advisory services. Also, annuity and other insurance commissions generated by Madison Financial of $151,000, $210,000 and $309,000 are included in commissions and fees from insurance sales for the years 2006, 2005 and 2004, respectively.

Revenues from insurance operations totaled $11.6 million in 2005 compared to $10.8 million in 2004. Revenues from broker and investment advisory commissions generated through Madison Financial, the Company’s investment subsidiary, increased to $998,000 in 2005 from $528,000 in 2004 due to an increase in the sales staff facilitating increased sales of wealth management products offered through the branch network.

The Company also relies on several other sources for its other income, including sales of newly originated mortgage loans and service charges on deposit accounts. The income recognized from mortgage banking activities was $3.6 million in 2006, $5.4 million in 2005 and $2.1 million in 2004. The decrease in mortgage banking revenue from 2005 to 2006 is mainly attributable to a decrease in the volume of mortgage loan originations and sales through the Company’s mortgage banking division, Philadelphia Financial. Also included in other income are net gains on other loan sales of $102,000 in 2006, $676,000 in 2005 and $432,000 in 2004 from the sale of $1.6 million, $16.3 million and $8.5 million, respectively, of fixed and adjustable rate portfolio residential mortgage loans, SBA loans and USDA loans. The increases in income from customer service fees reflect an expanded customer base, new products and services and the annual review of the fee pricing.

The income recognized from mortgage banking activities was $5.4 million in 2005 and $2.1 million in 2004. The increase in mortgage banking revenue from 2004 to 2005 is attributable to increased volumes of mortgage loan originations and mortgage sales. The increases in income from customer service fees reflect an expanded customer base, new products and services, the annual review of the fee pricing structure and the acquisition of Madison.

Earnings on investment in life insurance represent the change in cash value of Bank Owned Life Insurance (BOLI) policies. The BOLI policies of the Company are designed to offset the costs of employee benefit plans and to enhance tax-free earnings. The investment in BOLI totaled $17.2 million and $11.7 million at December 31, 2006 and 2005. In 2006, the Bank purchased an additional $5 million in BOLI. Earnings on BOLI are affected by fluctuations in interest rates.

Other income includes debit card network interchange income, merchant fee income, SBA service fee income and safe deposit box rentals, as well as, other miscellaneous income items. The most significant volume of income in this category is derived from ATM surcharge fees and interchange fees from the Bank’s ATM network and fees from debit card transactions. These fees totaled $907,000 in 2006 which represents a 15.8% increase over 2005. Throughout the year, the Bank has initiated marketing campaigns to encourage its customers to use debit cards as a convenient alternative to traditional check transactions. ATM surcharge fees and interchange fees from the Bank’s ATM network and fees from debit card transactions totaled $783,000 in 2005 which represents a 33.1% increase over 2004.

Other Expenses

The following table details non-interest expense as follows:

	2006 versus 2005										2005 versus 2004
			Increase/								Increase/
	2006		Decrease				%		2005		Decrease			%		2004
	(Dollars in thousands)
Salaries and employee benefits	$	22,142		$	(948	)	(4.1	)	$	23,090	$	5,931		34.6		$	17,159
Occupancy expense	4,465			(1		)	(0.0	)	4,466		1,870			72.0		2,596
Equipment expense	2,641			118			4.7		2,523		552			28.0		1,971
Marketing and advertising expense	1,354			(223		)	(14.1	)	1,577		407			34.8		1,170
Amortization of indentifiable intangible assets	636			(4		)	(0.6	)	640		208			48.1		432
Professional services	1,257			(471		)	(27.3	)	1,728		582			50.8		1,146
Outside processing services	2,981			240			8.8		2,741		603			28.2		2,138
Insurance expense	500			(130		)	(20.6	)	630		95			17.8		535
Merger related expense	—			—			—		—		(899		)	(100.0	)	899
Other expense	4,262			376			9.7		3,886		1,384			55.3		2,502
Total	$	40,238		$	(1,043	)	(2.5	)	$	41,281	$	10,733		35.1		$	30,548

Non-interest expense consists primarily of costs associated with personnel, occupancy and equipment, data processing, marketing and professional fees. The Company’s non-interest expense for the year ended December 31, 2006 totaled $40.2 million, representing an decrease of $1.0 million or 2.5% as compared to 2005. Salaries and employee benefits, the largest component of non-interest expense, decreased $948,000 or 4.1% from 2005 to 2006. Included in salaries and benefits for the year ended December 31, 2006 and 2005 were severance costs mentioned earlier of $594,000 and $445,000, respectively. Full-time equivalent (FTE) employees for the Company are 323, 338 and 332 for the years ended December 31, 2006, 2005 and 2004, respectively. The decrease in salaries and employee benefits and FTE employees from 2005 to 2006 was primarily attributed to a reduction in staff as a result of the Company’s corporate-wide reorganization plan, as well as, a decrease in commissions paid on both mortgage origination activity through Philadelphia Financial Mortgage Company and investment advisory activity through Madison Financial Advisors. Total commissions paid for the year ended December 31, 2006 and 2005 were $2,324,000 and $3,638,000, respectively.

The Company’s non-interest expense for the year ended December 31, 2005 totaled $41.3 million, representing an increase of $10.7 million or 35.1% as compared to 2004. Salaries and employee benefits increased $5.9 million or 34.6% from 2004 to 2005. The increase in salaries and employee benefits from 2004 to 2005 was primarily the result of the acquisition of Madison, merit increases, continued growth of the Company, commissions paid on revenue generated from sales of insurance products through Essick & Barr and wealth management products through Madison Financial, as well as, higher benefits costs consistent with industry trends. Full-time equivalent (FTE) employees for the Company are 338, 332 and 230 for the years ended December 31, 2005, 2004 and 2003, respectively.

Total occupancy and equipment expense increased 1.7% in 2006 compared to 2005 primarily due to general building repairs and maintenance and additional depreciation and software maintenance expense related to computer and software upgrades.

Total occupancy expense increased $1.9 million or 72.0% in 2005 compared to 2004 primarily due to the lease expense related to the branch network and administrative office space acquired from Madison. Total equipment expense increased $552,000 or 28.0% in 2005 primarily due to the additional depreciation and software maintenance expense related to the acquisition of Madison.

Total marketing expense decreased $223,000 or 14.1% in 2006 compared to 2005 primarily due to additional marketing campaigns in 2005 as a result of the Madison acquisition. The Company continues its marketing campaigns for the introduction of new products and services, as well as new marketing campaigns targeting the greater Philadelphia region. These marketing efforts coincide with a more cohesive and strategic branding approach designed to focus on our overall portfolio of banking, insurance and wealth management products and services. Our current marketing approach has contributed to increased visibility for the Company, setting the stage for continued core franchise growth in the Reading and Philadelphia markets.

Total marketing expense increased $407,000 or 34.8% in 2005 compared to 2004 primarily due to marketing campaigns for the introduction of new products and services, as well as, new marketing campaigns targeting the Madison region. Similar to 2006, these marketing efforts coincide with the Company’s strategic branding approach focusing on our overall portfolio of products and services. This marketing approach has contributed to the Company’s increased visibility and core franchise growth in both loans and deposits within the Reading and Philadelphia markets.

Total amortization of identifiable intangible assets decreased $4,000 or 0.6% in 2006 as compared to 2005, total outside processing services increased $240,000 or 8.8% in 2006 as compared to 2005 and total insurance expense decreased $130,000 or 20.6% in 2006 as compared to 2005. The increase in outside processing services is due primarily to costs associated with the implementation of various projects utilizing our core processing system. The decrease in insurance expense is due primarily to efficiencies gained in consolidating Madison insurances through Essick & Barr.

Total amortization of identifiable intangible assets increased $208,000 or 48.1% in 2005 as compared to 2004, total outside processing services increased $603,000 or 28.2% in 2005 as compared to 2004 and total insurance expense increased $95,000 or 17.8% in 2005 as compared to 2004. The increase in these costs is due primarily to the acquisition of Madison.

Other expense includes utility expense, postage expense, stationary and supplies expense, purchase accounting expense and OREO and foreclosure expense, as well as, other miscellaneous expense items. These costs totaled $4.3 million in 2006 which represents a 9.7% increase over 2005. Increases in other expenses were primarily attributable to purchase accounting amortization associated with the acquisition of Madison and an increase in shares tax expense as a result of an increase in the Bank’s equity.

Other expense includes utility expense, postage expense, stationary and supplies expense, purchase accounting expense and OREO and foreclosure expense, as well as, other miscellaneous expense items. These costs totaled $3.9 million in 2005 which represents a 55.0% increase over 2004. Increases in other expenses were almost entirely related to the first full year of expenses associated with the acquisition of Madison in 2004.

Income Taxes

The effective income tax rate for the Company for the years ended December 31, 2006, 2005 and 2004 was 23.67%, 23.80% and 17.56%, respectively. The effective tax rate for 2006 remained relatively unchanged from 2005 and increased from 2004 primarily because tax exempt income remained relatively flat while income before income taxes increased. Included in the income tax provision is a federal tax benefit from our $5.0 million investment in an affordable housing, corporate tax credit limited partnership of $600,000, $600,000 and $450,000, respectively, for the years ended December 31, 2006, 2005 and 2004.

Financial Condition

The Company’s total assets at December 31, 2006 and 2005 were $1.0 billion and $965.8 million, respectively.

Cash and Securities Portfolio

Cash and balances due from banks decreased to $21.8 million at December 31, 2006 from $29.1 million at December 31, 2005.

The securities portfolio decreased 11.3% to $167.3 million at December 31, 2006, from $188.7 million at December 31, 2005 primarily due to investment maturities and principal repayments reinvested into higher yielding commercial loans. Securities are used to supplement loan growth as necessary, to generate interest and dividend income, to manage interest rate risk, and to provide liquidity. To accomplish these ends, most of the purchases in the portfolio during 2006 and 2005 were of mortgage backed securities issued by US Government agencies. State and political subdivision securities were sold in 2006 to purchase $5 million in additional BOLI.

The securities balance included a net unrealized loss on available for sale securities of $3.8 million and $4.8 million at December 31, 2006 and 2005, respectively. Changes in longer-termed treasury interest rates were primarily responsible for the increase in the fair market value of the securities.

Loans

Loans increased to $764.8 million at December 31, 2006 from $654.2 million at December 31, 2005, an increase of $110.6 million or 16.9%. Management has targeted the commercial loan portfolio as a key to the Company’s continuing growth. Specifically, the Company has a lending focus within the Reading and Philadelphia market areas targeting higher yielding commercial loans made to small and medium sized businesses. The acquisition of Madison in 2004, whose loan portfolio consisted of mainly commercial loans, and the year over year growth in commercial loans originated underscores that focus as the commercial loan portfolio increased to $486.7 million at December 31, 2006, from $384.8 million at December 31, 2005, an increase of $101.9 million or 26.5%.

Loans secured by 1 to 4 family residential real estate increased to $187.8 million at December 31, 2006, from $172.8 million as of December 31, 2005, an increase of $15.0 million or 8.7%. Loans secured by multi-family residential real estate increased to $22.4 million at December 31, 2006, from $14.4 million as of December 31, 2005, an increase of $8.0 million or 55.6%. The overall increase in residential real estate loans is due primarily to the growth in the Company’s lending footprint within the Philadelphia market.

Home equity lending products decreased to $68.8 million at December 31, 2006, from $83.0 million as of December 31, 2005. Consumer demand for these types of loans was hampered by increases in the prime rate. Despite the numerous increases in the prime rate during the first half of 2006, we were able to maintain our outstanding balances through successful marketing initiatives.

The loans held for sale category is composed of $5.6 million of mortgage loans committed for sale to other institutions and the secondary market as of December 31, 2006 versus $16.6 million as of December 31, 2005. The decrease in loans held for sale is primarily due to decreased loan origination activity through Philadelphia Financial.

The sales of residential real estate loans in the secondary market reflects the Company’s strategy of de-emphasizing the retention of long-term, fixed rate loans in the portfolio utilizing these loans sales to generate fees, improve interest-rate risk and fund growth in higher yielding assets.

Premises and Equipment

Premises and equipment, net of accumulated depreciation and amortization, decreased during 2006 to $6.9 million from $7.8 million at the end of 2005. The decrease in premises and equipment is due mainly to depreciation expense and amortization of leasehold improvements which totaled $1.7 million in 2006 and $1.7 million in 2005.

During 2004, the Company sold six branch locations with a net book value of $7.0 million and leased them back from the purchaser with a lease term of 20 years resulting in a gain of $712,000, which is being amortized into income over the term of the lease.

Goodwill and Identifiable Intangible Assets

Goodwill increased to $39.2 million from $38.8 million for the years ended December 31, 2006 and 2005, respectively. During 2006, the Company recorded as goodwill $400,000 in contingent payments to the sellers based on predetermined revenue targets set forth in the asset purchase agreements. Identifiable intangible assets decreased to $4.5 million from $5.2 million for the years ended December 31, 2006 and 2005, respectively. The decrease in identifiable intangible assets is due mainly to amortization expense which totaled approximately $636,000 in 2006 and $640,000 in 2005.

Bank Owned Life Insurance

Bank owned life insurance increased $5.5 million to $17.2 million at December 31, 2006 from $11.7 million at December 31, 2005. The increase in bank owned life insurance is due primarily to the purchase of $5 million in additional BOLI in 2006.

Deposits and Borrowings

Total deposits at December 31, 2006 and 2005 were $702.8 million and $659.7 million, respectively.

Non-interest bearing deposits decreased to $108.5 million at December 31, 2006, from $116.0 million at December 31, 2005, a decrease of $7.5 million or 6.4%. The decrease in non-interest bearing deposits is primarily due to changes in consumer demand for these types of products. Management continues its efforts to promote growth in these types of deposits, such as offering a free checking product, as a method to help reduce the overall cost of the Company’s funds. Interest bearing deposits increased by $50.5 million or 9.3%, from $543.8 million at December 31, 2005 to $594.3 million at December 31, 2006. In 2006, our customer’s preference was clearly weighted in favor of maintaining a more liquid investment position while taking advantage of higher short-term interest rates. In early 2005, we responded to our customers by introducing our Capital Growth Checking product which gave our customers the liquidity of a checking account at money market rates and by offering incentive rates for shorter term time deposits.

Borrowed funds from various sources are generally used to supplement deposit growth. Short-term borrowings, which were composed of federal funds purchased from the Federal Home Loan Bank (“FHLB”) and other correspondent banks and securities sold under agreements to repurchase, were $173.1 million at December 31, 2006, and $135.7 million at December 31, 2005. This increase is primarily the result of funding needs generated by increased loan demand. Long-term borrowings, which consisted of advances from the FHLB, totaled $19.5 million and $43.0 million at December 31, 2006 and 2005, respectively.

Shareholders’ Equity

Total common stock, surplus, retained earnings and accumulated other comprehensive loss increased by $7.3 million or 7.8% to $102.1 million at December 31, 2006 from $94.8 million at December 31, 2005.

The increase for 2006 is primarily the result of net income of $9.2 million offset by cash dividends declared of $3.9 million.

Total shareholders’ equity includes accumulated other comprehensive loss, which includes an adjustment for the fair value of the Company’s securities portfolio. This amount attempts to identify the impact to equity in the unlikely event that the Company’s entire securities portfolio would be liquidated under current economic conditions. The amounts and types of securities held by the Company at the end of 2006, combined with current interest rates, resulted in an increase in equity, net of taxes, of $617,000. This compares with a decrease to equity, net of taxes, of $3.0 million during 2005.

Interest Rate Sensitivity

Through the years, the banking industry has adapted to an environment in which interest rates have fluctuated dramatically and in which depositors have been provided with liquid, rate sensitive investment options. The industry utilizes a process known as asset/liability management as a means of managing this adaptation.

Asset/liability management is intended to provide for adequate liquidity and interest rate sensitivity by matching interest rate sensitive assets and liabilities and coordinating maturities and repricing characteristics on assets and liabilities.

Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. Interest rate sensitivity is the relationship between market interest rates and earnings volatility due to the repricing characteristics of assets and liabilities. The Company’s net interest income is affected by changes in the level of market interest rates. In order to maintain consistent earnings performance, the Company seeks to manage, to the extent possible, the repricing characteristics of its assets and liabilities.

One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Company’s Asset/Liability Committee (“ALCO”), which is comprised of senior management and Board members. The ALCO meets quarterly to monitor the ratio of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk management is a regular part of management of the Company. In addition, there is an annual process to review the interest rate risk policy with the Board of Directors which includes limits on the impact to earnings from shifts in interest rates.

To manage the interest rate sensitivity position, an asset/liability model called “gap analysis” is used to monitor the difference in the volume of the Company’s interest sensitive assets and liabilities that mature or reprice within given periods. A positive gap (asset sensitive) indicates that more assets reprice during a given period compared to liabilities, while a negative gap (liability sensitive) has the opposite effect.

During October 2002, the Company entered into its first interest rate swap agreement with a notional amount of $5 million. This derivative financial instrument effectively converted fixed interest rate obligations of outstanding junior subordinated debt to variable interest rate obligations, decreasing the asset sensitivity of its balance sheet by more closely matching the Company’s variable rate assets with variable rate liabilities. The Company considers the credit risk inherent in the contracts to be negligible.

Interest rate caps are generally used to limit the exposure from the repricing and maturity of liabilities and to limit the exposure created by interest rate swaps. In June of 2003, the Company purchased a six month LIBOR cap to create protection against rising interest rates for the above mentioned $5 million interest rate swap. The initial premium related to this interest rate cap was $102,000. At December 31, 2006 and 2005, the carrying value and market value of the interest rate cap was approximately $15,000 and $38,000, respectively.

Also, the Company sells fixed and adjustable rate residential mortgage loans to limit the interest rate risk of holding longer-term assets on the balance sheet. In 2006, 2005 and 2004, the Company sold $1.7 million, $17.0 million and $8.5 million, respectively, of fixed and adjustable rate loans.

At December 31, 2006, the Company was in a negative one-year cumulative gap position. Commercial adjustable rate loans increased $92.8 million or 39.7% from $233.8 million at December 31, 2005 to $326.6 million at December 31, 2006. Installment adjustable rate loans decreased $8.9 million or 16.2% from $63.7 million at December 31, 2005 to $54.8 million at December 31, 2006. During 2006, the targeted short-term interest rate, as established by the FRB, increased which resulted in an increase in the prime rate from 7.25% at December 31, 2005, to 8.25% at December 31, 2006. The increase in interest rates throughout the first half of 2006 contributed to a slowdown in the refinance market effectively extending the maturities for fixed rate loans and investments. In order to augment the funding needs for new loan originations and investment security purchases, short-term borrowings, which include federal funds purchased and securities sold under agreements to repurchase, increased $37.4 million or 27.6% from $135.7 million at December 31, 2005 to $173.1 million at December 31, 2006. These factors contributed to the Company’s negative one-year cumulative gap position. In 2006, the Company will continue its strategy to originate adjustable rate commercial and installment loans and use investment security cash flows and non-interest bearing and core deposits to reduce the overnight borrowings to maintain a more neutral gap position.

Interest Sensitivity Gap at December 31, 2006

					3 to
	0-3 months				12 months			1-3 years			over 3 years
	(Dollars in thousands)
Interest bearing deposits		$	751		$	—		$	—			$	—
Securities(1),(2)		20,967			18,091			43,290				84,946
Mortgage loans held for sale		5,582			—			—				—
Loans(2)		487,163			69,709			113,062				87,238
Total rate sensitive assets (RSA)		514,463			87,800			156,352				172,184
Interest bearing deposits(3)		177,423			11,634			29,086				72,714
Time deposits		46,579			178,748			72,121				5,985
Federal funds purchased		82,105			—			—				—
Short-term borrowed funds		45,987			45,000			—				—
Long-term borrowed funds		1,000			13,500			5,000				—
Junior subordinated debt		15,150			—			5,000				—
Total rate sensitive liabilities (RSL)		368,244			248,882			111,207				78,699
Interest rate swap		(5,000		)	—			—				—
Interest sensitivity gap		$	151,219		$	(161,082	)	$	45,145			$	93,485
Cumulative gap		151,219			(9,863		)	35,282				128,767
RSA/RSL		1.4		%	0.4		%	1.4		%		2.2		%

(1) Includes gross unrealized gains/losses on available for sale securities.

(2) Securities and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due.

(3) Demand and savings accounts are generally subject to immediate withdrawal. However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments.

Certain shortcomings are inherent in the method of analysis presented in the above table. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

The Company also measures its sensitivity to interest rate movements through simulations of the effects of rate changes upon its net interest income. Interest rate movements of up 100, 200 and 300 basis points and down 100, 200 and 300 basis points, adjusted because of the current rate environment, were applied to the Company’s interest earning assets and interest bearing liabilities as of December 31, 2006. The results of these simulations on net interest income for 2006 are as follows:

Simulated % change in 2006
Net Interest Income
	Assumed Changes
		in Interest Rates	% Change
–300			–8.3	%
–200			–4.9	%
–100			–2.0	%
0			0.0	%
+100			2.1	%
+200			4.0	%
+300			6.0	%

Economic value of shareholders’ equity as a result of interest rate changes is presented in the following hypothetical table. This analysis estimates the projected change in the value of equity as of December 31, 2006 as a result of hypothetical interest rate movements. The results of the simulations in the up 100, 200 and 300 basis points categories reflect the balance sheet and interest rate environment changes as discussed above. The acquisition of Madison and the Company’s plan to reduce its negative one-year cumulative gap position is expected to keep the economic value of shareholders’ equity inside policy limits.

Simulated % change in Economic
Value of Shareholders’ equity
	Assumed Changes
		in Basis Points	% Change
–300			–8.7	%
–200			–3.4	%
–100			0.1	%
0			0.0	%
+100			–3.6	%
+200			–8.0	%
+300			–12.9	%

Capital

Federal bank regulatory agencies have established certain capital-related criteria that must be met by banks and bank holding companies. The measurements which incorporate the varying degrees of risk contained within the balance sheet and exposure to off-balance sheet commitments were established to provide a framework for comparing different institutions.

Other than Tier 1 capital restrictions on the Company’s junior subordinated debt discussed later, the Company is not aware of any pending recommendations by regulatory authorities that would have a material impact on the Company’s capital, resources, or liquidity if they were implemented, nor is the Company under any agreements with any regulatory authorities.

The adequacy of the Company’s capital is reviewed on an ongoing basis with regard to size, composition and quality of the Company’s resources. An adequate capital base is important for continued growth and expansion in addition to providing an added protection against unexpected losses.

An important indicator in the banking industry is the leverage ratio, defined as the ratio of common shareholders’ equity less intangible assets, to average quarterly assets less intangible assets. The leverage ratio at December 31, 2006 was 8.24% compared to 8.16% at December 31, 2005. This increase is primarily the result of an increase in common shareholders’ equity and the increase in average total assets primarily due to the growth in the commercial loan portfolio. For 2006 and 2005, the ratios were above minimum regulatory guidelines.

As required by the federal banking regulatory authorities, guidelines have been adopted to measure capital adequacy. Under the guidelines, certain minimum ratios are required for core capital and total capital as a percentage of risk-weighted assets and other off-balance sheet instruments. For the Company, Tier 1 capital consists of common shareholders’ equity less intangible assets plus the junior subordinated debt, and Tier 2 capital includes the allowable portion of the allowance for loan losses, currently limited to 1.25% of risk-weighted assets. By regulatory guidelines, the separate component of equity for unrealized appreciation or depreciation on available for sale securities is excluded from Tier 1 capital. In addition, federal banking regulating authorities have issued a final rule restricting the Company’s junior subordinated debt to 25% of Tier 1 capital. Amounts of junior subordinated debt in excess of the 25% limit generally may be included in Tier 2 capital. The final rule provides a five-year transition period, ending March 31, 2009.

The following table sets forth the Company’s capital ratios.

	At December 31,
	2006			2005
	(Dollars in thousands)
Tier 1
Common shareholders’ equity (excluding unrealized gains (losses) on securities)	$	102,130		$	94,756
Disallowed intangible assets	(43,338		)	(44,032		)
Junior subordinated debt	20,000			20,000
Tier 2
Allowable portion of allowance for loan losses	7,611			7,619
Unrealized gains available for sale equity securities	2,296			2,899
Total risk-based capital	$	88,699		$	81,242
Risk adjusted assets (including off-balance sheet exposures)	$	796,229		$	729,732
Leverage ratio	8.24		%	8.16		%
Tier 1 risk-based capital ratio	10.18		%	10.09		%
Total risk-based capital ratio	11.14		%	11.13		%

Regulatory guidelines require that Tier 1 capital and total risk-based capital to risk-adjusted assets must be at least 4.0% and 8.0%, respectively.

Liquidity and Funds Management

Liquidity management ensures that adequate funds will be available to meet anticipated and unanticipated deposit withdrawals, debt servicing payments, investment commitments, commercial and consumer loan demand and ongoing operating expenses. Funding sources include principal repayments on loans and investment securities, sales of loans, growth in core deposits, short and long-term borrowings and repurchase agreements. Regular loan payments are a dependable source of funds, while the sale of loans and investment securities, deposit flows, and loan prepayments are significantly influenced by general economic conditions and level of interest rates.

At December 31, 2006, the Company maintained $21.8 million in cash and cash equivalents primarily consisting of cash and due from banks. In addition, the Company had $164.2 million in available for sale securities and $3.1 million in held to maturity securities. Cash and investment securities totaled $189.1 million which represented 18.2% of total assets at December 31, 2006 compared to 22.6% at December 31, 2005.

The Company considers its primary source of liquidity to be its core deposit base, which includes non-interest-bearing and interest-bearing demand deposits, savings, and time deposits under $100,000. This funding source has grown steadily over the years through organic growth and acquisitions and consists of deposits from customers throughout the financial center network. The Company will continue to promote the growth of deposits through its financial center offices. At December 31, 2006, approximately 38.3% of the Company’s assets were funded by core deposits acquired within its market area. An additional 9.8% of the assets were funded by the Company’s equity. These two components provide a substantial and stable source of funds.

Off-Balance Sheet Arrangements

The Company’s financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk. These commitments consist mainly of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. Unused commitments, at December 31, 2006 totaled $298.6 million. This consisted of $82.1 million in commercial real estate and construction loans, $54.0 million in home equity lines of credit, $143.6 million in unused business lines of credit and $18.9 million in standby letters of credit and the remainder in other unused commitments. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company. Any amounts actually drawn upon, management believes, can be funded in the normal course of operations. The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.

Contractual Obligations

The following table represents the Company’s aggregate on and off balance sheet contractual obligations to make future payments.

	December 31, 2006
	Less than						Over
	1 year		1-3 Years		4-5 Years		5 Years		Total
	(in thousands)
Time deposits	$	225,327	$	72,121	$	5,683	$	302	$	303,433
Long-term debt	14,500		5,000		—		—		19,500
Junior subordinated debt	20,150		—		—		—		20,150
Operating leases	2,750		5,070		4,090		16,404		28,314
Unconditional purchase obligations	429		931		668		—		2,028
Total	$	263,156	$	83,122	$	10,441	$	16,706	$	373,425

Risk Elements

Non-performing loans, consisting of loans on non-accrual status, loans past due 90 days or more and still accruing interest, and renegotiated troubled debt were $4.4 million at December 31, 2006, a decrease from $6.3 million at December 31, 2005. Generally, loans that are more than 90 days past due are placed on non-accrual status. As a percentage of total loans, non-performing loans represented .57% at December 31, 2006 and .94% at December 31, 2005. The allowance for loan losses represents 172.94% of non-performing loans at December 31, 2006, compared to 120.50% at December 31, 2005.

The Company continues to emphasize credit quality and believes that pre-funding analysis and diligent intervention at the first signs of delinquency will help to manage these levels.

The following table is a summary of non-performing loans and renegotiated loans for the years presented.

	Non-performing Loans
	As of December 31,
	2006		2005		2004		2003		2002
	(in thousands)
Non-accrual loans:
Real estate	$	1,317	$	1,231	$	2,447	$	129	$	258
Consumer	578		366		—		18		—
Commercial	2,094		3,970		471		674		971
Total	3,989		5,567		2,918		821		1,229
Loans past due 90 days or more and still accruing interest:
Real estate	47		12		2,384		46		—
Consumer	—		—		33		16		11
Commercial	46		594		548		—		53
Total loans past due 90 days or more	93		606		2,965		62		64
Troubled debt restructurings:
Real estate	—		—		—		—		—
Consumer	—		—		—		—		—
Commercial	319		150		103		631		112
Total troubled debt restructurings	319		150		103		631		112
Total non-performing loans	$	4,401	$	6,323	$	5,986	$	1,514	$	1,405

At December 31, 2006, there was $817,000 of commercial loans for which payments are current, but where the borrowers were experiencing significant financial difficulties, that were not classified as non-accrual.

The following summary shows the impact on interest income of non-accrual and restructured loans for the year ended December 31, 2006 (in thousands):

Amount of interest income on loans that would have been recorded under original terms		$	113
Interest income reported during the period		$	261

Provision and Allowance for Loan Losses

The provision for loan losses for 2006 was $1.1 million compared to $1.5 million in 2005 and $1.3 million in 2004. The Company performs a review of the credit quality of its loan portfolio on a monthly basis to determine the adequacy of the allowance for possible loan losses. The Company experienced growth in the loan portfolio of 16.9% in 2006 and 9.7% in 2005. The allowance for loan losses at December 31, 2006 was $7.6 million, or 1.00% of outstanding loans, compared to $7.6 million or 1.16% of outstanding loans at December 31, 2005. The decrease in the provision for loan losses for 2006 over 2005 is primarily a result of a decrease in total non-performing loans of $1.9 million or 30.4%.

The allowance for loan losses is an amount that management believes to be adequate to absorb potential losses in the loan portfolio. Additions to the allowance are charged through the provision for loan losses. Management regularly assesses the adequacy of the allowance by performing an ongoing evaluation of the loan portfolio, including such factors as charge-off history, the level of delinquent loans, the current financial condition of specific borrowers, value of any collateral, risk characteristics in the loan portfolio, and local and national economic conditions. Significant loans are individually analyzed, while other smaller balance loans are evaluated by loan category. Based upon the results of such reviews, management believes that the allowance for loan losses at December 31, 2006 was adequate to absorb credit losses inherent in the portfolio as of that date.

The following table presents a comparative allocation of the allowance for loan losses for each of the past five year-ends. Amounts were allocated to specific loan categories based upon management’s classification of loans under the Company’s internal loan grading system and assessment of near-term charge-offs and losses existing in specific larger balance loans that are reviewed in detail by the Company’s internal loan review department and pools of other loans that are not individually analyzed. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future credit losses may occur.

Allocation of Allowance for Loan Losses
(In thousands except percentage data)

As of December 31,

2006

2005

2004

2003

2002

% of

Total

Amount

Loans

Amount

Loans

Amount

Loans

Amount

Loans

Amount

Loans

Commercial	$	6,451	50.9	%	$	6,318	49.4	%	$	6,071	46.9	%	$	3,391	47.5	%	$	3,095	53.4	%
Residential Real Estate	216		48.3		229		49.0		387		51.1		277		49.4		374		42.7
Consumer	808		0.8		884		1.6		782		2.0		598		3.1		500		3.9
Total Allocated	7,475		100.0		7,431		100.0		7,240		100.0		4,266		100.0		3,969		100.0
Unallocated	136		—		188		—		8		—		90		—		213		—
TOTAL	$	7,611	100.0	%	$	7,619	100.0	%	$	7,248	100.0	%	$	4,355	100.0	%	$	4,182	100.0	%

The unallocated portion of the allowance is intended to provide for possible losses that are not otherwise accounted for and to compensate for the imprecise nature of estimating future loan losses. Management believes the allowance is adequate to cover the inherent risks associated with the Company’s loan portfolio. While allocations have been established for particular loan categories, management considers the entire allowance to be available to absorb losses in any category.

The following tables set forth an analysis of the Company’s allowance for loan losses for the years presented.

Analysis of the Allowance for Loan Losses
(in thousands except ratios)

	Year Ended December 31,
	2006			2005			2004			2003			2002
Balance, Beginning of year	$	7,619		$	7,248		$	4,356		$	4,182		$	3,723
Balance acquired in merger	—			—			2,079			—			—
Charge-offs:
Commercial	708			663			315			771			799
Real Estate	356			413			202			49			57
Consumer	241			202			111			133			211
Total	1,305			1,278			628			953			1,067
Recoveries:
Commercial	59			53			9			59			41
Real Estate	94			89			87			9			10
Consumer	60			47			25			94			20
Total	213			189			121			162			71
Net Charge-offs	1,092			1,089			507			791			996
Provision Charged to Operations	1,084			1,460			1,320			965			1,455
Balance, End of Year	$	7,611		$	7,619		$	7,248		$	4,356		$	4,182
Average Loans	$	711,240		$	632,631		$	433,941		$	352,438		$	326,814
Ratio of Net Charge-offs to Average Loans	0.15		%	0.17		%	0.12		%	0.22		%	0.30		%
Ratio of Allowance to Loans, End of Year	1.00		%	1.16		%	1.22		%	1.22		%	1.25		%

Loan Policy and Procedure

The Bank’s loan policies and procedures have been approved by the Board of Directors, based on the recommendation of the Bank’s President, Chief Lending Officer, Loan Review Officer, and the Risk Management Officer, who collectively establish and monitor credit policy issues. Application of the loan policy is the direct responsibility of those who participate either directly or administratively in the lending function.

The Bank’s commercial lending officers originate loan requests through a variety of sources which include the Bank’s existing customer base, referrals from directors and various networking sources (accountants, attorneys, and realtors), and market presence. Over the past several years, the Bank’s commercial lending efforts have been significantly increased through (1) the hiring of experienced commercial lenders in the Bank’s geographic markets, (2) the Bank’s continued participation in community and civic events, (3) strong networking efforts, (4) local decision making, and (5) consolidation and other changes which are occurring with respect to other local financial institutions.

The Bank’s commercial lenders have approval authority up to designated individual limits, along with joint lending authority up to $1,000,000. Loans in excess of $1,000,000 are presented to the Bank’s Credit Committee, comprised of the Chief Lending Officer, Credit Manager, Loan Review Officer (non-voting),

and selected commercial lenders. The Credit Committee can approve loans up to $3,500,000 and recommend loans to the Executive Loan Committee for approval up to approximately $7,670,000 (which represents 65% of the Bank’s legal lending limit of approximately $11,800,000). The Executive Loan Committee is composed of the Chief Lending Officer, the Chief Credit Officer, the Chief Financial Officer, the Loan Review Officer (non-voting member) and selected Board members. Loans up to the Bank’s legal lending limit are submitted to the Board for approval. The Bank has established an “in-house” lending limit of 80% of its legal lending limit and, at December 31, 2006, the Bank has no loan relationships in excess of its in-house limit.

Through the Chief Credit Officer and the Credit Committee, the Bank has successfully implemented individual, joint, and committee level approval procedures which have monitored and solidified credit quality as well as provided lenders with a process that is responsive to customer needs.

The Bank manages credit risk in the loan portfolio through adherence to consistent standards, guidelines, and limitations established by the credit policy. The Bank’s credit department, along with the loan officer, analyzes the financial statements of the borrower, collateral values, loan structure, and economic conditions, to then make a recommendation to the appropriate approval authority. Commercial loans generally consist of real estate secured loans, lines of credit, term, and equipment loans. The Bank’s underwriting policies impose strict collateral requirements and normally will require the guaranty of the principals. For requests that qualify, the Bank will use Small Business Administration guarantees to improve the credit quality and support local small business.

The Bank’s loan review officers/department conduct ongoing, independent reviews of all new loan relationships to ensure adherence to established policies and procedures, monitor compliance with applicable laws and regulations, and provide objective measurement statistics. The Bank’s loan review officers/department submit quarterly reports to the Audit Committee and/or the Board on loan concentrations, large loan relationships, collateral and documentation exceptions, and relevant loan ratios pertaining to the Bank’s loan loss reserves, delinquency, and other key asset quality ratios.

Loan Portfolio

The following table sets forth the Company’s loan distribution at the periods presented:

	December 31,
	2006		2005		2004		2003		2002
	(in thousands)
Commercial, Financial, and Agricultural	$	389,455	$	322,875	$	279,756	$	180,378	$	179,144
Real Estate Construction	96,163		61,123		30,039		21,498		10,245
Residential Real Estate	272,925		259,434		274,417		144,335		132,714
Consumer	6,240		10,812		12,116		11,285		13,081
Total	$	764,783	$	654,244	$	596,328	$	357,496	$	335,184

Loan Maturities

The following table shows the maturity of commercial, financial and agricultural loans outstanding at December 31, 2006:

Maturities of Outstanding Loans

Within

After One

After

One

But Within

Five

Year

Five Years

Years

Total

(in thousands)

Commercial, Financial, and Agricultural

129,016

76,731

183,708

389,455

Securities Portfolio

The following table sets forth the amortized cost of the Company’s investment securities at its last three fiscal year ends:

	As of December 31,
Securities Available For Sale	2006		2005		2004
	(In thousands)
Obligations of U.S. Treasuries	$	—	$	650	$	1,986
Obligations of U.S. Government Agencies and Corporations	9,703		10,176		5,324
State and Municipal Obligations	16,327		19,685		14,237
Mortgage Backed Securities	113,953		126,944		119,541
Other Securities and Equity Securities	28,024		29,840		25,083
Total	$	168,007	$	187,295	$	166,171

	As of December 31,
Securities Held to Maturity	2006		2005		2004
	(In thousands)
Obligations of U.S. Government Agencies and Corporations	$	—	$	2,008	$	2,071
Other Securities and Equity Securities	3,117		4,165		4,332
Total	$	3,117	$	6,173	$	6,403

For purposes of financial reporting, available for sale securities are reflected at estimated fair value.

Securities Portfolio Maturities and Yields

The following table sets forth information about the maturities and weighted average yield on the Company’s securities portfolio. Floating rate securities are included in the “Due in 1 Year or Less” bucket. Yields are not reported on a tax equivalent basis.

	Amortized Cost at December 31, 2006
	Due in				After 1			After 5
	1 Year				Year to			Years to			After
Securities Available For Sale	or Less				5 Years			10 Years			10 Years			Total
	(In thousands except percentage data)
Obligations of U.S. Government Agencies and Corportations		$	864		$	8,534		$	305		$	—		$	9,703
		4.13		%	3.98		%	4.06		%	—		%	4.00		%
State and Municipal Obligations		$	—		$	2,049		$	11,697		$	2,581		$	16,327
		—		%	3.86		%	4.04		%	6.07		%	4.34		%
Other Securities and Equity Securities		$	—		$	4,196		$	1,000		$	22,828		$	28,024
		—		%	5.29		%	5.35		%	6.04		%	5.90		%
Mortgage Backed Securities		$	—		$	—		$	—		$	—		$	113,953
		—		%	—		%	—		%	—		%	4.49		%

	Amortized Cost at December 31, 2006
	Due in				After 1				After 5
	1 Year				Year to				Years to				After
Securities Held to Maturity	or Less				5 Years				10 Years				10 Years				Total
	(In thousands except percentage data)
Corporate Debt Securities		$	—			$	—			$	—			$	3,117		$	3,117
		—		%		—		%		—		%		7.59		%	7.59		%

LEESPORT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2006, 2005 and 2004
(Amounts in thousands, except per share data)

	Years Ended December 31,
	2006		2005		2004
Interest and dividend income:
Interest and fees on loans	$	52,971	$	42,646	$	26,181
Interest on securities:
Taxable	7,202		6,697		6,216
Tax-exempt	790		723		782
Dividend income	636		566		420
Interest on federal funds sold	—		—		4
Other interest income	18		21		8
Total interest and dividend income	61,617		50,653		33,611
Interest expense:
Interest on deposits	20,141		13,525		9,141
Interest on short-term borrowings	3,507		2,118		652
Interest on securities sold under agreements to repurchase	2,847		1,487		799
Interest on long-term debt	1,174		1,642		1,333
Interest on junior subordinated debt	1,852		1,547		917
Total interest expense	29,521		20,319		12,842
Net interest income	32,096		30,334		20,769
Provision for loan losses	1,084		1,460		1,320
Net interest income after provision for loan losses	31,012		28,874		19,449
Other income:
Customer service fees	2,689		2,687		1,947
Mortgage banking activities, net	3,574		5,379		2,096
Commissions and fees from insurance sales	11,269		11,634		10,781
Broker and investment advisory commissions and fees	721		998		528
Earnings on investment in life insurance	560		443		625
Gain on sale of loans	102		676		432
Other income	1,788		1,677		915
Net realized gains on sales of securities	515		371		345
Total other income	21,218		23,865		17,669
Other expense:
Salaries and employee benefits	22,142		23,090		17,159
Occupancy expense	4,465		4,466		2,596
Equipment expense	2,641		2,523		1,971
Marketing and advertising expense	1,354		1,577		1,170
Amortization of identifiable intangible assets	636		640		432
Professional services	1,257		1,728		1,146
Outside processing services	2,981		2,741		2,138
Insurance expense	500		630		535
Merger related expense	—		—		899
Other expense	4,262		3,886		2,502
Total other expense	40,238		41,281		30,548
Income before income taxes	11,992		11,458		6,570
Income taxes	2,839		2,727		1,154
Net income	$	9,153	$	8,731	$	5,416
Basic earnings per share	$	1.71	$	1.65	$	1.31
Diluted earnings per share	$	1.70	$	1.63	$	1.29

See Notes to Consolidated Financial Statements.

LEESPORT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2006, 2005 and 2004
(Dollar amounts in thousands, except share data)

	Common Stock
	Number of														Accumulated				Other
	Shares										Retained				Comprehensive				Treasury
	Issued		Par Value				Surplus				Earnings				Income (Loss)				Stock				Total
Balance, December 31, 2003		3,439,310		$	17,197			$	18,426			$	18,535			$	273			$	(1,054	)	$	53,377
Comprehensive Income:
Net Income		—		—				—				5,416				—				—			5,416
Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effect		—		—				—				—				(392		)		—			(392		)
Total comprehensive income																							5,024
Purchase of treasury stock (6,602 shares)		—		—				—				—				—				(140		)	(140		)
Additional consideration in connection with acquisitions		20,938		105				458				3				—				299			865
Common stock issued in connection with acquisitions		1,311,010		6,552				27,533				—				—				(7		)	34,078
Common stock issued in connection with Directors’ compensation		6,890		34				128				—				—				—			162
Common stock issued in connection with director and employee stock purchase plans		15,999		80				264				—				—				—			344
Common stock dividend declared (5%)		236,874		1,186				4,401				(5,587		)		—				—			—
Cash dividends declared ($0.62 per share)		—		—				—				(2,775		)		—				—			(2,775		)
Balance, December 31, 2004		5,031,021		25,154				51,210				15,592				(119		)		(902		)	90,935
Comprehensive Income:
Net Income		—		—				—				8,731				—				—			8,731
Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effect		—		—				—				—				(3,024		)		—			(3,024		)
Total comprehensive income																							5,707
Purchase of treasury stock (15,000 shares)		—		—				—				—				—				(348		)	(348		)
Additional consideration in connection with acquisitions (11,954 shares)		—		—				78				—				—				222			300
Common stock issued in connection with Directors’ compensation		6,391		32				129				—				—				—			161
Common stock issued in connection with director and employee stock purchase plans		73,766		378				1,116				—				—				—			1,494
Tax benefits from employee stock transactions		—		—				50				—				—				—			50
Fractional shares in connection with stock dividend paid		—		(8		)		(2		)		(1		)		—				—			(11		)
Cash dividends declared ($0.67 per share)		—		—				—				(3,532		)		—				—			(3,532		)
Balance, December 31, 2005		5,111,178		25,556				52,581				20,790				(3,143		)		(1,028		)	94,756
Comprehensive income:
Net income		—		—				—				9,153				—				—			9,153
Change in net unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effect		—		—				—				—				617				—			617
Total comprehensive income																							9,770
Purchase of treasury stock (45,000 shares)		—		—				—				—				—				(1,118		)	(1,118		)
Additional consideration in connection with
acquisitions (11,727 shares)		—		—				58				—				—				223			281
Common stock dividend (5%)		253,241		1,266				4,463				(5,729		)		—				—			—
Common stock issued in connection with directors’ compensation (7,124 shares)		—		—				39				—				—				132			171
Common stock issued in connection with director and employee stock purchase plans		90,170		451				1,220				—				—				139			1,810
Tax benefits from employee stock transactions		—		—				127				—				—				—			127
Compensation expense related to stock options		—		—				245				—				—				—			245
Cash dividends declared ($0.73 per share)		—		—				—				(3,912		)		—				—			(3,912		)
Balance, December 31, 2006		5,454,589		$	27,273			$	58,733			$	20,302			$	(2,526	)		$	(1,652	)	$	102,130

See Notes to Consolidated Financial Statements.

LEESPORT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2006, 2005 and 2004
(Amounts in thousands)

	Years Ended December 31,
	2006			2005			2004
Cash Flows From Operating Activities
Net income	$	9,153		$	8,731		$	5,416
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,084			1,460			1,320
Provision for depreciation and amortization of premises and equipment	1,653			1,665			1,392
Amortization of identifiable intangible assets	636			640			432
Deferred income taxes	121			397			(82		)
Director stock compensation	171			161			163
Net amortization of securities premiums and discounts	285			461			614
Amortization of mortgage servicing rights	77			29			94
Increase in mortgage servicing rights	(18		)	(271		)	(134		)
Net realized (gains) losses on sales of foreclosed real estate	(13		)	51			7
Net realized gains on sales of securities	(515		)	(371		)	(345		)
Proceeds from sales of loans held for sale	187,040			269,011			89,404
Net gains on sale of loans	(3,121		)	(5,249		)	(2,175		)
Loans originated for sale	(172,945		)	(270,519		)	(82,899		)
Realized (gain) loss on sale of premises and equipment	—			(19		)	—
Increase in investment in life insurance	(487		)	(348		)	(567		)
Tax benefits from employee stock transactions	—			50			—
Compensation expense related to stock options	245			—			—
(Increase) decrease in accrued interest receivable and other assets	(1,642		)	748			2,994
Increase (decrease) in accrued interest payable and other liabilities	12,256			(139		)	728
Net Cash Provided by Operating Activities	33,980			6,488			16,362
Cash Flow From Investing Activities
Investment securities:
Purchases - available for sale	(16,732		)	(57,889		)	(40,341		)
Principal repayments, maturities and calls - available for sale	26,729			28,798			27,229
Principal repayments, maturities and calls - held to maturity	3,031			—			—
Proceeds from sales - available for sale	8,006			8,241			45,048
Net decrease in federal funds sold	—			—			1,100
Net increase in loans receivable	(113,339		)	(75,962		)	(60,522		)
Proceeds from sale of loans	1,708			16,957			8,518
Net decrease (increase) in Federal Home Loan Bank Stock	1,546			(281		)	(250		)
Net (increase) decrease in foreclosed real estate	(758		)	(119		)	283
Proceeds from the sale of premises and equipment	—			163			7,707
Purchases of premises and equipment	(834		)	(1,078		)	(2,456		)
Disposals of premises and equipment	51			58			—
Purchases of bank owned life insurance	(5,000		)	—			—
Net cash received in acquisitions	—			—			9,260
Purchase of limited partnership investment	—			(1,050		)	(2,275		)
Net Cash Used In Investing Activities	(95,592		)	(82,162		)	(6,699		)

See Notes to Consolidated Financial Statements.

LEESPORT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2006, 2005 and 2004
(Amounts in thousands)

	Years Ended December 31,
	2006			2005			2004
Cash Flow From Financing Activities
Net increase in deposits	43,109			47,439			23,560
Net increase (decrease) in federal funds purchased	15,875			30,138			(53,588		)
Net increase in securities sold under agreements to repurchase	21,532			16,655			11,212
Proceeds from long-term debt	—			3,000			25,500
Repayments of long-term debt	(23,500		)	(14,500		)	(5,500		)
Purchase of treasury stock	(1,118		)	(348		)	(140		)
Proceeds from the exercise of stock options and stock purchase plans	1,810			1,494			344
Tax benefits from employee stock transactions	127			—			—
Reissuance of treasury stock	281			300			292
Cash dividends paid	(3,800		)	(3,428		)	(2,526		)
Net Cash Provided By (Used In) Financing Activities	54,316			80,750			(846		)
(Decrease) Increase in cash and cash equivalents	(7,296		)	5,076			8,817
Cash and cash equivalents:
January 1	29,131			24,055			15,238
December 31	$	21,835		$	29,131		$	24,055
Cash payments for:
Interest	$	28,862		$	19,756		$	12,396
Taxes	$	2,910		$	1,585		$	1,363
Supplemental Schedule of Non-cash Investing and Financing Activities
Other real estate acquired in settlement of loans	$	771		$	68		$	112

See Notes to Consolidated Financial Statements.

1. Significant Accounting Policies

Principles of consolidation:

The consolidated financial statements include the accounts of Leesport Financial Corp. (the “Company”), a bank holding company, which has elected to be treated as a financial holding company, and its wholly-owned subsidiaries, Leesport Bank (the “Bank”), Essick & Barr, LLC (“Essick & Barr”) and Madison Financial Advisors, LLC (“Madison Financial”). As of December 31, 2006, the Bank’s wholly-owned subsidiaries were Leesport Realty Solutions, LLC and Leesport Mortgage Holdings, LLC. All significant intercompany accounts and transactions have been eliminated.

Nature of operations:

The Bank provides full banking services. Essick & Barr provides risk management services, employee benefits insurance and personal and commercial insurance coverage through multiple insurance companies. Madison Financial provides investment advisory and brokerage services. Leesport Realty Solutions, LLC provides title insurance and other real estate related services to the Company’s customers through limited partnership arrangements with unaffiliated third parties involved in the real estate services industry. Leesport Mortgage Holdings, LLC provides mortgage brokerage services through its limited partnership agreements with unaffiliated third parties involved in the real estate services industry. First Leesport Capital Trust I, Leesport Capital Trust II and Madison Statutory Trust I are trusts formed for the purpose of issuing mandatory redeemable debentures on behalf of the Company. These trusts are wholly-owned subsidiaries of the Company, but are not consolidated for financial statement purposes. See “Junior Subordinated Debt” in footnote 10. The Company and the Bank are subject to the regulations of various federal and state agencies and undergo periodic examinations by various regulatory authorities.

Use of estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 in the near term relate to the determination of the allowance for loan losses, the potential impairment of goodwill the valuation of deferred tax assets and the determination of other-than-temporary impairment on securities.

Significant group concentrations of credit risk:

Most of the Company’s banking, insurance and wealth management activities are with customers located within Berks, Schuylkill, Philadelphia, Montgomery and Delaware Counties, as well as, within other southeastern Pennsylvania market areas. Note 4 details the Company’s investment securities portfolio for both available for sale and held to maturity investments. Note 5 discusses the Company’s loan concentrations. Although the Company has a diversified loan portfolio, its debtors’ ability to honor contracts is influenced by the region’s economy.

Reclassifications:

For comparative purposes, prior years’ consolidated financial statements have been reclassified to conform to report classifications of the current year. The reclassifications had no effect on net income.

Presentation of cash flows:

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits in other banks.

Securities:

Debt securities that management has the positive ability and intent to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized gains and losses are reported in other comprehensive income or loss, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Purchased premiums and discounts are recognized in interest income using a method which approximates the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans:

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are stated at their outstanding unpaid principal balances, net of any deferred fees or costs on originated loans or unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. These amounts are generally being amortized over the contractual life of the loan. Discounts and premiums on purchased loans are amortized to income using the interest method over the expected lives of the loans.

The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.

Allowance for loan losses:

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is

based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful or substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value for that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

Loans held for sale:

Mortgage loans originated and intended for sale in the secondary market at the time of origination are carried at the lower of cost or estimated fair value on an aggregate basis. The majority of all sales are made with 90 day recourse. At December 31, 2006 and 2005, there were $5.6 million and $16.6 million, respectively, of residential mortgage loans held for sale.

Rate lock commitments:

In March 2002, the Financial Accounting Standards Board determined that loan commitments related to the origination or acquisition of mortgage loans that will be held for sale must be accounted for as derivative instruments, effective for fiscal quarters beginning after April 10, 2002. Accordingly, the Company adopted such accounting on July 1, 2002.

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on

fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates.

Foreclosed assets:

Foreclosed assets, which are recorded in other assets, include properties acquired through foreclosure or in full or partial satisfaction of the related loan.

Foreclosed assets are initially recorded at fair value, net of estimated selling costs, at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value, less estimated costs to sell. Revenue and expense from operations and changes in the valuation allowance are included in other expense.

Premises and equipment:

Land and land improvements are stated at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated principally on the straight-line method over the respective assets estimated useful lives as follows:.

		Years
Buildings and leasehold improvements		10-40
Furniture and equipment		3-10

Transfer of financial assets:

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Bank-owned life insurance:

The Bank invests in bank owned life insurance (“BOLI”) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a chosen group of employees. The Bank is the owner and beneficiary of the policies and, in 2006, the Bank purchased $5 million of additional BOLI. This life insurance investment is carried at the cash surrender value of the underlying policies in the amount of $17.2 million and $11.7 million at December 31, 2006 and 2005, respectively. Income from the increase in cash surrender value of the policies is included in other income on the income statement.

Stock-based compensation:

Prior to January 1, 2006, employee compensation expense under stock option plans was recognized only if options were granted below market price at grant date in accordance with the intrinsic value method of Accounting Principles Board (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Because the exercise price of the Company’s employee stock options always equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized on options granted. The Company adopted the provisions of SFAS No. 123, “Share-Based Payment (Revised 2004),” on January 1, 2006. SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the consolidated statements of income based on their fair values on the measurement date, which, for the Company, is the

date of the grant. The Company transitioned to fair-value based accounting for stock-based compensation using the modified-prospective transition method. Under the modified prospective method, the Company is required to record compensation cost for new awards and to awards modified or cancelled after January 1, 2006. Additionally, compensation cost for the portion of non-vested awards (awards for which the requisite service has not been rendered) that were outstanding as of January 1, 2006 will be recognized prospectively over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modified prospective method.

SFAS No. 123R, requires pro forma disclosures of net income and earnings per share for all periods prior to the adoption of the fair value accounting method for stock-based employee compensation. The pro forma disclosures presented in Note 12 “Stock Option Plans and Shareholders’ Equity” use the fair value method of SFAS No. 123R to measure compensation expense for stock-based compensation plans for years prior to 2006.

Loan servicing:

Capitalized servicing rights, established upon the sale of loans with servicing retained, are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount.

Revenue recognition:

Insurance revenues are derived from commissions and fees. Commission revenues, as well as the related premiums receivable and payable to insurance companies, are recognized the later of the effective date of the insurance policy or the date the client is billed, net of an allowance for estimated policy cancellations. The reserve for policy cancellations is periodically evaluated and adjusted as necessary. Commission revenues related to installment premiums are recognized as billed. Commissions on premiums billed directly by insurance companies are generally recognized as income when received. Contingent commissions from insurance companies are generally recognized as revenue when the data necessary to reasonably estimate such amounts is obtained. A contingent commission is a commission paid by an insurance company that is based on the overall profit and/or volume of the business placed with the insurance company. Fee income is recognized as services are rendered.

Goodwill and other intangible assets:

The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 revised the accounting for purchased intangible assets and, in general, requires that goodwill no longer be amortized, but rather that it be tested for impairment on an annual basis at the reporting unit level, which is either at the same level or one level below an operating segment. Other acquired intangible assets with finite lives, such as purchased customer accounts, are required to be amortized over their estimated lives. Other intangible assets are amortized using the straight line method over estimated useful lives of four to twenty years. The Company periodically assesses whether events or changes in circumstances indicate that the carrying amounts of goodwill and other intangible assets may be impaired.

Income taxes:

Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the financial statements and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted through the provision for income taxes for the effects of changes in tax laws and rates on the date of enactment.

Off-balance sheet financial instruments:

In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the consolidated balance sheets when they become receivable or payable.

Derivative financial instruments:

The Company maintains an overall interest rate risk-management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Company’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation will generally be offset by income or loss on the derivative instruments that are linked to the hedged assets and liabilities. The Company views this strategy as a prudent management of interest rate sensitivity, such that earnings are not exposed to undue risk presented by changes in interest rates.

By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk exists to the extent of the fair value gain in a derivative. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes the Company, and, therefore, creates a repayment risk for the Company. When the fair value of a derivative contract is negative, the Company owns the counterparty and, therefore, it has no repayment risk. The Company minimizes the credit (or repayment) risk in the derivative instruments by entering into transactions with high quality counterparties.

Market risk is the adverse effect that a change in interest rates, currency, or implied volatility rates has on the value of a financial instrument. The Company manages the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The Company periodically measures this risk by using value-at-risk methodology.

During 2002, the Company entered into an interest rate swap to convert its fixed rate trust preferred securities to floating rate debt. Both the interest rate swap and the related debt are recorded on the balance sheet at fair value through adjustments to interest expense. The Company has designated its interest rate swap as a fair value hedge as defined in SFAS No. 133. Because the critical term of the interest rate swap matches the terms of the trust preferred securities, the swap qualifies for “short-cut method” accounting treatment under SFAS No. 133.

During 2003, the Company also entered into an interest rate cap agreement to limit its exposure to the variable rate interest achieved through the interest rate swap. The interest rate cap was not designated as a cash flow hedge and thus, it is carried on the balance sheet in other assets at fair value through adjustments to interest expense.

Advertising:

Advertising costs are expensed as incurred.

Earnings per common share:

Basic earnings per common share is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of stock options, if dilutive, using the treasury stock method.

The number of common shares outstanding as of December 31, 2006 and all references to the weighted-average number of common shares outstanding and per share amounts reflect the 5% stock dividend declared by the Board of Directors on May 16, 2006 with a record date of June 1, 2006 and distributed to shareholders on June 15, 2006. The 5% stock dividend resulted in 253,241 shares and cash paid of $9,452 on 398 fractional shares.

The Company’s calculation of earnings per share for the years ended December 31, 2006, 2005, and 2004 is as follows:

	Net			Weighted
	Income			Average shares		Per share
	(numerator)			(denominator)		amount
	(In thousands except per share data)
2006
Basic earnings per share:
Net income available to common shareholders		$	9,153		5,342		$	1.71
Effect of dilutive stock options		—			45		(0.01		)
Diluted earnings per share:
Net income available to common shareholders plus assumed conversion		$	9,153		5,387		$	1.70
2005
Basic earnings per share:
Net income available to common shareholders		$	8,731		5,292		$	1.65
Effect of dilutive stock options		—			62		(0.02		)
Diluted earnings per share:
Net income available to common shareholders plus assumed conversion		$	8,731		5,354		$	1.63
2004
Basic earnings per share:
Net income available to common shareholders		$	5,416		4,126		$	1.31
Effect of dilutive stock options		—			63		(0.02		)
Diluted earnings per share:
Net income available to common shareholders plus assumed conversion		$	5,416		4,189		$	1.29

Comprehensive income:

Accounting principles generally require that recognized revenue, expense, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and

losses on available for sale securities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

The components of other comprehensive income (loss) and related tax effects were as follows:

	Years Ended December 31,
	2006			2005			2004
	(In thousands)
Unrealized holding gains (losses) on available for sale securities	$	1,447		$	(3,996	)	$	(461	)
Reclassification adjustment for unrealized gains amortized from transfer of available for sale securities to held to maturity	—			(140		)	140
Reclassification adjustment for (gains) realized in income	(515		)	(371		)	(345		)
Net unrealized gains (losses)	932			(4,507		)	(666		)
Income tax effect	(315		)	1,483			274
Other comprehensive income (loss)	$	617		$	(3,024	)	$	(392	)

Equity method investment:

On December 29, 2003, the Bank entered into a limited partner subscription agreement with Midland Corporate Tax Credit XVI Limited Partnership, where the Bank will receive special tax credits and other tax benefits. The Bank subscribed to a 6.2% interest in the partnership, which is subject to an adjustment depending on the final size of the partnership at a purchase price of $5 million. This investment is included and recorded in other assets as of December 31, 2006 and 2005 and is not guaranteed; therefore, it will be accounted for in accordance with Statement of Position (SOP) 78-9, “Accounting for Investments in Real Estate Ventures” using the equity method.

Segment reporting:

The Bank acts as an independent community financial services provider which offers traditional banking and related financial services to individual, business and government customers. Through its branch and automated teller machine networks, the Bank offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of other financial services. Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial and retail operations of the Bank. As such, discrete financial information is not available and segment reporting for the Bank would not be meaningful. See Note 18 for a discussion of insurance operations, investment advisory and brokerage operations and mortgage banking operations.

Recently issued accounting standards:

In February 2006, Financial Accounting Standards Board (FASB) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 155 amends FASB Statement No. 133 and FASB Statement No. 140, and improves the financial reporting of certain hybrid financial instruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the accounting for these instruments. Specifically, SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is required to adopt the provisions of SFAS No. 155, as applicable, beginning in fiscal year 2007. Management does not believe the adoption of SFAS No. 155 will have a material impact on the Company’s financial position and results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—An Amendment of FASB Statement No. 140” (“SFAS 156”). SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006, which for the Company will be as of the beginning of fiscal 2007. The Company does not believe that the adoption of SFAS 156 will have a significant effect on its financial statements.

In February 2006, the FASB issued FASB Staff Position No. FAS 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event.” This position amends SFAS 123R to incorporate that a cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not meet certain conditions in SFAS 123R until it becomes probable that the event will occur. The guidance in this FASB Staff Position was applied upon initial adoption of Statement 123R. The adoption of SFAS 123(R)-4 did not have a significant effect on the Company’s financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that companies recognize in their financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its financial statements.

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Company is currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on its consolidated financial position, results of operations and cash flows.

On September 29, 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”), which amends SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date—the date at which the benefit obligation and plan assets are measured—is required to be the company’s fiscal year end. SFAS 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The Company is currently analyzing the effects of SFAS 158 but does not expect its implementation will have a significant impact on the its financial conditions or results of operations.

On September 13, 2006, the Securities and Exchange Commission “SEC” issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, Companies might evaluate the materiality of financial-statement misstatements using either the income statement or balance sheet approach, with the income statement

approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company has analyzed SAB 108 and determined that upon adoption it will have no impact on its reported results of operations or financial conditions.

In September 2006, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of the insurance to be incurred during the employee’s retirement. Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106 or Accounting Principals Board (APB) No. 12, as appropriate. For transition, an entity can choose to apply the guidance using either of the following approaches: (a) a change in accounting principle through retrospective application to all periods presented or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. The disclosures are required in fiscal years beginning after December 15, 2007, with early adoption permitted. The Company does not believe that the implementation of this guidance will have a material impact on the Company’s consolidated financial statements.

In October 2006, the FASB issued FASB Staff Position No. 123R-5, “Amendment of FASB Staff Position FAS 123(R)-1” (“FSP 123(R)-5”). FSP 123(R)-5 amends FSP 123(R)-1 for equity instruments that were originally issued as employee compensation and then modified, with such modification made solely to reflect an equity restructuring that occurs when the holders are no longer employees. The Company does not expect the adoption of FSP 123(R)-5 to have a material impact on its financial condition, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for the Company January 1, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 159 on its consolidated financial position, results of operations and cash flows.

2. Acquisitions and Divesture

On October 1, 2004, the Company acquired 100% of the outstanding voting shares of Madison Bancshares Group, Ltd., (“Madison”), the holding company for Madison Bank, a Pennsylvania state-chartered commercial bank. Madison has become a division of Leesport Bank. The transaction enhances the Company’s strong presence in Pennsylvania, particularly in the high growth counties of Berks, Philadelphia, Montgomery and Delaware. The results of Madison’s operations have been included in the consolidated financial statements since the date of acquisition.

Under the terms of the merger, each share of Madison common stock was exchanged for 0.6028 shares of Leesport common stock resulting in the issuance of 1,311,010 shares of Leesport common stock

and a cash payment of $11,790. The total purchase price was $34.6 million. The value of the common shares issued was determined based on the average market price of Leesport common shares five days before and five days after the date of the announcement. In connection with the transaction, Madison paid cash of $7.1 million and recognized the expense for 699,122 Madison options and warrants outstanding at September 30, 2004. In addition, Madison paid cash of $2.3 million and recognized the expense for the termination of existing contractual arrangements.

The $28.2 million of goodwill was assigned to our banking and financial services segment. None of the goodwill is expected to be deductible for tax purposes.

The following represents the unaudited pro forma results of the ongoing operations for Leesport Financial Corp. and Madison as though the acquisition of Madison had occurred at the beginning of each period shown. The unaudited pro forma information, however, is not necessarily indicative of the results that would have resulted had the acquisition occurred at the beginning of the periods presented, nor is it necessarily indicative of future results.

	Pro Forma
	Year Ended
	December 31,
	2004
	(In thousands except
	per share data)
Net interest income after provision for loan losses		$	24,883
Other income		22,115
Other expenses		41,645
Merger related expenses		10,254
Net (loss) income		(5,040		)
Earnings per share (basic)		(1.22		)
Earnings per share (diluted)		(1.20		)

In accordance with the provisions of SFAS No. 142, the Company continues to amortize other intangible assets over the estimated remaining life of each respective asset. Amortizable intangible assets were composed of the following:

	December 31, 2006						December 31, 2005
	Gross						Gross
	Carrying			Accumulated			Carrying			Accumulated
	Amount			Amortization			Amount			Amortization
	(In thousands)
Amortizable intangible assets:
Purchase of client accounts (20 year weighted average useful life)		$	3,295		$	637		$	3,295		$	472
Employment contracts (7 year weighted average useful life)		1,075			659			1,075			500
Assets under management (20 year weighted average useful life)		184			40			184			31
Trade name (20 year weighted average useful life)		196			157			196			118
Core deposit intangible (7 year weighted average useful life)		1,852			595			1,852			331
Total		$	6,602		$	2,088		$	6,602		$	1,452
Aggregate Amortization Expense:
For the year ended December 31, 2006		636
For the year ended December 31, 2005		640
For the year ended December 31, 2004		431
Estimated Amortization Expense:
For the year ending December 31, 2007		622
For the year ending December 31, 2008		597
For the year ending December 31, 2009		552
For the year ending December 31, 2010		439
For the year ending December 31, 2011		372

The changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2005 are as follows:

	Banking and							Brokerage and
	Financial							Investment
	Services				Insurance			Services			Total
	(In thousands)
Balance as of January 1, 2005		$	28,235			$	9,121		$	871	$	38,227
Goodwill adjusted for deferred tax asset recognized during the year 2005		(467		)		—			—		(467		)
Contingent payments during the year 2005		—				904			150		1,054
Balance as of December 31, 2005		27,768				10,025			1,021		38,814
Contingent payments during the year 2006		—				375			—		375
Balance as of December 31, 2006		$	27,768			$	10,400		$	1,021	$	39,189

In 2005, the Company recognized an additional net operating loss carry-forward of approximately $467,000 related to the Madison acquisition. This transaction resulted in an increase in deferred taxes and a decrease in goodwill.

3. Restrictions on Cash and Due from Banks

The Federal Reserve Bank requires the Bank to maintain average reserve balances. For the years 2006 and 2005, the average of these daily reserve balances approximated $1.2 million and $3.8 million, respectively.

4. Securities Available For Sale and Securities Held to Maturity

The amortized cost and estimated fair values of securities held to maturity and securities available for sale were as follows at December 31, 2006 and 2005:

			Gross			Gross
	Amortized		Unrealized			Unrealized				Fair
Securities Available For Sale	Cost		Gains			Losses				Value
December 31, 2006:
Obligations of U.S. Government agencies and corporations	$	9,703		$	—		$	(175	)	$	9,528
Mortgage-backed debt securities	113,953			57			(3,240		)	110,770
State and municipal obligations	16,327			150			(47		)	16,430
Other securities	15,361			21			(245		)	15,137
Equity securities	12,663			104			(452		)	12,315
	$	168,007		$	332		$	(4,159	)	$	164,180
December 31, 2005:
U.S. Treasury	$	650		$	—		$	—		$	650
Obligations of U.S. Government agencies and corporations	10,176			—			(213		)	9,963
Mortgage-backed debt securities	126,944			3			(3,762		)	123,185
State and municipal obligations	19,685			380			(137		)	19,928
Other securities	15,135			51			(820		)	14,366
Equity securities	14,705			181			(437		)	14,449
	$	187,295		$	615		$	(5,369	)	$	182,541

			Gross			Gross
	Amortized		Unrealized			Unrealized				Fair
Securities Held To Maturity	Cost		Gains			Losses				Value
December 31, 2006:
Corporate debt securities	$	3,117		$	171		$	(38	)	$	3,250
	$	3,117		$	171		$	(38	)	$	3,250
December 31, 2005:
Obligations of U.S. Government agencies and corporations	$	2,008		$	—		$	(5	)	$	2,003
Corporate debt securities	4,165			142			(11		)	4,296
	$	6,173		$	142		$	(16	)	$	6,299

Equity securities include restricted stock in the FHLB of $4.5 million and $6.1 million at December 31, 2006 and 2005, respectively. The FHLB requires the Company to maintain a certain amount of FHLB stock according to a predetermined formula. The stock is carried at cost.

The following table shows the gross unrealized losses and fair value of securities, 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:

	Less than 12 Months						12 Months or More						Total
	Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
Securities Available for Sale	Value		Losses				Value		Losses				Value		Losses
	(In thousands)
December 31, 2006:
Obligations of U.S. Government agencies and corporations	$	—		$	—		$	9,528		$	(175	)	9,528			(175		)
Mortgage-backed debt securities	6,157			(21		)	95,067			(3,219		)	101,224			(3,240		)
State and municipal obligations	327			(2		)	4,790			(45		)	5,117			(47		)
Other securities	2,968			(43		)	8,787			(202		)	11,755			(245		)
Equity securities	347			(9		)	5,923			(443		)	6,270			(452		)
Total	$	9,799		$	(75	)	$	124,095		$	(4,084	)	$	133,894		$	(4,159	)

	Less than 12 Months						12 Months or More					Total
	Fair		Unrealized				Fair		Unrealized			Fair		Unrealized
Securities Held to Maturity	Value		Losses				Value		Losses			Value		Losses
	(In thousands)

Corporate debt securities	$	1,042		$	(38	)	$	—		$	—	$	1,042		$	(38	)
Total	$	1,042		$	(38	)	$	—		$	—	$	1,042		$	(38	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At December 31, 2006, there were 14 securities with unrealized losses in the less than twelve month category and 101 securities with unrealized losses in the twelve month or more category. As management has the ability to hold these securities until maturity or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary.

A. U. S. Government agencies and corporations. The unrealized losses on the Company’s investments in obligations of U S Government agencies were caused by interest rate increases. The Company purchased those investments at par or at a discount relative to their face amount and the contractual cash flows are guaranteed by an agency of the U S Government. Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2006.

B. Federal Agency and Corporate Mortgage-Backed Securities. The unrealized losses on the Company’s investments in federal agency and corporate mortgage-backed securities were caused by interest rate increases. The Company purchased those securities at a price relative to the market at the time of the purchase, and the contractual cash flows of those investments are guaranteed either by an agency of the U S Government or the corporate entity. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2006.

C. Other Securities. The Company’s unrealized loss on investments in other securities relates to $3.0 million investment in financial services industry company notes. The unrealized losses are caused by (a) decreases in profitability and near-term profit forecasts by industry analysts resulting from competitive pricing pressure in the auto manufacturing industry and (b) interest rate increases. The contractual terms of those investments do not permit the companies to settle the securities at a price less than the amortized cost of the investment. While the credit rating for certain issues have stabilized during the period, the Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investment. Because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2006.

D. Equity Securities. The Company’s investments in marketable equity securities primarily consist of investments in preferred stock in a U S government sponsored enterprise ($4.5 million of the fair value and $374,000 of the total unrealized losses in equity security investments) and the common stock of companies in the financial services industry ($2.3 million of the total fair value and where there is a $53,000 net gain). Within the Company’s equity securities portfolio is (1) a $4.85 million investment in FHLMC 5.1% Series perpetual preferred stock. The unrealized losses are caused by (a) questions concerning the operating structure of the company, especially in the areas of financial reporting and management control and (b) interest rate increases. Perpetual preferred stock is an equity security that is junior to the entity’s debt obligations but senior to common stock. The preferred stock pays quarterly dividends at the above stated fixed rate, and while it does not have a stated maturity date the issuer has the right to retire securities through redemption provisions. FHLMC is a U S government-sponsored enterprise and the Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investment. Because the market value is attributable to operational scrutiny and changes in interest rates and not credit quality, and the Company has the ability and intent to hold those investments until a recovery of fair value, which may be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2006. (2) A $141,000 investment in FNMA common stock (5.2% of the fair value and 42.7% of the total unrealized losses in the equity security investments). The government sponsored enterprise has experienced recent growth and is working through its accounting issues and feels optimistic about the near-term prospects. Based on that information and the Company’s ability and intent to hold those investments for a reasonable time period sufficient for a recovery of fair value, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2006.

	Less than 12 Months						12 Months or More						Total
	Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
Securities Available for Sale	Value		Losses				Value		Losses				Value		Losses
	(In thousands)
December 31, 2005:
U.S. Treasury	$	650		$	—		$	—		$	—		650			—
Obligations of U.S. Government agencies and corporations	5,090			(79		)	4,400			(134		)	9,490			(213		)
Mortgage-backed debt securities	39,397			(872		)	78,853			(2,890		)	118,250			(3,762		)
State and municipal obligations	9,299			(137		)	—			—			9,299			(137		)
Other securities	7,014			(318		)	4,206			(502		)	11,220			(820		)
Equity securities	1,801			(102		)	4,675			(335		)	6,476			(437		)
Total	$	63,251		$	(1,508	)	$	92,134		$	(3,861	)	$	155,385		$	(5,369	)

	Less than 12 Months						12 Months or More						Total
	Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
Securities Held to Maturity	Value		Losses				Value		Losses				Value		Losses
	(In thousands)
Obligations of U.S. Government agencies and corporations	$	—		$	—		$	2,003		$	(5	)	$	2,003		$	(5	)
Other securities	2,163			(11		)	—			—			2,163			(11		)
Total	$	2,163		$	(11	)	$	2,003		$	(5	)	$	4,166		$	(16	)

The amortized cost and fair value of securities as of December 31, 2006, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain securities may be called or prepaid without penalty.

	Securities Available for Sale						Securities Held to Maturity
	Amortized			Fair			Amortized			Fair
	Cost			Value			Cost			Value
	(In thousands)						(In thousands)
Due in one year or less		$	911		$	902		$	—		$	—
Due after one year through five years		14,732			14,413			—			—
Due after five years through ten years		13,002			13,048			—			—
Due after ten years		12,746			12,732			3,117			3,250
Mortgage-backed securities		113,953			110,770			—			—
Equity securities		12,663			12,315			—			—
		$	168,007		$	164,180		$	3,117		$	3,250

Securities with a market value of $150.5 million and $153.0 million at December 31, 2006 and 2005, respectively, were pledged to secure securities sold under agreements to repurchase, public deposits and for other purposes as required or permitted by law.

The following gross gains and losses were realized on sales of securities available for sale in 2006, 2005 and 2004:

Year	Gains			Losses			Net
2006		$	519	$	(4	)	$	515
2005		$	433	$	(62	)	$	371
2004		$	973	$	(628	)	$	345

The federal income tax provision includes $175,000, $126,000 and $117,000 in 2006, 2005 and 2004, respectively, of federal income taxes related to gains on the sale of securities.

5. Loans

The components of loans were as follows:

	December 31,
	2006			2005
	(In thousands)
Residential real estate—1 to 4 family	$	187,755		$	172,801
Residential real estate—multi family	22,420			14,398
Commercial	136,666			141,475
Commercial, secured by real estate	350,149			243,350
Consumer	6,034			10,812
Home equity lines of credit	62,847			72,216
	765,871			655,052
Net deferred loan fees	(1,088		)	(808		)
Allowance for loan losses	(7,611		)	(7,619		)
Loans, net of allowance for loan losses	$	757,172		$	646,625

Changes in the allowance for loan losses were as follows:

	Year Ended December 31,
	2006			2005			2004
	(In thousands)
Balance, beginning	$	7,619		$	7,248		$	4,356
Provision for loan losses	1,084			1,460			1,320
Balance acquired in merger	—			—			2,079
Loans charged off	(1,305		)	(1,278		)	(628		)
Recoveries	213			189			121
Balance, ending	$	7,611		$	7,619		$	7,248

The recorded investment in impaired loans not requiring an allowance for loan losses was $8.4 million at December 31, 2006 and $6.2 million at December 31, 2005. The recorded investment in impaired loans requiring an allowance for loan losses was $2.9 million and $2.2 million at December 31, 2006 and 2005, respectively. At December 31, 2006 and 2005, the related allowance for loan losses associated with those loans was $1.1 million and $1.4 million, respectively. For the years ended December 31, 2006, 2005 and 2004, the average recorded investment in these impaired loans was $9.9 million, $8.1 million and $5.6 million, respectively; and the interest income recognized on impaired loans was $702,000 for 2006, $356,000 for 2005 and $236,000 for 2004.

Loans on which the accrual of interest has been discontinued amounted to $3,989,000 and $5,567,000 at December 31, 2006 and 2005 respectively. Loan balances past due 90 days or more and still accruing interest but which management expects will eventually be paid in full, amounted to $93,000 and $606,000 at December 31, 2006 and 2005.

6. Loan Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of these loans as of December 31, 2006 and 2005 was $25.4 million and $29.1 million, respectively.

The balance of capitalized servicing rights included in other assets at December 31, 2006 and 2005, was $626,000 and $685,000, respectively. The fair value of these rights was $626,000 and $685,000, respectively. The fair value of servicing rights was determined using a 9.5 percent discount rate and a 9.0 percent discount rate for 2006 and 2005, respectively.

The following summarizes mortgage servicing rights capitalized and amortized:

	Years Ended
	December 31,
	2006			2005		2004
	(In thousands)
Mortgage servicing rights capitalized		$	18	$	271	$	134
Mortgage servicing rights amortized		$	77	$	29	$	94

7. Premises and Equipment

Components of premises and equipment were as follows:

	December 31,
	2006		2005
	(In thousands)
Land and land improvements	$	263	$	263
Buildings	858		816
Leasehold improvements	3,398		3,365
Furniture and equipment	9,463		8,802
	13,982		13,246
Less accumulated depreciation	7,041		5,435
Premises and equipment, net	$	6,941	$	7,811

In the fourth quarter of 2004, the Company sold six branch locations and leased them back from the purchaser with a lease term of 20 years. The proceeds of the sale were $7.7 million. The gain on the transaction was $712,000 and will be amortized over the 20 year lease term.

Certain facilities and equipment are leased under various operating leases. Rental expense for these leases was $3,088,000, $3,215,000 and $1,633,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

Future minimum rental commitments under non-cancelable leases as of December 31, 2006 were as follows:

2007	$	2,750,000
2008	2,589,000
2009	2,481,000
2010	2,258,000
2011	1,832,000
Subsequent to 2011	16,404,000
Total minimum payments	$	28,314,000

8. Deposits

The components of deposits were as follows:

	December 31,
	2006		2005
	(In thousands)
Demand, non-interest bearing	$	108,549	$	115,978
Demand, interest bearing	209,875		212,035
Savings	80,982		72,367
Time, $100,000 and over	97,419		89,316
Time, other	206,014		170,034
Total deposits	$	702,839	$	659,730

At December 31, 2006, the scheduled maturities of time deposits were as follows (in thousands):

2007	$	225,327
2008	62,458
2009	9,663
2010	4,312
2011	1,371
Thereafter	302
	$	303,433

9. Borrowings and Other Obligations

At December 31, 2006 and 2005, the Bank had purchased federal funds from the Federal Home Loan Bank and correspondent banks totaling $82.1 million and $66.2 million, respectively.

During 2005, the Bank entered into securities sold under agreements to repurchase totaling $30 million. These securities sold under agreements to repurchase have a 5 year term, carry a variable interest rate tied to the three month LIBOR rate minus 75 basis points ranging from 3.62% to 3.78%, and, in 2006, may either convert to a fixed rate loan or may be called. During 2006, the Bank entered into securities sold under agreements to repurchase totaling $65 million. These securities sold under agreements to repurchase have 7 to 10 year terms, carry a variable interest rates spread to the three month LIBOR rate ranging from 3.90% to 4.25%, and, in 2007, may either convert to a fixed rate loan or may be called. Total borrowings under these repurchase agreements were $65.0 million and $45.0 million at December 31, 2006 and 2005, respectively.

These repurchase agreements are treated as financings with the obligations to repurchase securities sold reflected as a liability in the balance sheet. The dollar amount of securities underlying the agreements remains recorded as an asset, although the securities underlying the agreements are delivered to the broker who arranged the transactions. In certain instances, the brokers may have sold, loaned, or disposed of the securities to other parties in the normal course of their operations, and have agreed to deliver to the Company substantially similar securities at the maturity of the agreement. The broker/dealers who participated with the Company in these agreements are primarily broker/dealers reporting to the Federal Reserve Bank of New York. Securities underlying sales of securities under repurchase agreements consisted of investment securities that had an amortized cost of $76.4 million and a market value of $74.4 million at December 31, 2006.

Securities sold under agreements to repurchase at December 31, 2006 and 2005 consisted of the following:

							Weighted
	Amount						Average Rate
	2006			2005			2006		2005
	(In thousands)
Fixed rate securities sold under agreements to repurchase maturing:
2006	$	—		$	15,000	(3)	—	%	2.67	%
2010	—			30,000		(3)	—		3.67
2013	45,000		(1)	—			4.06		—
2016	20,000		(2)	—			4.25		—
Total securities sold under agreements to repurchase	$	65,000		$	45,000		4.12		3.34

(1) $20 million callable 02/22/2007 and $25 million callable 06/22/07

(2) $20 million callable 01/12/2007

(3) Agreements to repurchase were called in 2006

In addition, the Bank enters into agreements with bank customers as part of cash management services where the Bank sells securities to the customer overnight with the agreement to repurchase them at par. Securities sold under agreements to repurchase generally mature one day from the transaction date.

The securities underlying the agreements are under the Bank’s control. The outstanding customer balances and related information of securities sold under agreements to repurchase are summarized as follows:

	Years Ended
	December 31,
	2006			2005			2004
	(Dollars in thousands)
Average balance during the year	$	22,014		$	24,073		$	18,831
Average interest rate during the year	4.13		%	2.51		%	1.31		%
Weighted average interest rate at year-end	4.53		%	3.73		%	2.00		%
Maximum month-end balance during the year	31,547			33,257			30,494
Balance as of year-end	$	25,987		$	24,455		$	27,800

Long-term debt at December 31, 2006 and 2005 consisted of the following:

						Weighted
	Amount					Average Rate
	2006		2005			2006		2005
	(In thousands)
Fixed rate FHLB advances maturing:
2006	$	—	$	18,500		—	%	2.91	%
2007	14,500		14,500			3.28		3.28
2008	5,000		5,000			3.73		3.73
2009	—		5,000		(1)	—		4.97
Total long term debt	$	19,500	$	43,000		3.40		3.37

(1) These notes contain a convertible option that allows the FHLB, at quarterly intervals, to change the note to an adjustable-rate advance at three-month LIBOR (5.36% at December 31, 2006) plus 14 to 16 basis points. If the note is converted, the option allows the Bank to put the funds back to the FHLB at par. At the first conversion date in August 2006, the Bank put these funds back to the FHLB at par.

The Bank has a maximum borrowing capacity with the Federal Home Loan Bank of approximately $222.6 million, of which advances of $81.6 million and letters of credit of $37.5 million were outstanding at December 31, 2006. The letters of credit are used to collateralize public deposits. Advances and letters of credit from the Federal Home Loan Bank are secured by qualifying assets of the Bank.

The Company has entered into a contract with a provider of information systems services for the supply of such services through April 2011. The Company is required to make minimum annual payments as follows, whether or not it uses the services:

Year Ended	Amount
2007	429,000
2008	454,000
2009	477,000
2010	501,000
2011	167,000
Total minimum payments	$	2,028,000

Total expenditures during 2006 and 2005 in connection with the contract were $1,731,000 and $1,485,000, respectively.

10. Junior Subordinated Debt

First Leesport Capital Trust I, a Delaware statutory business trust, was formed on March 9, 2000 and is a wholly-owned subsidiary of the Company. The Trust issued $5 million of 107/8% fixed rate capital trust pass-through securities to investors. First Leesport Capital Trust I purchased $5 million of fixed rate junior subordinated deferrable interest debentures from Leesport Financial Corp. The debentures are the sole asset of the Trust. The terms of the junior subordinated debentures are the same as the terms of the capital securities. The obligations under the debentures constitute a full and unconditional guarantee by Leesport Financial Corp. of the obligations of the Trust under the capital securities. The capital securities are redeemable by Leesport Financial Corp. on or after March 9, 2010, at stated premiums, or earlier if the deduction of related interest for federal income taxes is prohibited, classification as Tier 1 Capital is no longer allowed, or certain other contingencies arise. The capital securities must be redeemed upon final maturity of the subordinated debentures on March 9, 2030. In October 2002, the Company entered into an interest rate swap agreement with a notional amount of $5 million that effectively converts the securities to

a floating interest rate of six month LIBOR plus 5.25% (10.62% at December 31, 2006). In June, 2003, the Company purchased a six month LIBOR cap with a rate of 5.75% to create protection against rising interest rates for the above mentioned $5 million interest rate swap. Interest rate caps are generally used to limit the exposure from the repricing and maturity of liabilities and to limit the exposure created by other interest rate swaps.

On September 26, 2002, the Company established Leesport Capital Trust II, a Delaware statutory business trust, in which the Company owns all of the common equity. Leesport Capital Trust II issued $10 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.45% (8.81% at December 31, 2006). These debentures are the sole assets of the Trusts. The terms of the junior subordinated debentures are the same as the terms of the capital securities. The obligations under the debentures constitute a full and unconditional guarantee by Leesport Financial Corp. of the obligations of the Trust under the capital securities. These securities must be redeemed in September 2032, but may be redeemed on or after November 7, 2007 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities is no longer qualified as Tier 1 capital for the Company.

On June 26, 2003, Madison established Madison Statutory Trust I, a Connecticut statutory business trust. Pursuant to the purchase of Madison on October 1, 2004, the Company assumed Madison Statutory Trust I in which the Company owns all of the common equity. Madison Statutory Trust I issued $5 million of mandatory redeemable capital securities carrying a floating interest rate of three month LIBOR plus 3.10% (8.46% at December 31, 2006). These debentures are the sole assets of the Trusts. The terms of the junior subordinated debentures are the same as the terms of the capital securities. The obligations under the debentures constitute a full and unconditional guarantee by Leesport Financial Corp. of the obligations of the Trust under the capital securities. These securities must be redeemed in June 2033, but may be redeemed on or after September 26, 2008 or earlier in the event that the interest expense becomes non-deductible for federal income tax purposes or if the treatment of these securities is no longer qualified as Tier 1 capital for the Company.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” which was revised in December 2003. This Interpretation provides guidance for the consolidation of variable interest entities (VIEs). First Leesport Capital Trust I, Leesport Capital Trust II and Madison Statutory Trust I (the “Trusts”) each qualify as a variable interest entity under FIN 46. The Trusts issued mandatory redeemable preferred securities (Trust Preferred Securities) to third-party investors and loaned the proceeds to the Company. The Trusts hold, as their sole assets, subordinated debentures issued by the Company.

FIN 46 required the Company to deconsolidate First Leesport Capital Trust I and Leesport Capital Trust II from the consolidated financial statements as of March 31, 2004 and to deconsolidate Madison Statutory Trust I as of December 31, 2004. There has been no restatement of prior periods. The impact of this deconsolidation was to increase junior subordinated debentures by $20,150,000 and reduce the mandatory redeemable capital debentures line item by $20,150,000 which had represented the trust preferred securities of the trust. The Company’s equity interest in the trust subsidiaries of $538,000, which had previously been eliminated in consolidation, is now reported in “Other assets” as of December 31, 2006. For regulatory reporting purposes, the Federal Reserve Board has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them. The adoption of FIN 46 did not have an impact on the Company’s results of operations or liquidity.

11. Employee Benefits

The Company has an Employee Stock Ownership Plan (ESOP) to provide its employees with future retirement plan assistance. The ESOP invests primarily in the Company’s common stock. Contributions to the Plan are at the discretion of the Board of Directors. For the years ended December 31, 2006, 2005 and 2004, $0, $233,000 and $285,000, respectively, was accrued to provide for contribution of shares to the Plan. During 2006, 2005 and 2004 respectively, 11,873 shares, 11,937 shares and 10,519 shares were purchased on behalf of the ESOP. The ESOP plan was terminated as of June 30, 2006.

The Company has a 401(k) Salary Deferral Plan. This plan covers all eligible employees who elect to contribute to the Plan. An employee who has attained 18 years of age and has been employed for at least 30 calendar days is eligible to participate in the Plan effective with the next quarterly enrollment period. Employees become eligible for the Company contribution to the Salary Deferral Plan at each future enrollment period upon completion of one year of service. The Company contributes 150% match of the first 2% of a participants pay deferred into the Plan plus 100% of next 1%, 50% of next 4% for a total available match of 6%. Contributions from the Company vest to the employee over a five year schedule. The annual expense included in salaries and employee benefits representing the expense of the Company’s contribution was $708,000, $661,000, and $462,000 for the years ended December 31, 2006, 2005, and 2004, respectively.

The Company has entered into deferred compensation agreements with certain directors and a salary continuation plan for certain key employees. At December 31, 2006 and 2005, the present value of the future liability for these agreements was $1,483,000 and $1,388,000, respectively. For the years ended December 31, 2006, 2005 and 2004, $214,000, ($22,000) and $360,000, respectively, was charged to expense in connection with these agreements. To fund the benefits under these agreements, the Company is the owner and beneficiary of life insurance policies on the lives of certain directors and employees. These bank-owned life insurance policies had an aggregate cash surrender value of $17.2 million and $11.7 million at December 31, 2006 and 2005, respectively. In 2006, the Bank purchased an additional $5 million in bank owned life insurance.

Leesport Financial Corp. has a non-compensatory Employee Stock Purchase Plan (ESPP). Under the ESPP, employees of the Company who elect to participate are eligible to purchase common stock at prices up to a 5 percent discount from the market value of the stock. The ESPP does not allow the discount in the event that the purchase price would fall below the Company’s most recently reported book value per share. The ESPP allows an employee to make contributions through payroll deductions to purchase common shares up to 15 percent of annual compensation. The total number of shares of common stock that may be issued pursuant to the ESPP is 256,452. As of December 31, 2006, a total of 32,954 shares have been issued under the ESPP.

12. Stock Option Plans and Shareholders’ Equity

The Company has an Employee Stock Incentive Plan (ESIP) that covers all officers and key employees of the Company and its subsidiaries and is administered by a committee of the Board of Directors. The total number of shares of common stock that may be issued pursuant to the ESIP is 463,601. The option price for options issued under the Plan must be at least equal to 100% of the fair market value of the common stock on the date of grant and shall not be less than the stock’s par value. Options granted under the Plan have various vesting periods ranging from immediate up to 5 years, 20% exercisable not less than one year after the date of grant, but no later than ten years after the date of grant in accordance with the vesting. Vested options expire on the earlier of ten years after the date of grant, three months from the participant’s termination of employment or one year from the date of the participant’s death or disability. As of December 31, 2006, a total of 136,019 shares have been issued under the ESIP.

The Company has an Independent Directors Stock Option Plan (IDSOP). The total number of shares of common stock that may be issued pursuant to the IDSOP is 115,900. The Plan covers all directors of the Company who are not employees and former directors who continue to be employed by the Company. The option price for options issued under the Plan will be equal to the fair market value of the Company’s common stock on the date of grant. Options are exercisable from the date of grant and expire on the earlier of ten years after the date of grant, three months from the date the participant ceases to be a director of the Company or the cessation of the participant’s employment, or twelve months from the date of the participant’s death or disability. As of December 31, 2006, a total of 20,156 shares have been issued under the IDSOP.

A combined summary of stock option transactions under the Plans, as adjusted for the 5% stock dividend in 2006, is presented in the following table:

	Years Ended December 31,
	2006					2005					2004
			Weighted-					Weighted-					Weighted-
			Average					Average					Average
			Exercise					Exercise					Exercise
	Options		Price			Options		Price			Options		Price
Outstanding at the beginning of the year	362,578			$	19.21	294,900			$	17.18	239,740			$	15.83
Granted	154,620			24.02		155,925			22.41		66,384			21.75
Exercised	(79,511	)		17.78		(57,080	)		17.68		(2,288	)		13.60
Forfeited	(16,571	)		20.24		(25,252	)		19.48		(5,555	)		16.94
Expired	(3,510	)		20.88		(5,915	)		16.15		(3,381	)		14.12
Outstanding at the end of the year	417,606			$	21.21	362,578			$	19.21	294,900			$	17.18
Exercisable at December 31	225,381			$	19.29	277,024			$	18.80	195,574			$	16.54

Options available for grant at December 31, 2006 were 5,720.

Other information regarding options outstanding and exercisable as of December 31, 2006 is as follows:

	Options Outstanding							Options Exercisable
			Average		Weighted					Weighted
			Remaining		Average					Average
	Options		Term		Exercise			Options		Exercise
Range of Exercise Price	Outstanding		in Years		Price			Outstanding		Price
$10.00 to $11.99		7,937		3.9		$	11.88		7,937		$	11.88
12.00 to 13.99		28,079		4.8		13.04			28,079		13.04
14.00 to 15.49		24,887		4.0		14.67			22,800		14.61
15.50 to 16.99		32,924		5.2		16.67			28,350		16.68
17.00 to 18.49		827		6.8		18.35			496		18.34
18.50 to 21.49		24,729		7.4		21.22			22,560		21.26
21.50 to 22.99		138,873		8.9		22.40			103,079		22.35
23.00 to 24.49		159,350		9.7		24.04			12,080		23.84
		417,606		8.2		$	21.21		225,381		$	19.29

Proceeds from director and employee stock purchase plans totaled $1.8 million in 2006, $1.5 million in 2005 and $344,000 in 2004.

For the years ended December 31, 2006, 2005 and 2004, the aggregate intrinsic value of options outstanding was $1,111,408, $1,226,055 and $1,990,964, respectively. For the years ended December 31, 2006, 2005 and 2004, the weighted average remaining term of options outstanding was 8.2 years, 7.7 years and 6.8 years, respectively. For the years ended December 31, 2006, 2005 and 2004, the aggregate intrinsic

value of options exercisable was $1,006,731, $1,006,538 and $1,502,713, respectively. For the years ended December 31, 2006, 2005 and 2004, the weighted average remaining term of options exercisable was 7.0 years, 7.3 years and 6.5 years, respectively.

The aggregate intrinsic value of a stock option represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holder had all option holders exercised their options on December 31, 2006. This amount changes based on changes in the market value of the Company’s stock.

Stock-Based Compensation Expense. As stated in Note 1—Significant Accounting Policies, the Company adopted the provisions of SFAS 123R on January 1, 2006. SFAS 123R requires that stock-based compensation to employees be recognized as compensation cost in the consolidated statements of income based on their fair values on the measurement date, which, for the Company, is the date of grant. Included in the results for the year ended December 31, 2006 were compensation costs relating to the adoption of Statement No. 123R of approximately $245,000, or $162,000 net of tax. Cash flows from financing activities for 2006 included $127,000 in cash inflows from excess tax benefits related to stock compensation. As of December 31, 2006, there was approximately $663,000 of total unrecognized compensation cost related to non-vested stock options under the plans.

Valuation of Stock-Based Compensation. The fair value of options granted during 2006, 2005 and 2004 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

	Years ended December 31,
	2006			2005			2004
Dividend yield	3.06		%	2.95		%	2.85		%
Expected life	7 years			7 years			7 years
Expected volatility	17.43		%	17.83		%	19.00		%
Risk-free interest rate	4.61		%	4.29		%	3.85		%
Weighted average fair value of options granted	$	4.47		$	4.32		$	4.34

The expected volatility is based on historic volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

For years ended December 31, 2005 and 2004, the Company accounted for the above stock option plans under the recognition and measurement principles of APB opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. No stock-based employee compensation cost is reflected in net income, as all existing options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

Pro Forma Net Income and Earnings Per Common Share. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” to stock-based compensation.

	Years ended December 31,
	2005			2004
	(In thousands)
Net income, as reported	$	8,731		$	5,416
Deduct total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects	(580		)	(143		)
Pro forma net income	$	8,151		$	5,273

Basic earnings per share:
As reported	$	1.65		$	1.31
Pro forma	$	1.54		$	1.28
Diluted earnings per share:
As reported	$	1.63		$	1.29
Pro forma	$	1.52		$	1.26

Stock Repurchase Plan. On May 20, 2004, the Company announced the extension of its stock repurchase plan, originally effective January 1, 2003, for the repurchase of up to 162,000 shares of the Company’s common stock. During 2006, the Company repurchased 45,000 shares of common stock. At December 31, 2006, the maximum number of shares that may yet be purchased under the plan is 50,513.

13. Income Taxes

The components of income tax expense were as follows:

	Years ended December 31,
	2006		2005		2004
	(In thousands)
Current	$	2,718	$	2,330	$	1,236
Deferred	121		397		(82		)
	$	2,839	$	2,727	$	1,154

Reconciliation of the statutory federal income tax expense computed at 34% to the income tax expense included in the consolidated statements of income is as follows:

	Years ended December 31,
	2006			2005			2004
	(In thousands)
Federal income tax at statutory rate	$	4,077		$	3,896		$	2,229
Tax exempt interest	(584		)	(442		)	(366		)
Interest disallowance	78			43			26
Bank owned life insurance	(165		)	(130		)	(193		)
Tax credits	(600		)	(600		)	(451		)
Incentive stock option expense	54			—			—
Other	(21		)	(40		)	(91		)
	$	2,839		$	2,727		$	1,154

Deferred income taxes reflect temporary differences in the recognition of revenue and expenses for tax reporting and financial statement purposes, principally because certain items, such as, the allowance for loan losses and loan fees are recognized in different periods for financial reporting and tax return

purposes. A valuation allowance has not been established for deferred tax assets. Realization of the deferred tax assets is dependent on generating sufficient taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. Deferred tax assets are recorded in other assets.

Net deferred tax assets consisted of the following components:

	December 31,
	2006			2005
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	2,497		$	2,431
Deferred compensation	504			472
Net operating loss carryovers	1,794			2,308
Time deposits	—			93
Net unrealized losses on available for sale securities	1,301			1,616
Non-qualified stock option expense	29			—
Other	10			11
Total deferred tax assets	6,135			6,931
Deferred tax liabilities:
Premises and equipment	(501		)	(639		)
Goodwill	(835		)	(858		)
Core deposit intangible	(427		)	(517		)
Mortgage servicing rights	(213		)	(233		)
Loans receivable	(145		)	(227		)
Prepaid expense and deferred loan costs	(397		)	(394		)
Other	(34		)	(44		)
Total deferred tax liabilities	(2,552		)	(2,912		)
Net deferred tax assets	$	3,583		$	4,019

The Company has approximately $3.2 million of federal net operating loss carryovers from the acquisition of Madison, which will expire in 2024. The utilization of these losses is subject to annual limitation under Section 382 of the Internal Revenue Code. The Company has approximately $7.0 million of state net operating loss carryovers which will expire in 2024.

14. Transactions with Executive Officers and Directors

The Bank has had banking transactions in the ordinary course of business with its executive officers and directors and their related interests on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. At December 31, 2006 and 2005, these persons were indebted to the Bank for loans totaling $6.6 million and $9.0 million, respectively. During 2006, $351,000 of new loans were made and repayments totaled $2,141,000.

15. Regulatory Matters and Capital Adequacy

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 their 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 its assets, liabilities and certain off-balance sheet items as calculated

under regulatory accounting practices. The capital amounts and classification 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 of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2006, that the Company and the Bank meet all minimum capital adequacy requirements to which they are subject.

As of December 31, 2006, the most recent notification from the Bank’s primary regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed its category.

The Company’s and the Bank’s actual capital amounts and ratios are presented below:

													Minimum
													To Be Well
					Minimum								Capitalized Under
					For Capital								Prompt Corrective
	Actual				Adequacy Purposes								Action Provisions
	Amount		Ratio		Amount				Ratio				Amount				Ratio
	(Dollar amounts in thousands)
As of December 31, 2006:
Total Capital (to risk-weighted assets):
Leesport Financial Corp,	$	88,699	11.11	%		$	63,894	³		8.00	%			N/A			N/A
Leesport Bank	79,711		10.13			62,974		³		8.00		³		$	78,717	³	10.00	%
Tier I capital (to risk-weighted assets):
Leesport Financial Corp,	81,088		10.15			31,947		³		4.00				N/A			N/A
Leesport Bank	72,100		9.16			31,487		³		4.00		³		47,230		³	6.00
Tier I capital (to average assets):
Leesport Financial Corp,	81,088		8.24			39,341		³		4.00				N/A			N/A
Leesport Bank	72,100		7.41			38,916		³		4.00		³		48,645		³	5.00
As of December 31, 2005:
Total Capital (to risk-weighted assets):
Leesport Financial Corp,	$	81,242	11.13	%		$	58,395	³		8.00	%			N/A			N/A
Leesport Bank	72,526		10.12			57,333		³		8.00		³		$	71,666	³	10.00	%
Tier I capital (to risk-weighted assets):
Leesport Financial Corp,	73,623		10.09			29,187		³		4.00				N/A			N/A
Leesport Bank	64,907		9.06			28,657		³		4.00		³		42,985		³	6.00
Tier I capital (to average assets):
Leesport Financial Corp,	73,623		8.16			36,090		³		4.00				N/A			N/A
Leesport Bank	64,907		7.27			35,712		³		4.00		³		44,640		³	5.00

Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. At December 31, 2006, the Bank had approximately $13.4 million available for payment of dividends to the Company. Loans or advances are limited to 10 percent of the Bank’s capital stock and surplus on a secured basis. At December 31, 2006 and 2005, respectively, the Bank had no secured loans outstanding to the Company.

As of December 20, 2006, the Company had declared a $.19 per share cash dividend for shareholders of record on January 2, 2007, payable January 12, 2007. As of December 21, 2005, the Company had declared a $.18 per share cash dividend for shareholders of record on January 3, 2006, payable January 13, 2006.

In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

16. Financial Instruments with Off-Balance Sheet Risk

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet investments.

A summary of the Bank’s financial instrument commitments is as follows:

	December 31,
	2006		2005
	(In thousands)
Commitments to extend credit:
Loan origination commitments	$	82,123	$	61,819
Unused home equity lines of credit	53,949		51,738
Unused business lines of credit	143,627		156,582
	$	279,699	$	270,139
Standby letters of credit	$	18,862	$	9,156

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. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.

Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2006 and 2005 for guarantees under standby letters of credit issued is not material.

During October 2002, the Company entered into an interest rate swap agreement with a notional amount of $5 million. This derivative financial instrument effectively converted fixed interest rate obligations of outstanding mandatory redeemable capital debentures to variable interest rate obligations, decreasing the asset sensitivity of its balance sheet by more closely matching the Company’s variable rate assets with variable rate liabilities. The Company considers the credit risk inherent in the contracts to be negligible. This swap has a notional amount equal to the outstanding principal amount of the related trust preferred securities, together with the same payment dates, maturity date and call provisions as the related trust preferred securities.

Under the swap, the Company pays interest at a variable rate equal to six month LIBOR plus 5.25%, adjusted semiannually (10.62% at December 31, 2006), and the Company receives a fixed rate equal to the

interest that the Company is obligated to pay on the related trust preferred securities (107/8%). The Company has designated its interest rate swap as a fair value hedge as defined in SFAS No. 133. Because the critical terms of the interest rate swap match the terms of the trust preferred securities, the swap qualifies for “short-cut method” accounting treatment under SFAS No. 133.

The estimated fair value of the interest rate swap agreement represents the amount the Company would have expected to receive (pay) to terminate such contract. At December 31, 2006 and 2005, the estimated fair value of the interest rate swap agreement was ($185,000) and ($93,000), respectively, and was offset by a decrease in the fair value of the related trust preferred security. The swap agreement exposes the Company to market and credit risk if the counterparty fails to perform. Credit risk is equal to the extent of a fair value gain on the swap. The Company manages this risk by entering into the transaction with high quality counterparties.

During the years ended December 31, 2006, 2005 and 2004, the Company recognized amounts received or receivable under the agreement of $27,000, $113,000 and $200,000, which were recorded as a reduction of interest expense on the trust preferred securities.

Interest rate caps are generally used to limit the exposure from the repricing and maturity of liabilities and to limit the exposure created by other interest rate swaps. In June, 2003 the Company purchased a six month LIBOR cap to create protection against rising interest rates for the above mentioned $5 million interest rate swap. The initial premium related to this interest rate cap was $102,000. At December 31, 2006 and 2005, the carrying and market values were approximately $15,000 and $38,000, respectively.

17. Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amount the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at December 31, 2006 and 2005:

Cash and cash equivalents:

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Securities:

Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Loans and loans held for sale:

For variable-rate and adjustable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. For fixed-rate loans, fair values are estimated using quoted market prices, when available, or discounted cash flows, at interest rates currently offered for loans with similar terms to borrowers of similar credit quality.

Mortgage servicing rights:

The fair value of mortgage servicing rights is based on observable market prices when available or the present value of expected future cash flows when not available.

Interest rate swap and cap:

The fair value of the interest rate swap and interest rate cap agreements are based on the net present value of expected future cash flows and are heavily dependent on interest rate assumptions over the remaining term of the agreements.

Deposit liabilities:

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings and certain types of money market accounts) are considered to be equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits.

Securities sold under agreements to repurchase and federal funds purchased:

The carrying amounts of these borrowings approximate their fair values.

Long-term debt:

The fair value of long-term debt is calculated based on the discounted value of contractual cash flows, using rates currently available for borrowings with similar maturities.

Junior subordinated debt:

The fair value of these debentures is calculated based on the discounted value of contractual cash flows, using rates currently available.

Accrued interest receivable and payable:

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Off-balance sheet instruments:

Fair values for the off-balance sheet instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

The estimated fair values of the Company’s financial instruments as of December 31, 2006 and 2005 were as follows:

	2006		2006		2005		2005
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(In thousands)
Financial Assets:
Cash and cash equivalents and federal funds sold	$	21,835	$	21,835	$	29,131	$	29,131
Mortgage loans held for sale	5,582		5,582		16,556		16,556
Securities available for sale	164,180		164,180		182,541		182,541
Securities held to maturity	3,117		3,250		6,173		6,299
Loans, net	757,172		768,190		646,625		646,702
Mortgage servicing rights	626		626		685		685
Accrued interest receivable	4,698		4,698		4,004		4,004
Interest rate cap	15		15		38		38
Financial Liabilities:
Deposits	702,839		702,736		659,730		657,472
Securities sold under agreements to repurchase	90,987		90,987		69,455		69,455
Federal funds purchased	82,105		82,105		66,230		66,230
Long-term debt	19,500		19,212		43,000		42,385
Junior subordinated debt	20,150		20,271		20,150		20,400
Accrued interest payable	3,195		3,195		2,536		2,536
Interest rate swap	185		185		93		93
Off-balance Sheet Financial Instruments:
Commitments to extend credit	—		—		—		—
Standby letters of credit	—		—		—		—

18. Segment and Related Information

The Company’s insurance operations, investment operations and mortgage banking operations are managed separately from the traditional banking and related financial services that the Company also offers. The mortgage banking operation offers residential lending products and generates revenue primarily through gains recognized on loan sales. The insurance operation provides coverage for commercial, individual, surety bond, and group and personal benefit plans. The investment operation provides services for individual financial planning, retirement and estate planning, investments, corporate and small business pension and retirement planning. Effective January 1, 2005, Leesport Investment Group, LLC merged into Leesport Wealth Management, LLC. Leesport Wealth Management, LLC changed its name to Madison Financial Advisors, LLC.

During the second quarter of 2005, the Company changed the composition of its reportable segments, which resulted in the mortgage banking operations being included as a separate segment. The segment was previously included in the banking and financial services segment. The Company has restated the corresponding items of segment information for earlier periods.

Segment information for 2006, 2005 and 2004 is as follows (in thousands):

	Banking and						Brokerage and
	Financial			Mortgage			Investment
	Services			Banking			Services				Insurance			Total
2006
Net interest income and other income from external customers		$	36,675		$	4,458		$	788			$	11,393	$	53,314
Income (loss) before income taxes		8,822			1,001			(158		)		2,327		11,992
Total assets		967,040			53,758			1,226				19,608		1,041,632
Purchases of premises and equipment		758			10			6				60		834
2005
Net interest income and other income from external customers		$	34,919		$	6,580		$	1,005			$	11,695	$	54,199
Income (loss) before income taxes		7,543			1,984			(109		)		2,040		11,458
Total assets		889,568			55,690			1,438				19,056		965,752
Purchases of premises and equipment		720			25			5				328		1,078
2004
Net interest income and other income from external customers		$	24,238		$	2,891		$	528			$	10,781	$	38,438
Income (loss) before income taxes		3,483			1,319			(177		)		1,945		6,570
Total assets		824,655			33,677			1,147				17,903		877,382
Purchases of premises and equipment		2,299			—			—				157		2,456

Income (loss) before income taxes, as presented above, does not reflect referral and management fees of approximately $891,000, $1,220,000 and $140,000 that the mortgage banking operation, insurance operation and the brokerage and investment operation, respectively, paid to the Company during 2006. For 2005, referral and management fees of approximately $580,000, $1,577,000 and $110,000 were paid by the mortgage banking operation, insurance operation and the brokerage and investment operation, respectively. Referral and management fees of approximately $1,608,000 and $146,000 were paid by the insurance operation and the brokerage and investment operation, respectively, in 2004.

19. Legal Proceedings

The Company is also party to legal actions that are routine and incidental to its business. In management’s opinion, the outcome of these matters, individually or in the aggregate, will not have a material effect on the financial statements of the Company.

20. Leesport Financial Corp. (Parent Company Only) Financial Information

STATEMENTS OF CONDITION

	December 31,
	2006		2005
	(In thousands)
ASSETS
Cash and short-term investments	$	2,752	$	445
Investment in bank subsidiary	98,476		91,404
Investment in non-bank subsidiary	13,656		13,517
Securities available for sale	4,304		5,503
Advance to non-bank subsidiary	2,045		2,045
Premises and equipment and other assets	3,241		3,361
Total assets	$	124,474	$	116,275
LIABILITIES AND SHAREHOLDERS’ EQUITY
Other liabilities	2,194		1,369
Junior subordinated debt	20,150		20,150
Shareholders’ equity	102,130		94,756
Total liabilities and shareholders’ equity	$	124,474	$	116,275

STATEMENTS OF INCOME

	Years Ended December 31,
	2006			2005			2004
	(In thousands)
Dividends from subsidiaries	$	3,912		$	3,532		$	3,711
Other income	8,771			7,705			6,348
Interest expense on junior subordinated debt	(1,852		)	(1,547		)	(917		)
Other expense	(6,648		)	(6,849		)	(5,068		)
Income before equity in undistributed net income of subsidiaries and income taxes	4,183			2,841			4,074
Income tax expense (benefit)	138			(255		)	119
Net equity in undistributed net income of subsidiaries	5,108			5,635			1,461
Net income	$	9,153		$	8,731		$	5,416

STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2006			2005			2004
	(In thousands)
Cash Flows From Operating Activities
Net Income	$	9,153		$	8,731		$	5,416
Depreciation and net amortization	273			179			120
(Equity in) excess of undistributed earnings of subsidiaries	(5,108		)	(5,635		)	(1,461		)
Directors’ stock compensation	171			161			163
Gain on sale of available for sale securities	(262		)	(182		)	(298		)
Increase (decrease) other liabilities	825			241			(222		)
Decrease (increase) in other assets	286			(202		)	376
Other, net	5,985			2,546			5,172
Net Cash Provided by Operating Activities	11,323			5,839			9,266
Cash Flow From Investing Activities
Purchase of available for sale investment securities	(1,267		)	(1,500		)	(2,357		)
Proceeds from the sale of available for sale securities	2,680			1,073			2,853
Purchase of premises and equipment	(391		)	(257		)	(1,159		)
Investment in bank subsidiary	(7,072		)	(2,754		)	(8,618		)
Investment in non-bank subsidiary	(139		)	(551		)	2,554
Net Cash Used In Investing Activities	(6,189		)	(3,989		)	(6,727		)
Cash Flow From Financing Activities
Repayment of long term debt	—			—			(1,010		)
Proceeds from the exercise of stock options and stock purchase plans	1,810			1,494			344
Purchase of treasury stock	(1,118		)	(348		)	(140		)
Reissuance of treasury stock	281			300			292
Cash dividends paid	(3,800		)	(3,428		)	(2,526		)
Net Cash Used In Financing Activities	(2,827		)	(1,982		)	(3,040		)
Increase (decrease) in cash and cash equivalents	2,307			(132		)	(501		)
Cash:
Beginning	445			577			1,078
Ending	$	2,752		$	445		$	577

21. Quarterly Data (Unaudited)

	Year Ended December 31, 2006
	Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter
	(In thousands, except per share data)
Interest income	$	16,499	$	15,821	$	15,012	$	14,285
Interest expense	8,387		7,795		6,968		6,371
Net interest income	8,112		8,026		8,044		7,914
Provision for loan losses	359		300		225		200
Net interest income after provision for loan losses	7,753		7,726		7,819		7,714
Other income	4,948		5,406		5,176		5,173
Net realized gains on sale of securities	241		65		105		104
Other expense	9,971		9,755		10,477		10,035
Income before income taxes	2,971		3,442		2,623		2,956
Income taxes	695		854		608		682
Net income	$	2,276	$	2,588	$	2,015	$	2,274
Earnings per common share:
Basic earnings per share	$	0.42	$	0.48	$	0.38	$	0.43
Diluted earnings per share	$	0.42	$	0.48	$	0.37	$	0.42

	Year Ended December 31, 2005
	Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter
	(In thousands, except per share data)
Interest income	$	13,785	$	13,024	$	12,282	$	11,562
Interest expense	5,825		5,283		4,827		4,384
Net interest income	7,960		7,741		7,455		7,178
Provision for loan losses	250		430		350		430
Net interest income after provision for loan losses	7,710		7,311		7,105		6,748
Other income	5,989		5,961		5,700		5,844
Net realized gains on sale of securities	128		61		144		38
Other expense	10,592		10,268		10,037		10,384
Income before income taxes	3,235		3,065		2,912		2,246
Income taxes	832		742		686		467
Net income	$	2,403	$	2,323	$	2,226	$	1,779
Earnings per common share:
Basic earnings per share	$	0.45	$	0.44	$	0.42	$	0.34
Diluted earnings per share	$	0.45	$	0.43	$	0.42	$	0.33

PENNSYLVANIA		23-2354007
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

	Common Stock, $5.00 Par Value				The NASDAQ Stock Market LLC
(Title of each class)				(Name of each exchange on which registered)

	December 31, 2006
	(in thousands)
Three Months or Less		$	26,808
Over Three Through Six Months		17,466
Over Six Through Twelve Months		32,475
Over Twelve Months		20,670
TOTAL		$	97,419

		PAGE
PART I	FORWARD LOOKING STATEMENTS	1
Item 1.	Business	1
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	13
Item 3.	Legal Proceedings	15
Item 4.	Submission of Matters to a Vote of Security Holders	15
Item 4A.	Executive Officers of the Registrant	16

PART II		18
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	18
Item 6.	Selected Financial Data	20
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 8.	Financial Statements and Supplementary Data	45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	87
Item 9A.	Controls and Procedures	87
Item 9B	Other Information	90

PART III		91
Item 10.	Directors and Executive Officers of the Registrant	91
Item 11.	Executive Compensation	91
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	91
Item 13.	Certain relationships and Related Transactions, and Director Independence	91
Item 14.	Principal Accounting Fees and Services	91

PART IV		92
Item 15.	Exhibits and Financial Statement Schedules	92
SIGNATURES		94

/s/ ROBERT D. DAVIS		/s/ EDWARD C. BARRETT
Robert D. Davis President and Chief Executive Officer		Edward C. Barrett Executive Vice President and Chief Financial Officer

Exhibit No.		Description
3.1	Articles of Incorporation of Leesport Financial Corp. (incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2003).
3.2	Bylaws of Leesport Financial Corp. (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on November 18, 2005).
4.1	Form of Rights Agreement, dated as of September 19, 2001, between Leesport Financial Corp. and American Stock Transfer & Trust Company as Rights Agent (incorporated by reference to Exhibit 4.1 of Registrant’s Registration Statement on Form 8-A, dated October 1, 2001).
10.1	Employment Agreement, dated September 19, 2005, among Leesport Financial Corp., Leesport Bank and Robert D. Davis, (incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K/A filed on September 22, 2005).*
10.2	Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).*
10.3	Deferred Compensation Plan for Directors (incorporated herein by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996).*
10.4	First Leesport Financial Bancorp, Inc. Non-Employee Director Compensation Plan (incorporated by reference to Exhibit 10-1 to Registrant’s Registration Statement on Form S-8 No. 333-37452).*
10.5	1998 Employee Stock Incentive Plan (incorporated by reference to Exhibit 99.1 to Registrant’s Registration Statement on Form S-8 No. 333-108130).*
10.6	1998 Independent Directors Stock Option Plan (incorporated by reference to Exhibit 99.1 to Registrant’s Registration Statement on Form S-8, No. 333-108129).*
10.7	Employment Agreement, dated September 17, 1998, among Leesport Financial Corp., Inc., Essick & Barr, Inc. and Charles J. Hopkins, as amended (incorporated herein by reference to Exhibit 10.4 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002).*
10.8	Change in Control Agreement, dated February 11, 2004 among Leesport Financial Corp., Leesport Bank and Edward C. Barrett (incorporated by reference to Exhibit 10.9 of Registrant’s Annual Report Form 10-K for the year ended December 31, 2003).

10.9		Change in Control Agreement, dated February 11, 2004 among Leesport Financial Corp., Leesport Bank and Jenette L. Eck. (incorporated by reference to Exhibit 10.10 of Registrant’s Annual Report Form 10-K for the year ended December 31, 2005).
10.11		Employment Agreement, dated as of April 16, 2004 among Leesport Financial Corp., Leesport Bank and Vito A. DeLisi (incorporated by reference to Exhibit 10.10 of the Registrant’s Registration Statement No. 333-116331 on Form S-4).*
10.12		Amendment to Employment Agreement dated as of December 23, 2005, among Leesport Financial Corp., Leesport Bank and Vito A. DeLisi (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on December 28, 2005).*
10.13		Agreement and Plan of Merger, dated as of April 16, 2004, between Leesport Financial Corp. and Madison Bancshares Group, Ltd. (incorporated by reference to Exhibit 99.1 of the Registrant’s Form 8-K filed on April 20, 2004).
10.14		Severance Agreement and General Release dated November 16, 2006, between Leesport Financial Corp. and James E. Kirkpatrick (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K/A filed on November 27, 2006).*
11		No statement setting forth the computation of per share earnings is included because such computation is reflected clearly in the financial statements set forth in response to Item 8 of this Report.
21		Subsidiaries of Leesport Financial Corp.
23.1		Consent of Beard Miller Company LLP.
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1		Section 1350 Certification of Chief Executive Officer.
32.2		Section 1350 Certification of Chief Financial Officer.

	LEESPORT FINANCIAL CORP.
	By:	/s/ ROBERT D. DAVIS
		Robert D. Davis
		President and Chief Executive Officer

	Name		Title		Date
/s/ROBERT D. DAVIS		President and Chief Executive		March 9, 2007
Robert D. Davis		Officer, Director (Principal Executive Officer)
/s/EDWARD C. BARRETT		Chief Financial Officer (Principal		March 9, 2007
Edward C. Barrett		Financial and Accounting Officer)
/s/JAMES H. BURTON		Director		March 9, 2007
James H. Burton
/s/PATRICK J. CALLAHAN		Director		March 9, 2007
Patrick J. Callahan
/s/CHARLES J. HOPKINS		Director		March 9, 2007
Charles J. Hopkins
/s/PHILIP E. HUGHES, JR.		Director		March 9, 2007
Philip E. Hughes, Jr.
/s/ANDREW J. KUZNESKI, JR.		Vice Chairman of the Board; Director		March 9, 2007
Andrew J. Kuzneski, Jr.
/s/M. DOMER LEIBENSPERGER		Director		March 9, 2007
M. Domer Leibensperger
/s/FRANK C. MILEWSKI		Director		March 9, 2007
Frank C. Milewski
/s/MICHAEL J. O’DONOGHUE		Director		March 9, 2007
Michael J. O’Donoghue

/s/HARRY J. O’NEILL III	Director	March 9, 2007
Harry J. O’Neill III
/s/KAREN A. RIGHTMIRE	Director	March 9, 2007
Karen A. Rightmire
/s/MICHAEL L. SHOR	Director	March 9, 2007
Michael L. Shor
/s/ALFRED J. WEBER	Chairman of the Board; Director	March 9, 2007
Alfred J. Weber

Name				Jurisdiction of Incorporation
Leesport Bank				Pennsylvania
Essick & Barr Insurance, LLC				Pennsylvania
Madison Financial Advisors, LLC				Pennsylvania
First Leesport Capital Trust I				Delaware
Leesport Capital Trust II				Delaware
Madison Statutory Trust I				Connecticut
Leesport Realty Solutions, LLC				Pennsylvania
Leesport Mortgage Holdings, LLC				Pennsylvania